Tax Analysts®Tax Analysts®

My Subscriptions:

Featured News

September 27, 2010
So How Did the Bush Tax Cuts Work Out for the Economy?

Full Text Published by Tax Analysts®

By David Cay Johnston

David Cay Johnston is a former tax reporter for The New York Times and teaches at Syracuse University Law School. He is also the author of two books about taxes, Free Lunch and Perfectly Legal.

Analyzing the latest tax data, Johnston finds that average incomes are down since 2000, the number of high-income nontaxpayers is rapidly rising, and the numbers show that the 2001 and 2003 Bush tax cuts failed to produce economic growth as promised.


* * * * *

The 2008 income tax data are now in, so we can assess the fulfillment of the Republican promise that tax cuts would produce widespread prosperity by looking at all the years of the George W. Bush presidency.

Just as they did in 2000, the Republicans are running this year on an economic platform of tax cuts, especially making the tax cuts permanent for the richest among us. So how did the tax cuts work out? My analysis of the new data, with all figures in 2008 dollars:

Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels.

That much additional income would have more than made up for the lack of demand that keeps us mired in the Great Recession. That would mean no need for a stimulus, although it would not have affected the last administration's interfering with market capitalism by bailing out irresponsible Wall Streeters instead of letting the market determine their fortunes.

In only two years was total income up, but even when those years are combined they exceed the declines in only one of the other six years.

Even if we limit the analysis by starting in 2003, when the dividend and capital gains tax cuts began, through the peak year of 2007, the result is still less income than at the 2000 level. Total income was down $951 billion during those four years.

Average incomes fell. Average taxpayer income was down $3,512, or 5.7 percent, in 2008 compared with 2000, President Bush's own benchmark year for his promises of prosperity through tax cuts.

Had incomes stayed at 2000 levels, the average taxpayer would have earned almost $21,000 more over those eight years. That's almost $50 per week.

The changes in average and total incomes are detailed on the next page in Table 1, the first of four tables analyzing the whole data.

Now that we have looked at the whole eight-year period, what does the new data show about 2008, the worst recession ear since the 1930s, show when compared to the peak year of 2007, when the average taxpayer made $63,096, which was 2.5 percent more than in 2000.

In only two of the eight Bush years, 2006 and 2007, were average incomes higher than in 2000, but the gains were highly concentrated at the top. Of the total increase in income in 2007 over that in 2005, nearly 30 percent went to taxpayers who made $1 million or more.

Now surely some will say that it is not fair to saddle George W. Bush and those who supported his tax cuts with the economic figures from 2001 and 2008. The first would be on the theory that President Clinton should be charged for that year (just as Bush should be charged with 2009, the first year of the Obama administration). The second is on less solid ground, but let's consider it for the sake of argument.

Just measuring the second through seventh years we find that total income was still nearly $2 trillion lower than if 2000 level income continued. Stacking the deck in President George W. Bush's favor does not change the awful performance or even soften it much.

The tax cuts cost $1.8 trillion in the first eight years, according to an analysis by the Tax Policy Center, whose reliability the last administration went out of its way to praise. Those cuts were heavily weighted toward the people candidate George W. Bush famously called "haves and the have-mores . . . some people call you the elite. I call you my base."

In the two years since 2008, the cuts' total cost grew to $2.3 trillion, the Tax Policy Center estimated. (See Tax Notes, Nov. 2, 2009, p. 605, Doc 2009-23711, or 2009 TNT 207-13.)

One of every eight dollars of the tax cuts went to the 1 in 1,000 taxpayers in the top tenth of 1 percent, the annual threshold for which was in the $2 million range throughout the last administration. The only other large beneficiary was parents with children under 17 who make enough to pay income taxes, thanks to the $1,000-per-child tax credit Republicans started championing in the mid-1990s.

Now let's look at wages, the source of most people's income. In 2008 the average taxpayer made $58,000. That was $5,100 less than in 2007, a decline of 8.1 percent.

The number of taxpayers reporting any wages in 2008 was 1.26 million fewer than in 2007, a scary figure when you consider that most people do not expect to be out of work for an entire year and that the population grew by more than a percentage point. In August 42 percent of the unemployed -- 6.2 million people -- had been out of work for 27 weeks or more, the Bureau of Labor Statistics said. The average for all jobless workers was 33.6 weeks of unemployment, the equivalent of going from New Year's Day through August 23 without a paycheck.

