The High-Income Rate Reductions
The Neglected Stepchild of the Bush Tax Cuts

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No. 3, September 2010

Congress is considering allowing the Bush tax cuts' rate reductions for high-income households to expire at the end of 2010 while providing a deficit-financed extension of the middle-class portion of the tax cuts. This combination would damage economic growth by hiking marginal tax rates on saving and investment while swelling the budget deficit. The vulnerable state of the high-income rate reductions is largely due to the failure of supporters of the Bush tax cuts to make the economic-growth case for these reductions.

Key points in this Outlook:

  • Congress is poised to allow the high-income rate reductions in the Bush tax cuts to expire while extending the middle-class Bush tax cuts. This combination would increase the deficit while reducing incentives for earning income, saving, and investing.
  • The high-income rate reductions provide greater incentives for economic activity, relative to revenue loss, than the middle-class tax cuts.
  • Supporters of the Bush tax cuts have either downplayed the high-income rate reductions or offered counterproductive justifications for them.
  • To avoid ever-increasing marginal tax rates, supporters need to defend the high-income rate reductions in the name of economic growth.

Congress confronts a pivotal decision this fall about whether to extend the 2001 and 2003 Bush tax cuts. The 2001 tax cut lowered the top four brackets, moved some income previously taxed in the 15 percent bracket to a new 10 percent bracket, increased the child tax credit, gave tax relief to married couples, and expanded other tax breaks.[1] The 2003 tax cut accelerated some of the provisions of the 2001 tax cut and lowered capital-gains and dividend tax rates. Without further action, most of these provisions will expire at the end of 2010.

President Barack Obama has proposed that most of the tax cuts for households with incomes above roughly $200,000 for singles and $250,000 for married couples (the "high-income rate reductions") be allowed to expire as scheduled, although he would partially extend the 2003 dividend tax cut. At the same time, he has called for the permanent extension of the Bush tax cuts for taxpayers with incomes below those thresholds (the "middle-class tax cuts"), with no spending cuts or tax increases to offset the associated revenue loss.[2]

From the standpoint of long-run economic growth, this proposal represents the worst of both worlds. As explained below, the high-income rate reductions provide much greater incentive for investment and other economic activity, relative to revenue loss, than the middle-class tax cuts. The expiration of the former and extension of the latter therefore combine much of the disincentive effects of full expiration with much of the deficit increase of full extension

Laying a firm foundation for sound tax policy will require bringing the neglected stepchild in from the cold and making the economic-growth case for the high-income rate reductions.

If this outcome occurs, much of the blame will rest with supporters of the Bush tax cuts. Over the last nine years, the high-income rate reductions have been the neglected stepchild of the tax cuts. The Bush administration downplayed these reductions when the 2001 tax cut was adopted, and supporters have generally failed to make the growth case for them. Most defenses of the high-income rate reductions continue to rely on misplaced arguments about small-business aid and Keynesian demand stimulus. These arguments solidified political support for the initial passage of the tax cuts, but impeded the establishment of lasting pro-growth tax policy. Laying a firm foundation for sound tax policy will require bringing the neglected stepchild in from the cold and making the economic-growth case for the high-income rate reductions.

Hiking Marginal Tax Rates

The figure shows the increases that will occur in marginal tax rates at the top income levels if the high-income rate reductions (including the dividend tax cut) expire. Beginning in 2011, the top income-tax bracket for wages and self-employment income, and for ordinary investment income, would revert from 35 to 39.6 percent; wages and self-employment income would continue to face an additional 2.9 percent Medicare tax. The top capital-gains tax rate would revert from 15 to 20 percent. Dividends would lose their current 15 percent tax rate and become taxable as ordinary income, subject to the new 39.6 percent rate. All four categories of income would also face a 1.2 percent stealth-tax-rate increase, from the restoration of a provision that phases out itemized deductions at high income levels.[3]

President Obama recently claimed that the expiration of the high-income rate reductions would merely restore marginal tax rates "back to what they were under President Clinton."[4] Whether or not this claim is a compelling argument for expiration, it is a correct description of 2011 and 2012 tax rates, as can be seen from the figure. But it is not correct for later years. Under the March 2010 health care law, the top Medicare payroll tax rate on wages and self-employment income will rise from 2.9 to 3.8 percent, starting in 2013. Also, a new 3.8 percent tax on ordinary investment income, capital gains, and dividends, called the Unearned Income Medicare Contribution (UIMC), will take effect in 2013.[5] As shown in the figure, the expiration of the high-income rate reductions (including the dividend tax cut) will leave the tax rates on all of the income categories above the Clinton levels.

