Bush Tax Cuts Worked

The Bush Tax Cuts Raised Revenues and Stimulated Growth
By Richard Leonetti,

There were two tax cuts. The smaller began in mid 2001 and was phased in over time. The larger came in mid 2003. The effects were quite dramatic. By July of 2004 GDP growth had jumped from 1.8% to 5.4%, business investment jumped over 10 times and employment growth was also up a factor of 10. The good news was that supply side economics really worked. Tax revenues increased steadily from 2003 right up to the present as the table below shows:

Total Federal Revenues in Billions
2000……….$2,025
2001……….1,991
2002……….1,853
2003……….1,782
2004……….1,880
2005……….2,153
2006……….2,407
2007……….2,568
2008 est. 2,521 before new rebates

The deficit grew right along because Congress let the spending grow even faster.

To kill the tax cuts, that is greatly raise taxes as the two Democratic candidates are suggesting, can be expected to have the opposite and dramatic results of less GDP growth, less business investment, higher employment and less total revenue. This would really put pressure on Congressional spending and a much faster growing deficit.

Be careful what you wish for.

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  • John in Oregon

    This item is about the 1960s (JFK) and the 1980s (RWR) as much as 2003 (GWB). All three presidents campaigned for tax cuts. In all three decades the economy grew and federal revenues grew.

    The key phrase in this piece is *”The deficit grew right along because Congress let the spending grow even faster.”*

    The Congress monkey see the money. The Congress monkey spend the money. The Congress monkey spend more money.

  • Rupert in Springfield

    To the best of my recollection, there has only been one admission by the major media that tax cuts result in increased revenues. This was when Charlie Gibson asked both Hill and BO in a recent debate why they favoured raising the capitol gains rate when doing so was always accompanied by decreased revenues.

    Both candidates answered that even though it would reduce income to the treasury, they both favoured it. To me this is somewhat akin to Fords moment in the debate with Carter when he insisted there was no Soviet presence in Poland. Yet in this instance, neither of these two were laughed off the stage despite the fact that Gibson really hammered this point.

    How can this be? The answer is that Americans have, to a large extent, been sold on the divisiveness of class warfare. Americans believe, somehow, that if someone who makes a dollar more than they do, has their taxes raised, somehow that helps them.

    It would be good if this point were hammered on by McCain. I doubt he will though. Punishing achievement, especially when coupled with decreased revenues as a result is insanity. The only purpose in it is to maintain a divisive strategy and win elections, the fact that it hurts the country, in the form of lower revenues, is of no consequence to the implementers.

  • dean

    And…President Clinton RAISED tax rates and the economy grew larger and faster than under Bush. Roodevelt-Truman RAISED taxes a whole lot and the economy had its longest period of sustained growth. Maybe correlation is not causation?

    Best bet is it was lowering the interest rates that stimulated economic growth under both Bush and Clinton, combined with the normal business cyycle recovering from a downturn.

    Rupert…”class warfare?” Hardly.

    • John in Oregon

      You said > And…President Clinton RAISED tax rates and the economy grew larger…

      And now for the rest of the story. Marginal tax rates were increased, Tax bracket realignment reduced taxes for many, and then the Republican congress reduced spending. The capitol gains was reduced. And the economy grew larger much much later than Clintons tax increase………..

      > Roodevelt-(sic) Truman RAISED taxes

      Wasn’t that WWII? Hardly normal economic conditions and hardly relevant. Or do you endorse war as an economic development tool?

      You suggest > Best bet is it was lowering the interest rates that stimulated economic growth

      So lets see. The FED reduced interest rates in response to the 1999 Clinton recession and GDP fell. The FED reduced more in 2001 and GDP fell. Taxes down in 2003 and GDP rose. Oh I See, it just must have been the interest rates.

    • John Fairplay

      “Roodevelt-Truman RAISED taxes a whole lot and the economy had its longest period of sustained growth”

      This is, of course, completely historically inaccurate. In fact, prior to WWII, Roosevelt was increasing the national debt by an average of $3 billion per year to pay for the New Deal. This was in a time when the entire federal budget was $6 – 9 billion – so Roosevelt was running an annual deficit equal to 33 – 50 percent of the entire budget. For perspective, Bush’s annual deficits would have to be at least $1 trillion to match Roosevelt’s profligacy. Despite all this extra New Deal spending, the U.S. economy was virtually flat-lined until the U.S. began ramping up production for WWII. While unemployment under Roosevelt initially went down, it then reversed course and went right back up. New Deal programs were, by and large, a complete failure in achieving their stated goals.