The number of taxpayers with incomes below $100,000 with any wage income fell in 2008 by 1.8 million. Because married couples file many tax returns, this means more than 2 million people who worked in 2007 earned no wages in 2008.

Total wages in 2008 fell by nearly 4 percent, compared with a year earlier, for the 87 percent of Americans whose total income was less than $100,000. Since 2000, population grew more than wages.

Those reporting negative incomes quadrupled from less than 600,000 in 2000 to nearly 2.5 million in 2008. Their losses worsened slightly from -$64,000 on average to -$66,000.

The number of workers earning $500,000 or more in total income also fell, by just under 100,000 (or nearly 12 percent), but their average wage of $718,000 is still more than the average American earns in a decade at 2008 levels.

The number of people reporting incomes of $200,000 or more but legally paying no federal income taxes skyrocketed in the second Bush term. A decade ago it was fewer than 1,500 taxpayers; in 2000 it was about 2,300. This high-income, tax-free group jumped to more than 11,000 in 2007 and then doubled in 2008 to more than 22,000.

In 2008 nearly 1 in every 200 high-income taxpayers paid no federal income tax, up from about 1 in 1,500 in 1998.

The share of high incomes that were untaxed increased more than sevenfold to one dollar of every $166.

The Statistics of Income data on tax-free, high incomes severely understate economic reality because they exclude deferral accounts, including those of hedge fund managers with billion-dollar incomes who can legally report no current income and borrow against their untaxed gains to live tax free.

                              Table 1.
          2008 Average Incomes Fell Well Below 2000 Level
 _____________________________________________________________________

 New IRS data show that average incomes were smaller in 2008 than in
 2000. The figures for all taxpayers are the product of the number of
 returns filed each year multiplied by the increase (decrease) in
 average income. The total line shows the difference between actual
 results and what would have happened had 2000 average incomes
 continued for eight more years.
 _____________________________________________________________________

                Average         Change in $
                  AGI           Per Taxpayer        Change in $ for
   Year         (2008 $)         From 2000           All Taxpayers
 _____________________________________________________________________

   2000         $61,517
   2001         $57,592           ($3,925)          ($511,251,805,225)
   2002         $55,513           ($6,004)          ($780,978,963,772)
   2003         $55,688           ($5,829)          ($760,239,315,954)
   2004         $58,519           ($2,998)          ($396,413,673,916)
   2005         $60,896             ($621)           ($83,445,433,038)
   2006         $61,973              $456             $63,108,007,824
   2007         $63,096            $1,579            $225,763,534,674
   2008         $58,005           ($3,512)          ($500,286,398,328)
   Total                         ($20,854)        ($2,743,744,047,735)
      2000 to 2008
 $ change       ($3,512)
 % change         -5.7%
 _____________________________________________________________________

 Source: IRS Statistics of Income Table 1.4, inflation
 adjustments by author.

The one bright spot in the SOI data at Table 1.4 was that the number of people making $100,000 to $200,000 grew significantly between 2007 and 2008. Their ranks increased by 393,465, or 3 percent, to more than 13.8 million taxpayers.

This truly is good news, because most of the increase had to be people who worked their way up into six-figure incomes from 2007 to 2008.

We know this because fewer than 160,000 taxpayers fell out of the $200,000-and-up income groups. Even if we assume that every one of them fell into the $100,000-$200,000 class, that still leaves 233,000 taxpayers who joined this income group. These 233,000 taxpayers must be people who increased their incomes enough to get them above the $100,000 line. And we know that they did it mostly through becoming more valuable workers, because this group relies on paychecks for more than 77 percent of its income.

But despite that one sliver of good news about low six-figure incomes, the data show overwhelmingly that the Republican-sponsored tax cuts damaged our nation.

Examining performance against the promises, what do we find? Overwhelming evidence that the tax cuts of 2001 and 2003 made us much worse off.