The Harm from High Marginal Tax Rates

As I explained in two previous Outlooks, high marginal tax rates are harmful because they pose a disincentive to earning taxable income.[6] Because the marginal tax rate is the additional tax liability that arises from earning an additional dollar of income, it directly governs the incentive to earn that additional dollar.

The fact that taxpayers can alter their taxable income implies that income taxation is distortionary, meaning that it imposes an economic burden beyond the actual tax payments. For example, suppose that a taxpayer would earn $1,000 of income if her tax liability did not depend upon income, but chooses to earn only $800 when 40 percent of additional income must be paid in tax. The revenue raised by the tax is $320 (40 percent of $800), but this tax payment is not the taxpayer's only loss because she also bypasses the opportunity to earn the additional $200. The sacrifices that would be required to earn the last $200 were worth making when she kept the full $200, but not worth making when she keeps only $120 of the extra income. If these sacrifices would have been worth making for $160, for example, then the taxpayer has a $40 loss in addition to the $320 tax payment. That $40 loss reflects the distortion inflicted by the tax. The distortion depends upon the marginal tax rate, the fraction of each additional dollar of income that is absorbed by tax. Moreover, the distortion rises disproportionately with the marginal tax rate, roughly quadrupling when the marginal tax rate doubles.

Although marginal-tax-rate increases are distortionary at any income level, rate increases at the top income levels generally create the largest distortions per dollar of revenue. That partly reflects the fact that the rates at the top income levels are already high, so further increases are more damaging. But it also reflects the fact that rate increases at the top raise revenue from only some of the affected taxpayers' income. For example, consider a proposal to increase taxes by 5 percent of the income above $250,000 (which approximates the expiration of the high-income rate reductions for a married couple with ordinary income). The resulting revenue is less than 5 percent of the affected taxpayers' incomes because the tax applies only to the income above the $250,000 threshold; for a $400,000 couple, for example, the 5-percentage-point tax increase applies only to the last $150,000 of income, and the revenue is only $7,500. Because the disincentive effects depend upon the marginal tax rate applied to the last dollar, though, they are as severe as if the couple had to pay an extra 5 percent on their entire income (except that the disincentive will not prompt the couple to reduce their income below $250,000).

The opposite pattern holds for tax hikes in the bottom bracket, which actually leave marginal rates unchanged for most of the taxpayers from whom additional revenue is collected. For example, suppose that the 10 percent bracket, which will apply to the first $17,000 of a couple's taxable income in 2011 if extended, reverted to 15 percent. Taxpayers in that bracket would face a 5-percentage-point increase in ¬disincentives and would pay an additional 5 percent of taxable income. At the same time, all couples in higher brackets would also pay an additional $850 in tax because the first $17,000 of their income would be taxed at 15 rather than 10 percent. These higher-bracket taxpayers would not, however, face any additional disincentives because there would be no change in their marginal last-dollar tax rates.

The size of the distortions depends upon the extent to which taxpayers can reduce their taxable income in response to higher marginal tax rates. Even if taxpayers do not greatly reduce their work effort, they may significantly reduce their taxable income in many other ways, such as by shifting their earnings into tax-free fringe benefits or spending more on tax-deductible items. Statistical studies have generally found that taxable income displays significant sensitivity to marginal tax rates, particularly at high income levels.[7] This greater sensitivity at the top provides a third reason to avoid rate hikes at those income levels, in addition to the fact that those rates are already relatively high and the fact that rate increases at the top raise revenue from only part of the affected taxpayers' incomes.

Penalizing Investment

Although the factors above offer a powerful case against rate hikes at the top, the case is dramatically strengthened by the impact on saving and investment. Because the income tax applies to capital income as well as labor income, an increase in income-tax rates reduces the incentive to save and invest. The rate hikes at the top would have important effects in this regard.