    • John in Oregon

      By the way Dean, I should grant you a point here. In 99 as things deteriorated the FED did stubbornly “fight” inflation adding one more to push the decline along. That’s the problem with blanket blame of a president or a political party for event. Events are often the result of many divergent factors.

  • Alan

    Bush tax cuts to expire soon. The clock is ticking. Tick. Tock.

  • Betsy O

    “The deficit grew right along because Congress let the spending grow even faster.”

    Oh, right. Bush gets credit for the tax cuts, not for the budgets he signed into law that caused the deficits to skyrocket.

    Bankrupting our kids. It’s the Republican way.

    • John Fairplay

      No, Bush deserves criticism for allowing Congress to overspend. His efforts to appear to be a “uniter” by approving every lots of new and increased spending (and developing some of his own) were a complete failure. This is why Obama’s effort to be a “uniter” by simply proposing lots of new spending but not enough tax revenue to pay for it all will also fail.

      However, had the tax cuts never happened, Congress would have spent that money as well and the deficit would have grown just as much. Honestly, I’d rather have the tax cuts. Had Bush insisted on even 5 percent total annual spending growth, we’d probably be running a surplus.

    • John in Oregon

      Hi Betsy

      It was a bit snarky but you did ask an important question.
      >Oh, right. Bush gets credit for the tax cuts, not for the budgets he signed into law that caused the deficits to skyrocket.

      Lets take each part of the question in turn for 3 historical tax cuts.

      How much credit does the president get for the tax cut?

      1963 JFK Tax cuts. Neither Kennedy’s Congressional Democrats or the Rockefeller Republicans were happy about Kennedy’s proposal. Give Kennedy 90% credit.

      1981 Reagan Tax cuts. The Democrats bitterly opposed tax cuts. Give Reagan 100%

      2003 Bush Tax cuts. Bush had considerable Congressional support. Democrats bitterly opposed. Legacy media viciously opposed. Give Bush 75% credit for the tax cut.

      Now look at the spending side.

      1964 LBJ spending. LBJ was president during the spending. He and congressional Democrats both went wild with spending. Give LBJ 60% and congress 40% of the blame for spending.

      1982 Reagan spending. Reagan did oppose wild spending and considered prohibiting committee report earmarks. With the important task of repairing the Carter damage, he chose not to confront congress on spending. Give Reagan 40% and Congress 60% blame for spending.

      2004 Bush spending. Congressional Democrats and Republicans spent considerably more than Bush proposed. Conversely, Bush didn’t veto excessive spending. Give Bush 50% and Congress 50%

      These are just dart board guesses. Just the same it’s a mixed bag of credit and blame.

      One of the few eras of spending restraint was the 90s Republican congress. And, frankly, many conservatives are upset that Bush did not encourage spending restraint.

      It must also be said that the 63, 81, and 03 tax cuts produced economic recovery and GDP growth.

  • Jerry

    Of course they worked. They always work.
    When will people ever figure out that government does not produce anything. It only takes and wastes and redistributes what is left.
    Government should be small and stand out of the way of the capitalist engines of growth.

    • dean

      Did the Bush tax cuts “work?” Does supply side economics “work?” Lets look at the economic record in comparison of the past 9 presidents (conveniently 5 Republicans and 4 Democrats).

      Average indicators from 1960 through 2004:
      Democratics Republicans Bush
      Growth rate: 4.1% 2.8% 2.5%
      Unemployment 5.3% 6.4% 5%
      Fed spending 19.58% of GDP 20.9% of GDP 20.8%
      Inflation 3.8% 4.8% 2-3%
      Deficits 1.2% of GDP 2.7%of GDP 4-5%
      Revenue 18.4% of GDP 18.1% of GDP ???