                              Table 2.
                   More Taxpayers, Less Revenue
 _____________________________________________________________________

 Sponsors promised voters that the 2001 and 2003 Bush temporary tax
 cuts would pay for themselves by spurring more investment, thereby
 leading to robust economic growth. Instead, individual income tax
 revenues in 2008 were smaller than in 2000, despite a 10 percent
 growth in the number of taxpayers.
 _____________________________________________________________________

              Individual Income Tax in Millions (2008 $)
 _____________________________________________________________________

           Year                                      Revenue
 _____________________________________________________________________

           2000                                    $1,225,955
           2001                                    $1,079,407
           2002                                      $953,676
           2003                                      $875,178
           2004                                      $948,163
           2005                                    $1,030,435
           2006                                    $1,093,323
           2007                                    $1,158,339
           2008                                    $1,081,295
           Total                                   $8,219,818
 Total at 2000 rate for 8 years                    $9,807,642
 Difference                                       ($1,587,824)
 _____________________________________________________________________

                     Revenues 2008 vs. 2000
 _____________________________________________________________________

 $ change                                           ($144,660)
 % change                                               -11.8%

 _____________________________________________________________________

                      Number of taxpayers
 _____________________________________________________________________

 2000                                              129,373,500
 2008                                              142,450,569
 % change 2000-2008                                 13,077,069
 % change                                                 10.1%
 _____________________________________________________________________

 Source: IRS SOI Table 3.5, inflation adjustments by author.

Ignore the cynics who say the Republican leaders on Capitol Hill, in Wasilla, and on the airwaves care only about the rich. I don't believe that. I think they are captive to economic theories few of them understand and that are simplistic in the extreme. I take them at their word, that they truly believe their policies will produce broad benefits for all, but accepting that does not diminish the fact that the policies these Republicans promote also produce massive tax savings for the superrich who finance their campaigns.

The question to ask is whether their policies worked as promised. Have they even come close? Where is the prosperity -- and where was it in the Bush years, when massive increases in both military and discretionary spending provided a chronic stimulus to the economy?

                                  Table 3.
               2007 to 2008: Fewer Jobs, Less Money (Mostly)
 ______________________________________________________________________________

 The number of  people with any job in 2008 fell. Average wages fell for
 everyone except those with negative incomes or incomes above $200,000.
 ______________________________________________________________________________

                                                    2008
                                _______________________________________________

                                   Number
                                 With Wages        Wages        Average Wage
 ______________________________________________________________________________

 All returns, total               119,578,500  $5,950,634,829         $49,76
 No AGI                               730,913     $23,883,454         $32,67
 $1 under $5,000                    8,527,532     $28,895,710          $3,38
 $5,000 under $10,000               9,492,781     $69,736,639          $7,34
 $10,000 under $15,000              8,890,373    $103,999,168         $11,69
 $15,000 under $20,000              9,116,668    $150,846,247         $16,54
 $20,000 under $25,000              8,470,576    $180,007,445         $21,25
 $25,000 under $30,000              7,646,081    $198,487,077         $25,95
 $30,000 under $40,000             12,919,079    $420,337,671         $32,53
 $40,000 under $50,000              9,823,938    $406,847,030         $41,41
 $50,000 under $75,000             16,993,075    $935,297,197         $55,04
 $75,000 under $100,000            10,539,797    $794,320,811         $75,36
 $100,000 under $200,000           12,586,228  $1,431,970,077        $113,77
 $200,000 under $500,000            3,089,870    $666,055,096        $215,56
 $500,000 under $1,000,000            487,403    $209,788,740        $430,42
 $1,000,000 under $1,500,000          116,152     $75,983,094        $654,16
 $1,500,000 under $2,000,000           48,331     $41,062,767        $849,61
 $2,000,000 under $5,000,000           70,890     $92,936,598      $1,310,99
 $5,000,000 under $10,000,000          17,684     $45,159,641      $2,553,70
 $10,000,000 or more                   11,129     $75,020,367      $6,740,98
 Less than $100,000               103,150,813  $3,312,658,449         $32,11
 Less than $200,000               115,737,041   4,744,628,526         $40,99
 More than $200,000                 3,841,459   1,206,006,303        $313,94
 More than $500,000                   751,589     539,951,207        $718,41

                           Table 3. (Continued

 ______________________________________________________________________________

                                              2007 (in 2008 %)
                                _______________________________________________

                                    Number
                                  With Wages        Wages        Average Wage
 ______________________________________________________________________________