It is widely recognized that individual income tax is imposed on the income of "pass-through" firms--sole proprietorships, partnerships, limited-liability companies taxed as partnerships, and S corporations. For tax purposes, these firms' profits are passed through to the owners' individual tax returns. It is often forgotten, though, that individual income tax is also imposed on the income of C corporations. Although these firms pay a separate corporate income tax, their investors also pay individual income tax. If a C corporation issues new stock to finance an investment, the resulting profits are either paid out as dividends on which stockholders are taxed or reinvested to generate capital gains on which stockholders are taxed when they sell their stock. If the corporation reinvests past profits to finance an investment, the reinvestment generates capital gains on which stock-holders are taxed when they sell their stock. Also, if any firm--a C corporation or a pass-through--borrows to finance an investment, the lenders are taxed on the interest income.

Of course, the expiration of the high-income rate reductions would boost marginal tax rates only on the savings of high-income households. The savings of this small group, however, account for a large volume of investment. Internal Revenue Service data for 2007 reveal that households with incomes above $200,000 received 47 percent of the taxable interest income, 60 percent of the dividends, and a staggering 84 percent of the net capital gains reported on tax returns.[8] Although a few of these taxpayers (married couples with incomes between $200,000 and $250,000 and taxpayers on the alternative minimum tax) would not be affected by the higher rates, this still leaves a significant amount of income that would be affected. The share of pass-through business income going to the affected group is also large. Taxpayers subject to the higher rates will receive 44 percent of the pass-through income reported on 2011 tax returns, according to Urban-Brookings Tax Policy Center estimates.[9] The Joint Committee on Taxation estimates that such taxpayers will receive 50 percent of the pass-through income reported on 2011 tax returns.[10]

Neglected from Birth

Unfortunately, supporters of the Bush tax cuts have ignored or downplayed the economic-growth case for the high-income rate reductions, a pattern that can be traced back to the initial design and marketing of the 2001 tax cut. Although the 2001 tax cut included the high-income rate reductions and marginal rate reductions in other brackets, a large portion of the package was devoted to provisions with little or no incentive effects. Examples included the 10 percent bracket, mentioned above, and the doubling of the child credit from $500 to $1,000, which did nothing to improve incentives for work or saving. These features reduced the package's impact on incentives relative to its revenue loss.

If marginal rate reduction was deemphasized in the design of the tax cut, it was almost entirely ignored in its marketing. Speaking to Congress on February 27, 2001, President George W. Bush described the proposed tax cut in these terms:

A typical family with two children will save $1,600 a year on their federal income taxes. Now, $1,600 may not sound like a lot to some, but it means a lot to many families: $1,600 buys gas for two cars for an entire year; it pays tuition for a year at a community college; it pays the average family grocery bill for three months. That's real money.[11]

Increasing disposable income to spur the consumption of groceries and gasoline is a quite different agenda from reducing marginal tax rates on work, saving, and investment. But that agenda dominated the effort to promote the tax cut. The $1,600 tax savings, which was entirely attributable to the 10 percent bracket and the doubling of the child credit, became a centerpiece of the campaign, with Bush using a large cardboard check made out to "U.S. Taxpayer" for $1,600 as a prop at one speech.[12]

Economic growth played a somewhat greater role in the design and marketing of the 2003 tax cut, with its reductions in dividend and capital-gains tax rates. Even then, however, growth shared center stage with the increase in disposable income for senior citizens with dividend income.[13]

From a short-run political perspective, the focus on increasing disposable income worked, helping secure the passage of the tax cut, including its marginal rate reductions. But the high costs of the strategy have become apparent over time. Provisions unrelated to marginal tax rates swelled the tax package's revenue loss and its impact on the deficit. Deficit-financed tax cuts can easily harm long-run growth because deficits can crowd out private investment and force future tax rate hikes to service the debt.[14]

The tax cuts would not have added to the deficit if spending had been cut. But the administration's marketing strategy blocked any real prospects for spending reduction. It is difficult to call for entitlement cuts that would reduce the disposable income of the middle class while supporting tax cuts on the grounds that they increase the disposable income of the middle class. Far from restraining federal entitlement spending, the Bush administration expanded it by adopting a new Medicare prescription drug benefit.