      Contrary to conventional wisdom, Democratic Presidents have a better record on the economy across the board, except they do tax slightly higher, than Republican presidents.

      As for Bush? It looks to me he bought some economic growth, has managed to keep unemployment low (though it is higher than what he inherited,) has kept inflation low until recently, and did cut taxes. The cost? A whole lot of accumulated debt to be paid by your, my and his kids and grandkids. In other words, he is doing more of what what his dad and Reagan did. Cut, spend, and borrow.

  • Rupert in Springfield

    And now, for those of us not swayed by the third grade “let’s manipulate statistics in a way the dullest of simpletons could see through” let’s all remember – Democrats tend to screw up the economy so bad they don’t remain in office for long. Thus, 4 Democrats is just an instant in the time line, 5 Republicans is close to a generation.

    Eisenhower – elected right after WW2, Gee, do you think maybe the fact that we were scaling down from a World War might have something to do with things economically?

    Nixon – Well, he inherited Kennedys war and had to figure out that mess. The again, the one time he did listen to Democrats, on wage and price controls, well, we all know the legacy of that.

    Reagan – Inherited the worst economy since the great depression from Carter, gee, you think it maybe took a while for Regan to fix that Weimar inflation rate Carter left us with?

    Bush 2 – Inherited a recession from Clinton, as well as a “lets sell security for temporary prosperity” attitude towards terrorism that lead to the worst attack on US soil ever. Gee? you think maybe that had an effect on the economy? Just remember these immortal words from Bill when you think about the horror that was 9/11 and what got us to this place:

    “well, yes, we had a few chances to get Osama, but we couldn’t find a charge to hold him on”

    Lets just repeat that, because obviously some have missed it:

    “we couldn’t find a charge to hold him on”

    Lets also remember, a lot of Clintons deficit gains were achieved through some very risky, but in the end successful accounting gimmicks. Refinancing the national debt from long term to short would be an example. Had interest rates turned the other way however, we would all be speaking Chinese right about now.

    At the end of the day, Democrats are left with a logical mess on any and all issues economic. For if their basic premise – we can tax ourselves into prosperity – truly worked, we would do it. The fact is most people by the age of 12 realize wealth redistribution is a a non functioning economic model. The difference is, Republicans figured it out when they realized Mom wasn’t going to increase their allowance any further. Democrats, on the other hand, still think an allowance is due to them.

    • John in Oregon

      Hi Rupert

      It’s a bit of a nit-pic point. You comment that >Nixon – Well, he inherited Kennedys war

      Actually it was LBJs war. And to reinforce your point. LBJ did guns and butter one better. He spent on the war, he spent on domestic programs and then added the Great Society on top of it all.

  • Joanne Rigutto

    I think that there are a lot of factors that come into play as far as how the economy does and how much revenue from taxes the federal, state and local governments make.

    Bill Clinton signing us up for the WTO had quite a bit to do with the booming economy of the 90’s and continues to impact the US economy through both imports and exports and their attendant support industries. The other FTAs that both Clinton and Bush entered this country into have also had substantial impacts on the US economy, and the revenue the government brings in each year. The increases just in ag imports and exports since 1994 are eye opening to say the least, and that’s just ag, not all of the other things this country imports and exports.

    I also have to wonder what the economy would be like if personal and commercial computers hadn’t become so easy to use and inexpensive to buy. The electronics industry has had and continues to have a profound impact on the US economy, especially in the areas of commerce, research, trade, communications, etc..

    Everytime something changes hands in business, it seems that government gets some kind of fee or tax, and all of the related industries supporting trade, or just about any other aspect of commerce, pay fees, taxes, etc.. So while the rate/level of taxes plays a role in how much money the government brings into its coffers each year – obviously if you’re paying less in taxes and fees you’ll have that money to spend some other way which means that you’ll just support taxes and fees in other ways that you might not realize – it really has to do with many other factors all working in concert.

    • dean

      Rupert: That statistics I used are the most common measures of national economic preformance, and they were not “manipulated.”

