Real-life Case Study: The Bush Tax Cuts
Monetary and Fiscal Policy
On June 7, 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001, called “TRA 2001” for short. This law largely fulfilled his campaign promise to reduce taxes in light of the projected federal budgetary surplus. Two years later, on May 28, 2003, President Bush signed a second major tax cut bill. President Bush argued that this bill, known as the Jobs and Growth Tax Relief Reconciliation Act of 2003, would encourage growth in a sluggish economy.
Lower Tax Brackets The 2001 law reduced the four highest tax brackets from their 2000 levels. It also created a new lowest tax bracket with a 10% tax rate. The 2003 tax cut moved up several tax rate reductions planned for the late 2000s in the first tax cut. Overall, the top marginal income tax rate was lowered from 39.6% to 35%.
Children and Students The Bush tax bills increase the tax credit for dependent children under 17 from $500 in 2000 to $1000 in 2003. The Treasury mailed tax refund checks to eligible parents during the summer of 2003 in order to anticipate this increased deduction.
The new laws also make it easier for parents to afford to send their children to school. The amount that can be saved in an Education IRA grew from $500 to $2000 a year. Students will be able to withdraw money from special tuition-saver programs without having to pay taxes. More students and their parents will be able to deduct tuition expenses and student loan interest from their taxable income.
President George W. Bush signs the 2001 tax bill.
Easier Retirement Savings Taxpayers will also be able to contribute more to their retirement accounts. For example, the allowable contribution to an Individual Retirement Account (IRA) goes up from $2000 a year in 2000 to $4000 in 2005 and $5000 in 2008. Workers over age 50 will be allowed to contribute an extra $500 a year (until 2005) and $1000 a year (starting in 2006).
Will These Changes Last? Nearly all the changes in the new tax laws were phased in over several years, and then will disappear by the early 2010s when the laws expire. This means that future Congresses and future presidents will have to decide whether to extend these provisions or return to the law as it was in 2000.
Applying Economic Ideas
- Why did concerns about the slow economy generate support for the president's second tax cut plan?
- What are some potential problems with having a tax cut that evaporates in 2011? Why might Congress have decided to do it this way?
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