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Dollars of Income From 15 Percent To 10 Percent

The Bush tax cuts of 2001 and 2003 lowered income tax rates and capital gains tax rates in phases. Supporters argued it would boost aggregate demand and incentivize work and saving. However, critics note the cuts were initially phased in slowly, had sunset clauses making the tax system less predictable, and tax rebates may have been used to pay down debt rather than spur spending. The document does not take a clear position and instead provides context around the Bush tax cuts and poses additional questions about the 2008 rebates and appropriate fiscal policy under Obama.

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32 views2 pages

Dollars of Income From 15 Percent To 10 Percent

The Bush tax cuts of 2001 and 2003 lowered income tax rates and capital gains tax rates in phases. Supporters argued it would boost aggregate demand and incentivize work and saving. However, critics note the cuts were initially phased in slowly, had sunset clauses making the tax system less predictable, and tax rebates may have been used to pay down debt rather than spur spending. The document does not take a clear position and instead provides context around the Bush tax cuts and poses additional questions about the 2008 rebates and appropriate fiscal policy under Obama.

Uploaded by

1601vaibhav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

1. In 2000-2003, were the Bush tax cuts a good idea?

Would you have proposed that the federal


government spend the surplus to spur growth? Did the 2001-2003 tax cuts work?

The “Bush tax cuts” are the product of two staggered tax reforms: the Economic Growth and Tax
Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.

 The 2001 tax cut immediately reduced marginal income tax rates, but by a small amount:
each of the top four rates was reduced by 0.5 percentage points in the first year.
 In 2002, a new bottom marginal rate reduced the tax applied to the first several thousand
dollars of income from 15 percent to 10 percent.
 The rest of the rate reductions were to be slowly phased in over the next four years.
 The top marginal income tax rate was to have fallen from 39.6 percent to 35 percent, while
the bottom rate was to have fallen from 15 percent to 10 percent

The 2003 tax cut accelerated this process and immediately implemented income tax rate reductions
that had not been scheduled to take effect for one to three more years. In addition, the 2003 law
immediately cut the top marginal capital gains tax rate for assets held more than a year from 20
percent to 15 percent and the bottom long-term capital gains rates from 8 and 10 percent to 5
percent (and eventually to 0 by 2008)

Arguments in favour

 short-run benefits of tax cuts- put money in the pockets of consumers and in the accounts of
businesses. this increases purchasing power and boosts aggregate demand
 on the longer run and emphasizes that low marginal tax rates tend to increase peoples’
incentives to work and save, increasing aggregate output.
 Also- high taxes lead to inefficient resource allocation in the long run- e tax policies that
favor one sector over another can drive labor and capital (including human capital) into less-
taxed but lower-productivity sectors.

But Bush tax cuts

Initially Phased in reduction- delay economic activity until the anticipated tax conditions were better

Sunset clause- less predictable tax system

No surety if the tax cuts and rebates actually spent by the consumers and business (if say used to
repay debt.. you are essentially replacing private debt by govt debt as tax cuts financed by debt

2. Would you have supported the 2008 rebates? Was that proposal a good use of fiscal policy?

3. What fiscal policy should Obama follow in 2008? Did the economy need a stimulus at that time?
Could monetary policy alone help avoid a recession?

4. If the Obama administration decides to use a fiscal stimulus, how should it pay for it?

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