      From 1960-2004, we had 20 years of Democratic presidents and 24 of Republicans. Eisenhower was President prior to 1960, so his numbers are not included in my post. Kennedy “inherited” a recession from Eisenhower, Reagan inherited high inflation (but a rapidly growing economy) from Carter, Clinton inherited a recession and a big national debt from Reagan/Bush Sr., and Bush Jr. inherited a dot com crash, mild downturn, and budget surplus from Clinton. So I would say each incoming president has had inherited issues to deal with. Whomever inherits the present mess will have the deepest hole yet, in my opinion.

      Dragging Osama into it merely changes the subject. But given that the subject was the comparative statistical economic performance of Presidents, and that your side fares rather badly, I can see why you did it.

      Joanne…you are right in that the national economy is influenced by more than taxing and spending policies. Trade agreements. labor laws, minimum wage….lots of things matter as much or more. Which is why it is good to focus on results and then work backwards.

      Frankly, I don’t even pretend to know why our economy did better statistically under Democratic Presidents. Maybe it was mere luck. But either way, our history challenges the initial post that claims Bush’s tax cuts “worked.” And that supply side economics “works.”

      • Joanne Rigutto

        Dean,

        One of the things I’m really worried about right now, speaking of multiple agents having an effect on the economy, is the price of fuel. If it keeps going up the way that it has been, we’re going to have substantial inflation as a result. Everything is going up, food, products, services, and all of the support industries servicing those sectors.

        As a tile/stone contractor in the Portland area, I charged $10/square foot to install a standard job 4 years ago, now I charge $12/square foot for the same job. I’ve had to raise my prices because all of my expenses have gone up. A few years ago I saw the price of expanded metal, also known as withe lath go up by 50% in just 6 months. My expenses are exclusively materials expenses. Being an exempt contractor, I work alone so I don’t have employee expenses.

        In that kind of economic environment no ammount of tax cuts will help….

        • dean

          Joanne….yes, you should be concerned. Those of us old enough to remember the “stagflation” of the Carter and early Reagan years know that the primary cause was the rapidly rising price of oil courtesy of OPEC. What drove the price down in the 80s was new oil finds, primarily in the North Sea, as well as the greed of individual OPEC members who cheated on their quotas. But this time around there may be no new finds equal to the North Sea, and it is looking like OPEC capacity is now limited. Demand will have to come down, because supply is not going to go up much if at all.

          We are way more dependent on this stuff than is good for us, but unfortunately the only way out (that I can think of) is conservation and investment in alternatives, and the only way we will conserve and invest is if the price of oil stays ridiculously high. We are probably in for a long period of economic stagnation until we find a way through this, if ever.

          Tax cuts will not help, and will probably hurt because we will just increase the deficit and end up under funding needed investments in alternatives.

          I hope you can find a way to keep yourself going. As a landscape architect, I have had a long (but unrequited) love affair with stone. Our local stone (basalt) is probably not the right one for your business, meaning your transportation costs are going to continue to be a problem for you.

          • Joanne Rigutto

            Transportation is going to be a big problem for everyone. I deal in dressed stone, think marble and granite, onyx and serpentines, etc.. I like basalt, I’ve used it and Camas rock in stone walls, although the engeneered stone is nice to work with. Lots less weight, lol.

            One of the problems I see coming at us is the fact that everything is dependant on transportation from the food we eat to the things we buy. That’s one of the problems of being in a ‘global’ economy. I read a recent report on ag in the metro area and was surprised – although given my background I shouldn’t have been – that 80% of the ag in the metro area is shipped out of state and 40% of that is shipped out of country. Fuel will have a huge impact on those commodities.

            You can read the report here –
            https://www.metro-region.org/files/planning/agreport.pdf

            The more we become dependant on a global economy the longer the supply chains become and the more vulnerable to disruption they are.

          • dean

            Yep….full agreement. But if the cost of transportation keeps going up, then local products will be more competitive locally. And growing useless ornamental trees to ship back east will be less economical. On the other hand, there is only so much we can produce locally. We lack stone quality for dressing, as just one example. We have plenty of wood,sand and gravel, so we could build more wooden and concrete countertops and less stone. Bad for your business, but good for local carpenters and concrete finishers.

            The core problem is that we have too long treated oil as an infinitely available resource rather than as a one time gift from the dinosaurs. We got spoiled and greedy, and ignored those who warned us about oil depletion, thinking that new finds would always keep up with demand. And this has been the case until now.