Now that Obama and congressional Democrats have succeeded in separating the high-income rate reductions from the rest of the tax-cut package in the public debate, the reductions are standing alone and undefended.

Although the emphasis on disposable income and consumption helped get the marginal rate reductions adopted as part of a larger tax package, the strategy failed to build any lasting political foundation for these provisions. Now that Obama and congressional Democrats have succeeded in separating the high-income rate reductions from the rest of the tax-cut package in the public debate, the reductions are standing alone and undefended. Although supporters of the tax cuts are now offering some arguments directed specifically to the high-income rate reductions, they continue to neglect the economic-growth case and give priority to a variety of flawed arguments.

Misdirected Arguments

A common argument is that the high-income rate reductions lower taxes on small business. The valid form of this argument, recently explained by Kevin A. Hassett and myself, is that the rate reductions lower marginal tax rates on investment by all firms, including small businesses.[15] Unfortunately, the more common forms of the argument adopt an exclusive focus on small business and obscure the growth implications.

To begin, the argument is often founded on the mistaken premise that small firms are inherently better than large firms, which suggests that the government should interfere with market forces to promote the former over the latter. In a previous Outlook, Amy Roden and I explained that firms of all sizes contribute to national prosperity and demonstrated that small firms do not play a disproportionately large role in job creation.[16] By focusing only on small (more precisely, pass-through) firms, the argument ignores the adverse effect of letting the high-income rate reductions expire on investment by big business. The data cited above suggest that the affected high-income households finance a greater fraction of corporate investment than pass-through investment. The potential tax-rate increase on corporate investment is also larger, at least if the dividend tax cut fully expires.

Also, because the argument is often phrased in terms of helping small business rather than promoting investment, it lends itself to the rejoinder--now heard on an almost continuous basis--that less than 3 percent of individuals with pass-through business income would be affected by the expiration of the high-income rate reductions.[17] As noted above, the correct response is that more than 40 percent of pass-through business income is affected by the expiration. The high concentration of pass-through income allows a small fraction of the owners to earn a large fraction of the income. But opponents of the rate reductions reply that, if so few individuals earn so much pass-through income, then their pass-through businesses must be relatively large (a valid inference) and should not be considered small businesses. They also note that some of this income goes to law, real estate, and accounting firms "that are not what most Americans think of when they hear the term 'small business.'"[18]

From a growth perspective, of course, the size of the affected pass-through firms and Americans' perceptions of them make no difference. And, as noted above, there is no reason to focus on pass-through firms, to the exclusion of C corporations. All of these digressions arise only because supporters talk about small business rather than growth.

A Keynesian argument has also been made for the rate reductions. With the U.S. economy apparently in the early stages of a slow recovery from an unusually severe recession, there has been concern about the need to stimulate aggregate demand. It is tempting to support the tax cuts as a form of Keynesian demand stimulus; the tax cuts increase the disposable income of the affected taxpayers, some of which will likely be spent on consumer goods, providing a short-term boost to output and employment. The Keynesian argument has met with some political success. After taking office, Obama, citing the weak economy, backed off from his campaign proposal to repeal the high-income rate reductions at the end of 2008 and shifted to his current position of letting them expire at the end of 2010; more recently, continued economic weakness has prompted some Democrats in Congress to suggest a reprieve of another year or two for the reductions.

But the Keynesian argument has several pitfalls. The rate reductions are not well designed as Keynesian stimulus because high-income households are likely to save rather than consume. While the willingness of such households to save increases the effectiveness of the rate reductions in promoting long-run growth, it reduces their effectiveness as short-run demand stimulus. The Congressional Budget Office recently concluded that permanent extension of the Bush tax cuts would provide only a small stimulus to aggregate demand, while carefully noting that the "long-term effects on work incentives and investment" were a separate matter.[19] Unfortunately, many opponents of the high-income rate reductions ignore this critical distinction, pointing to the limited demand stimulus as proof that the reductions offer little economic benefit and never discussing the impact on incentives and long-run growth.[20] To rebut such arguments, supporters of the rate reductions must emphasize long-run growth rather than short-run stimulus.