 All returns, total                120,844,802  $6,066,612,981         $50,202
 No AGI                                635,883     $18,045,318         $28,378
 $1 under $5,000                     9,211,632     $30,441,101          $3,305
 $5,000 under $10,000                9,667,212     $73,253,962          $7,578
 $10,000 under $15,000               9,214,593    $112,463,181         $12,205
 $15,000 under $20,000               9,095,607    $156,725,215         $17,231
 $20,000 under $25,000               8,599,801    $190,870,554         $22,195
 $25,000 under $30,000               7,865,276    $212,473,009         $27,014
 $30,000 under $40,000              13,097,548    $441,368,812         $33,699
 $40,000 under $50,000               9,924,196    $422,744,382         $42,597
 $50,000 under $75,000              17,170,387    $973,647,306         $56,705
 $75,000 under $100,000             10,481,514    $814,840,305         $77,741
 $100,000 under $200,000            12,030,320  $1,382,227,999        $114,895
 $200,000 under $500,000             2,999,587    $634,197,079        $211,428
 $500,000 under $1,000,000             535,532    $220,613,390        $411,952
 $1,000,000 under $1,500,000           134,847     $82,221,850        $609,742
 $1,500,000 under $2,000,000            56,226     $44,970,874        $799,823
 $2,000,000 under $5,000,000            87,293    $108,019,569      $1,237,437
 $5,000,000 under $10,000,000           22,663     $53,758,068      $2,372,063
 $10,000,000 or more                    14,683     $93,731,006      $6,383,641
 Less than $100,000                104,963,649  $3,446,873,147         $32,839
 Less than $200,000                116,993,969  $4,829,101,146         $41,276
 More than $200,000                  3,850,831  $1,237,511,837        $321,362
 More than $500,000                    851,244    $603,314,757        $708,745

                          Table 3. (Continued)

 ______________________________________________________________________________

                                       2007-2008
                                   ____________________________________________

                                   $ Change     % Change
 ______________________________________________________________________________

 All returns, total                   ($438)        -0.9%
 No AGI                              $4,298         15.1%
 $1 under $5,000                        $84          2.5%
 $5,000 under $10,000                 ($231)        -3.1%
 $10,000 under $15,000                ($507)        -4.2%
 $15,000 under $20,000                ($685)        -4.0%
 $20,000 under $25,000                ($944)        -4.3%
 $25,000 under $30,000              ($1,055)        -3.9%
 $30,000 under $40,000              ($1,162)        -3.4%
 $40,000 under $50,000              ($1,183)        -2.8%
 $50,000 under $75,000              ($1,665)        -2.9%
 $75,000 under $100,000             ($2,377)        -3.1%
 $100,000 under $200,000            ($1,123)        -1.0%
 $200,000 under $500,000             $4,133          2.0%
 $500,000 under $1,000,000          $18,470          4.5%
 $1,000,000 under $1,500,000        $44,428          7.3%
 $1,500,000 under $2,000,000        $49,792          6.2%
 $2,000,000 under $5,000,000        $73,561          5.9%
 $5,000,000 under $10,000,000      $181,637          7.7%
 $10,000,000 or more               $357,339          5.6%
 Less than $100,000                   ($724)        -2.2%
 Less than $200,000                   ($282)        -0.7%
 More than $200,000                 ($7,417)        -2.3%
 More than $500,000                  $9,668          1.4%
 _____________________________________________________________________________

 Source: IRS SOI Table 1.4, inflation adjustments by author.

The hard, empirical facts:

The tax cuts did not spur investment. Job growth in the George W. Bush years was one-seventh that of the Clinton years. Nixon and Ford did better than Bush on jobs. Wages fell during the last administration. Average incomes fell. The number of Americans in poverty, as officially measured, hit a 16-year high last year of 43.6 million, though a National Academy of Sciences study says that the real poverty figure is closer to 51 million. Food banks are swamped. Foreclosure signs are everywhere. Americans and their governments are drowning in debt. And at the nexus of tax and healthcare, Republican ideas perpetuate a cruel and immoral system that rations healthcare -- while consuming every sixth dollar in the economy and making businesses, especially small businesses, less efficient and less profitable.

