Abstract
This paper analyzes the tax cut policies that were introduced by the former President Bush and his Administration between 2001 and 2003. The paper discusses how such policies affected different households categorized on the basis of income.
The impact of the tax cuts on the high-income households, the middle-income households and the low-income households have been assessed. The study found out that former regimes enacted tax cut policies that mainly favored the poor by ensuring that they paid little or no income taxes. On the other hand, the wealthy contributed the greatest portion of federal tax revenues. The introduction of Bush tax cut policies made use of the remaining options, that is, tax rates that concerned the rich. As a result, President Bush tax cut policies do not necessarily favor the rich at the expense of the poor.
Introduction
The tax cut policies that were proposed by President Bush were made into law in the years 2001, 2002 and 2003 (Edwards, 2006). The impact of these law policies on different households is difficult to analyze due to a number of reasons. First, the concrete comprehensive information concerning the amount of taxes paid by different households is obtainable only following a time lag. Second, even though the effect of changes in taxes on different households is the major scope of many studies, the tax code also affects the households.
For instance, the level of tax differs depending on the source of income such as wages, corporate profits and dividends. The taxes also differ depending on the size of family and whether or not the unit is an individual or a company. Despite all these difficulties inherent in the tax system, the impact of the President Bush tax cut policy has been researched and analyzed by a number of scholars and tax experts. However, the opinions differ as to whether the policies have favored the rich and deteriorated the living standards of the poor or vice versa.
Body
Taylor (2004) argues that the tax cut policies of President Bush have minimized the amount of tax bills initially paid by those at the peak of the income distribution. This group of income earners comprises of those individuals and corporations that earn greater than $1 million per annum. The cut of the tax rates in the two uppermost brackets from 39.6% in 2001 to 35% in 2003, and from 36% in 2001 to 33% in 2003 significantly reduced the amount of tax expenses paid by this group (Taylor, 2004, p.87).
This group also profited from reduced tax duties on dividends and capital gains. Nevertheless, individuals and corporations that belong to the upper-middle income bracket and that earn six figure incomes have not profited from the tax cut policies as much as the top income earners have. This is because of the fact that even though they paid less regular tax, they were now forced to pay the substitute minimum tax. As a result, the amount of money saved from the tax cuts is not significantly large.
President Bush tax cut policies similarly profited the individuals and corporations belonging in the middle and low income distribution. The tax cut policy of 2001 for instance minimized the lowest tax duty by 5 percent, that is, from 15 to 10 percent (Edwards, 2006). The policy also increased the tax credit available for children and made it repayable. This means that although an individual owed the government no taxes, the tax credit permitted an individual with children to collect a check. This policy is indeed beneficial to families that have children (Taylor, 2004).
A great percentage of the tax cuts introduced by President Bush were enjoyed by individuals and corporations belonging to the high income earners group. The tax cut policies introduced in 1986, 1990 and 1993 significantly reduced the tax bill paid by the low income earners to almost nil in some cases. By 2001, the bottom three-fifths of the households classified in terms of income contributed roughly 3.2% of government taxes whereas the top one-fifth of households contributed 82% of government taxes (Taylor, 2004, p.89).
It is therefore expected that any further reductions in taxes would benefit the high income earners. Tax cut policies like those introduced by President Bush can only benefit the low income earners in two ways. First, if the reduction in income taxes is refundable (for instance the tax credit given to individuals and families with children as well as the tax credit given to those working but living below the poverty threshold), then individuals who do not owe the government taxes can receive payments from the government.
Secondly, a tax cut can benefit the poor as long as that tax cut is not income-based. This includes a reduction in payroll taxes that fund social safety net programs such as Social Security and Medicare (Senese, 2003, p.468). Such tax cuts could be of great benefit to low income earners. Nonetheless, such a tax cut policy would violate the Universalist principle of such social programs which requires that everyone should contribute the same proportion of income up to a particular income level.
Through the past decades, the proportion of government taxes paid by the top income earners has been on the upward trend. Friedman and Shapiro state that, “the top one-fifth of taxpayers, ranked by income, paid 56.3 percent of total federal tax revenues in 1980 (including income, payroll and all other federal taxes), 57.9 percent in 1990, and 66.7 percent in 2000,” (2004, p.3). Although the tax cuts introduced by President Bush in 2001 reduced the tax bill of the top income earners and halted the long-run tendency of the government collecting high tax revenues from this group, this group still contributed the highest federal tax revenues compared to other groups.
The impact of the tax cuts on different households varies widely. On the one hand, the top 20 percent of households belonging to the middle-income group get a mean tax cut of approximately $647 from the 2001, 2002 and 2003 tax cuts. Secondly, the highest 1 percent of households belonging to the high income bracket enjoys an average tax cut of close to $35,000 which is almost 54 times the average tax cut enjoyed by middle income earners (Friedman and Shapiro, 2004).
On the other hand, individuals and households earning above $1 million enjoyed tax cuts that averaged approximately $123,000. These tax cuts have increased the disposable income of millionaires by close to 6.4 percent which is greater than the increase received by the middle fifth by three-fold (Friedman and Shapiro, 2004). The general portions of the tax cuts that are received by the different households also vary widely.