In any case, the Keynesian argument would justify only a temporary extension of the high-income rate reductions. The purpose of Keynesian demand management is to stabilize the business cycle by boosting demand when the economy is weak and restraining it when the economy is strong, a separate goal from promoting long-run growth. Demand stimulus should be temporary and tied to the business cycle, while marginal-tax-rate reductions should be permanent.

Still another argument for the high-income rate reductions is that the affected households are not really all that wealthy. One top Republican official even commented that, "after taxes, a million dollars is not a lot of money."[21] This argument is unlikely to ring true to the average voter. It also undermines the case for entitlement spending reductions, which would almost exclusively affect people with incomes well below $1 million.

Although the above arguments can be pressed into service for the high-income rate reductions, they ultimately point to other policies, including some that are inimical to growth. The most direct way to help small business would be to interfere with market forces by adopting tax credits or credit-allocation measures targeted to small business.[22] The most direct way to manage the business cycle would be to adopt temporary consumption-oriented tax cuts and government benefit payments during recessions. And the most direct way to avoid fiscal burdens on people making less than $1 million would be the economically destructive strategy of imposing much steeper marginal-tax-rate increases on people making more than that amount.[23] If the high-income rate reductions are to be selected over growth-inhibiting policies, they must be defended in terms of growth.

Deficits and Fairness

The Obama administration has repeatedly cited deficit reduction as a reason why the high-income rate reductions should be allowed to expire, with Treasury Secretary Timothy Geithner asserting that "borrowing to finance tax cuts for the top 2 percent would be a $700 billion fiscal mistake."[24] While the deficit is a very serious long-run problem, the administration's concern about it has not led to any proposals to restrain entitlement spending.

The administration's professed commitment to fiscal responsibility is also inconsistent with its willingness to accept a revenue loss of roughly $1.9 trillion from extending the middle-class tax cuts. This double standard is also reflected in the February 2010 pay-go budget law, which exempted most of the middle-class tax cuts but not the high-income rate reductions, from the requirement that revenue losses be offset.[25] Alan Greenspan and others have recently recognized that deficit concerns should be considered before deciding to extend all of the middle-class tax cuts permanently.[26] It clearly is possible to fashion a package that extends most or all of the high-income rate reductions along with some of the middle-class tax cuts while keeping the total revenue loss at, or even well below, the level that the administration views as acceptable. Some factor other than the deficit explains the administration's unwillingness to extend the high-income rate reductions.

That factor appears to be the belief that tax cuts for the middle class are fairer than those for "the top 2 percent." The fairness argument loses some of its force, however, in view of the high fraction of taxes already paid at the top. The Congressional Budget Office estimates that, in 2007, households in the top 1 percent of the income distribution paid 28.1 percent of federal taxes (individual and corporate income tax, payroll and self-employment taxes, and excise taxes) while earning 19.4 percent of the nation's income. In contrast, households in the bottom 60 percent of the income distribution paid 14.4 percent of federal taxes while earning 25.5 percent of the nation's income.[27] Moreover, if tax increases at the top impede capital accumulation, they reduce labor productivity and drive down wages for workers throughout the income distribution.

Numerous economists and observers across the ideological spectrum have noted that the long-run fiscal imbalance cannot be addressed solely by tax increases on the small set of people making more than $250,000.

In a recent interview, Geithner argued that allowing the high-income rate reductions to expire is necessary to "show the world" that the United States has the political will to make progress on deficit reduction.[28] This puts matters exactly backward. Numerous economists and observers across the ideological spectrum have noted that the long-run fiscal imbalance cannot be addressed solely by tax increases on the small set of people making more than $250,000.[29] There is little benefit from showing the world that we are pursuing the unsustainable strategy of raising taxes only on this group. Instead, the world needs to see that the United States has the political will to take the steps on middle-class taxes and entitlements that will ultimately be needed to address the long-run imbalance.

The Way Forward to Growth

Due to past mistakes, the outlook for the high-income rate reductions is bleak. If any of the reductions are to be salvaged, it is necessary to begin making the economic-growth case and abandon the misdirected arguments previously offered.