            If we were more strategic and truly “conservative” we would only use oil for purposes that have no alternatives. We can drive smaller, more fuel efficient cars or electric ones for example, but driving smaller trucks makes little sense. Driving a Hummer around town is the height of either arrogance or ignorance.

            Read the article in today’s Oregonian business section about the German entrepeneur who is starting up a solar panel plant in Hillsboro. He is appalled at how behind we in the US are on energy issues compared with Europe.

            I have a lot of faith in our brainpower to come up with a range of solutions that will keep us comfortable, but that will require changes in our behavior, including developing a greater respect for the earth’s gifts.

            On your last point…doesn’t that suggest that we should also be “conservative” when it comes to expanding the edges of our cities? As we lose productive farmland locally, don’t we limit our future options for more self-reliance?

  • Joanne Rigutto

    Productive farmland is one thing, but one of the problems I see with our whole system, and here I’m not talking just about the USA, but the base for humanity’s whole existence and success on this planet, is that everything is based on growth. Increase production, increase density, increase population, increase transportation, increase energy use, and on and on. That, in the end is what will do in our species. Unchecked growth can not be maintained indefinately, but the only alternative that I see to that is to regulate peoples’ lives more and more strictly until we eventually wind up in what is essentially a dictatorship. That’s the road I see us going down right now in Oregon.

    Local, sustainable agriculture is a nice goal, but with the growth that is predicted for the Portland Metro area over the next few decades, unless you want to force people to grow food crops and animals, and you’re going to force people to use industrial techniques to increase per acre yields, we’re still going to be dependant on imported foods/feeds. And industrial farming brings it’s own risks and hazards to the table.

    Given the way growth is going, especially in the developing world, and the continuing levels of globalization, the next 50 years are going to be interesting to say the least.

    • dean

      Amen to that.

      I used to think that infinite economic growth was impossible on a finite planet. I’ve come to think otherwise. Infinite population growth is definitely not sustainable. But I think “wealth” can continue to accumulate and grow, if we think of wealth as qualitative instead of just quantitative. Eating a pink lady apple or a red delicious is materially the same….1 apple. But it is qualitatively very different. Same is true for reading Don Quiote versus Paris Hilton’s autobiography (if she has one).

      I have lived in this region for 30 years, and while personal income growth has been fairly stagnant, a whole lot of quality has been added along the way, if one is interested in good food, wine, beer, or if one uses trails, or bicycles or rides transit. Cars are way better and not much more expensive. HOuses are more energy efficient. I’m hoping for a shift in our thinking, away from GNP (Gross National Product) and towards GNH (Gross National Happiness,) like they did in Bhutan, and like what the Tories in GReat Britain are working on.

      We will never be completely locally self sufficient in food or energy and should not even try for that goal. But we should support local farmers and forest owners when they do the right thing, and we should hedge our bets on energy by creating better local options. How we accomodate population growth (assuming current projections are true) is a big part of the equation.

  • Joanne Rigutto

    That’s the best response I’ve heard to the problems of growth and globalization I’ve heard in quite a while.

    You’re right. It’s not just about quantity of goods, but quality of life. I’ve been poor in money for the vast majority of my adult life, but I believe that, by my own standards, I have a high quality of life. I have good friends, all the food I could ever want and high quality of that, etc.. Sure there are things that I don’t have that others do, but I’m that way by my own choice and for me, it’s a better way, although it might not be the best way for someone else.

    I also like that you realize that we will never be completely self sufficient. When I hear people talk of sustainability, so often I hear them speak in absolute terms. When I hear people talk of globalization, it’s usually in absolute terms. Always all of one or all of the other.

    I agree that it’s more realistic to say source what you can locally and the rest needs to be brought in from elsewhere, be it energy, food, products, etc..

    • dean

      Complete self sufficiency, whether an individual, a city, or a state, is fools gold. We are a mutually interdependent species, should accept that fact and make the most of it.

      Your life choices have been similar to mine, though I suck at physical work. I have always gone for time over money, quality over quantity. More money would be great, but it costs too much.

      Ciao.

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