The middle one-fifth of households enjoyed only 8.9 percent of the tax cuts in 2004 whereas the highest income earners (millionaires) who comprise only 0.2 percent of the American households enjoyed 15.3 percent of the tax cuts in the same year. This shows that the top 0.2 percent of the total households (the millionaires) received almost double the tax cuts received by 20 percent of the total households (the middle income earners). The tax cuts awarded over $30 billion to 257,000 individuals (the country’s millionaires) in 2004 alone (Friedman and Shapiro, 2004). This uneven and unfair allocation of tax cuts is likely to grow over the years as long as more tax cut policies are put in place.
The reason behind this is the fact that the tax reductions that are most likely to benefit the poor and other unprivileged groups were put in place even before the Bush Administration’s tax cut policy came into effect. On the other hand, most of the tax reductions that are most likely to benefit the rich and privileged groups – such as the abolition of the estate tax – have only been partly implemented while others are yet to be put into effect. As a result, any tax cut policy introduced will inevitably have to touch on those tax cuts that will benefit the rich.
In analyzing the tax cut policies and their impact on the different households, it is important to differentiate between the three middle-class conditions. These middle-class conditions were first ratified in 2001 but became in operation in 2003 after the Administration hastened its implementation. The middle-class provisions have been supported by different political parties unlike a majority of the other tax cut conditions such as those concerning dividends, capital gains and estate tax.
The provisions offer significant assistance to the extensive middle income earners even though it is often taken for granted that they offer substantial tax advantages to the high income earners. The allocation of tax cuts to this middle income group varies widely. The top 1% of the households in this group received a tax cut averaging about $33,700, whereas the middle 20% of the households received a tax cut averaging about $100. This implies that the top 1% of the households received more than 300 times the benefits from the tax cuts than those in the middle of the group yet those belonging to the middle of the group are more in number than those at the top (Friedman and Shapiro, 2004).
While the Bush Administration’s tax cut policies provided some benefits to the high-income and middle-income groups, the same cannot be said of the low-income groups. The Administration often tried as much as possible to avoid providing tax cuts to the low-income groups. In cases where tax cuts were offered to this group, it was always as a result of mounting pressure from the public and opposition parties. For instance, during the 2001 tax cut propositions, the Administration argued that low-income earners with children would receive child tax credit.
The limitation to this however is that such an individual would not have received any relief if they did not owe the government any income tax but instead paid large payroll taxes. This limitation was however corrected following sharp criticism and the Administration agreed to make necessary changes that would benefit the low income earners.
The tax system has some inherent problems that make the tax cut policies to unfairly benefit the wealthy. For instance, the Bush Administration often cited the advantages of the tax policies to small businesses. However, such benefits were enjoyed by only two percent of small businesses. In addition, the definition of “small business owner” given by the Administration – anyone earning at least one dollar as income – leaves a lot to be desired and provides loopholes through which wealthy individuals could benefit from such tax benefits.
Based on this definition, an individual does not have to possess an important business to qualify for such tax cut benefits. As a result, many wealthy individuals with businesses but who do other work such as consulting are included in this category. Friedman and Shapiro argue that, “many of those in the top bracket are better characterized as very-high-income individuals, such as corporate executives, with some business investments,” (2004, p.6).
From the above analysis of the President Bush tax cut policies, it is not ethical to state that his policies were in favor of the rich and against the poor. For one, the poor had already benefited from tax cut policies that were enacted and implemented in the previous regimes before President Bush took office. Such policies ensured that the low-income earners paid little or no income taxes while the high-income earners contributed the greatest percentage of federal tax revenues.
Secondly, even though the tax cuts introduced by President Bush did not have many benefits to the low income earners, his Administration put in place other mechanisms that further reduced the burden carried by the poor and helped to improve their living standards. Such mechanisms included the child tax credit which allowed households with children to receive check from the government even if they did not the government any income tax.
Conclusion
Most importantly, the argument that President Bush tax cut policies favored the rich stemmed from the fact that most of the tax cuts introduced by his Administration are those whose sources had either been partly touched or not touched at all by the previous regimes. Past tax cuts centered on those tax sources that affected the poor and not the poor. As a result, if President Bush was to implement any tax cut, he had no option left but to touch on those tax sources that resulted from the wealthy corporations and individuals. This is in no way a matter of favoritism but rather a matter of few options left. The tax cut polices that were introduced by President Bush and his Administration therefore did not favor the wealthy at the expense of the poor.
References
Edwards, C. (2006). Tax policy under President Bush. CATO Institute. Web.
Friedman, J., and Shapiro, I. (2004). Tax returns: A comprehensive assessment of the Bush Administration’s record on cutting taxes. Web.
Senese, D.J. (2003). Policy challenges for senior citizens: Reforms in Social Security, Medicare, and taxes are essential to help seniors and keep our economy strong. Vital Speeches of the Day, 69.15, 468.
Taylor, T. (2004). The economy in perspective. Public Interest, 157, 85-99.