This is economic madness. It is policy divorced from empirical evidence. It is insanity because the policies are illusory and delusional. The evidence is in, and it shows beyond a shadow of a reasonable doubt that the 2001 and 2003 tax cuts failed to achieve the promised goals.

So why in the world is anyone giving any credence to the insistence by Republican leaders that tax cuts, more tax cuts, and deeper tax cuts are the remedy to our economic woes? Why are they not laughingstocks? It is one thing for Fox News to treat these policies as successful, but what of the rest of what Sarah Palin calls with some justification the "lamestream media," who treat these policies as worthy ideas?

The Republican leadership is like the doctors who believed bleeding cured the sick. When physicians bled George Washington, he got worse, so they increased the treatment until they bled him to death. Our government, the basis of our freedoms, is spewing red ink, and the Republican solution is to spill ever more.

Those who ignore evidence and pledge blind faith in policy based on ideological fantasy are little different from the clerics who made Galileo Galilei confess that the sun revolves around the earth. The Capitol Hill and media Republicans differ only in not threatening death to those who deny their dogma.

How much more evidence do we need that we made terrible and costly mistakes in 2001 and 2003?

Your thoughts? E-mail me at JohnstonsTake@tax.org.


High-Income Paying Zero Tax 1998-2008



The number of individual income tax returns showing adjusted gross income of $200,000 or more, but no income tax liability, has been rising rapidly in recent years.

Source: IRS SOI Table 4.

                                  Table 4.
                          2008: Fewer Jobs, Lower Pay
                           (With Exceptions in Bold)
 ______________________________________________________________________________

                                                       Number of Taxpayers
                          Change in Total Wages            With Wages,
                          2007-2008 (in 2008 $)             2007-2008
                        __________________________    ______________________

                           $ Change       % Change     # Change     % Change
 ______________________________________________________________________________

 All returns            ($115,978,152)       -1.9%    -1,266,302       -1.0%
 No AGI                    $5,838,136        32.4%        95,030       14.9%
 $1 under $5,000          ($1,545,391)       -5.1%      -684,100       -7.4%
 $5,000 under $10,000     ($3,517,323)       -4.8%      -174,431       -1.8%
 $10,000 under $15,000    ($8,464,013)       -7.5%      -324,220       -3.5%
 $15,000 under $20,000    ($5,878,968)       -3.8%        21,061        0.2%
 $20,000 under $25,000   ($10,863,109)       -5.7%      -129,225       -1.5%
 $25,000 under $30,000   ($13,985,932)       -6.6%      -219,195       -2.8%
 $30,000 under $40,000   ($21,031,141)       -4.8%      -178,469       -1.4%
 $40,000 under $50,000   ($15,897,352)       -3.8%      -100,258       -1.0%
 $50,000 under $75,000   ($38,350,109)       -3.9%      -177,312       -1.0%
 $75,000 under $100,000  ($20,519,494)       -2.5%        58,283        0.6%
 $100,000 under
   $200,000               $49,742,078         3.6%       555,908        4.6%
 $200,000 under
   $500,000               $31,858,017         5.0%        90,283        3.0%
 $500,000 under
   $1,000,000            ($10,824,650)       -4.9%       -48,129       -9.0%
 $1,000,000 under
   $1,500,000             ($6,238,756)       -7.6%       -18,695      -13.9%
 $1,500,000 under
   $2,000,000             ($3,908,107)       -8.7%        -7,895      -14.0%
 $2,000,000 under
   $5,000,000            ($15,082,971)      -14.0%       -16,403      -18.8%
 $5,000,000 under
   $10,000,000            ($8,598,427)      -16.0%        -4,979      -22.0%
 $10,000,000 or more     ($18,710,639)      -20.0%        -3,554      -24.2%
 Less than $100,000     ($134,214,698)       -3.9%    -1,812,836       -1.7%
 Less than $200,000      ($84,472,620)       -1.7%    -1,256,928       -1.1%
 More than $200,000      ($31,505,534)       -2.5%        -9,372       -0.2%
 More than $500,000      ($63,363,550)      -10.5%        -99655      -11.7%
 ___________________________________________________________________________

 Source: IRS SOI Table 1.4; inflation adjustments by author.



About Tax Analysts

Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.

For reprint permission or other information, contact communications@tax.org