Background

• President Bush's economic policy during his first term as president involved three large tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, and Working Families Tax Relief Act of 2004.
• His first tax cut was worth $1.35 trillion over ten years. All tax brackets received a break in marginal rates and lowest 10% bracket was expanded. It raised the child tax credit, eliminated the "marriage penalty" and set a time table to end the estate tax. The reform added to the existing complexity by assigning different rates, new deductions, and new credits to new categories of income. It increased contribution limits on tax-deferred retirement savings accounts, such as IRAs and 401(k)s, expanded credits and deductions for education-related expenses, and temporarily increased the alternative minimum tax exemption. Nearly every tax payer benefited in some capacity from this legislation however, many argue that the tax cuts were distributed disproportionately to higher income taxpayers because of the decrease in marginal rates for the highest tax bracket and the phasing out of the estate tax, a tax that only effects the wealthiest 2% of Americans. The official 10-year cost of the legislation is $350 billion and sunsets in 2010.
• The goal of the second set of reform was to stimulate the lackluster economy by shifting the tax burden away from investment income through lowering taxes on long-term capital gains and dividends. Under previous tax provisions, corporate income was taxed once when a firm makes a profit and again on investor dividends. The wealthiest Americans particularly benefited from the dividend tax, but they stand the most to gain from tax reform of this scale because they pay the most in taxes.It accelerated the individual tax rate reductions and other provisions the previous set of reforms that were not scheduled to take place until 2006. *The Working Families Tax Relief Act of 2004 temporarily extended and increased some of the provisions in the previous two bills. The official 10-year cost of the bill is $146 billion.
• Bush's cuts hearken back to "supply-side" economics during the Reagan administration. This approach to economic policy is based on the the belief that that decreasing the government's real income by cutting taxes will stimulate the economic activity by producing incentives for investment, since individuals and corporations have more of their real income to spend. The revenue lost by the government is replenished by increased net revenue from the stimulated economy. How individuals and corporations use their extra income is uncertain, making it impossible to predict the long term macroeconomic effects of tax cuts.

Debate

• -Proponents argument . . .

• According to an analysis by the Urban Institute, the tax cuts are regressive and will become more regressive over time, shifting the tax burden onto the middle-income earners. "2.6 percent of after-tax income ($742) for those in the middle quintile of the income distribution. Those in the top 1 percent received an average tax cut of 4.6 percent of after-tax income ($34,948). The top one-tenth of 1 percent-taxpayers with income greater than $1.75 million-received an average tax cut of 5.6 percent of after-tax income ($185,533)" (Source: Urban Institute). * The budget surplus President Bush inherited from his predecessor was obliterated by this reform coupled with his spending record.
  * The budget outlook is bleak in the midst of the costly Iraq war and in the onset of the retiring baby boomer generation, both of which are intended to overload government finances.

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