The most promising area is the dividend tax cut, which Obama has proposed to extend partially. Under his proposal, the top dividend tax rate would be 21.2 percent in 2011 and 2012 and 25.0 percent thereafter, 19.6 percentage points lower than the rates that would prevail if all of the high-income rate reductions expire. The administration has done little to promote this proposal, although Geithner recently reaffirmed the administration's support.[30] It is unclear whether congressional Democrats favor this partial extension, particularly because they did not exempt it from the pay-go requirements in the February 2010 law, while they did exempt extension of most of the middle-class tax cuts. At a minimum, supporters of economic growth should hold the administration to its proposal to partially extend this important component of the high-income rate reductions.

Given the federal government's spending commitments, the administration's emphasis on taxing only high-income households lays the groundwork for ever-increasing marginal tax rates on saving and investment. The enactment of the UIMC was a first step in this direction, and the potential expiration of the high-income rate reductions threatens to be the second step. Stopping this trend will ultimately require slowing the growth of federal entitlement spending, particularly Social Security and Medicare, and turning to more efficient revenue sources. But the first prerequisite for sound tax policy is a clear and consistent articulation of the impact of marginal tax rates on economic growth.

Alan D. Viard ([email protected]) is a resident scholar at AEI.

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Notes

1. The 2001 tax cut also gradually reduced the top estate-tax rate from 55 percent to zero. President Obama has proposed that the top rate be permanently set at 45 percent. Because Congress is likely to address the estate tax separately from the remainder of the Bush tax cuts, the estate tax is not specifically discussed in this Outlook.

2. For a description of the expiring provisions of the 2001 tax cut and President Obama's associated proposals, see Joint Committee on Taxation, Present Law and the President's Fiscal Year 2011 Budget Proposals Related to Selected Individual Income Tax Provisions Scheduled to Expire under the Sunset Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, 111th Cong., 2d sess. (July 14, 2010), JCX-36-10, available at www.jct.gov/publications.html?func=startdown&id=3691 (accessed September 3, 2010). The report does not discuss the 2003 tax cut.

3. The Pease provision disallows three dollars of itemized deductions for each $100 of additional income earned, causing an additional $1.18 of tax for a taxpayer in the 39.6 percent ordinary tax bracket. If the rate reductions expire, the second-highest bracket would also revert from 33 to 36 percent, and another stealth-tax-rate increase from a restored phase-out of personal exemptions would increase marginal rates for some high-income taxpayers. Because the increase in the second-highest bracket and the exemption phase-out do not affect marginal rates at the highest income levels, they are not shown in the figure.

4. White House, "Remarks by the President on the Economy in Parma, Ohio," news release, September 8, 2010, available at www.whitehouse.gov/the-press-office/2010/09/08/remarks-president-economy-parma-ohio (accessed September 10,2010).

5. As I have noted elsewhere, the UIMC is misnamed in three respects, as it is a tax rather than a voluntary contribution, it applies to income earned by savers rather than to unearned income, and it has no financial link to Medicare (Alan D. Viard, "Tax on Income Earned by Savers Signed into Law," Enterprise Blog, March 30, 2010, available at http://blog.american.com/?p=11963). Despite its significant impact on marginal tax rates, the UIMC was passed without any hearings in Congress and with little public debate.

6. Alan D. Viard, "The Trouble with Taxing Those at the Top," AEI Tax Policy Outlook (June 2007), available at www.aei.org/outlook/26354; and Alan D. Viard, "Should Millionaires Pay for Health Care Reform?" AEI Tax Policy Outlook (January 2010), available at www.aei.org/outlook/100930.

7. The statistical studies are surveyed in Seth H. Giertz, "The Elasticity of Taxable Income: Influences on Economic Efficiency and Tax Revenues, and Implications for Tax Policy," in Tax Policy Lessons from the 2000s, ed. Alan D. Viard (Washington, DC: AEI Press, 2009), 101-36, available at www.aei.org/book/975.

8. Author's calculations (available upon request) from Internal Revenue Service, "All Returns: Sources of Income, Adjustments, and Tax Items, by Size of Adjusted Gross Income, Taxable Year 2007," table 1.4, available at www.irs.gov/pub/irs-soi/07in14ar.xls (accessed September 7, 2010).

9. Urban-Brookings Tax Policy Center, "Distribution of Business Income by Statutory Marginal Tax Rate, 2011 Baseline plus Administration's Upper-Income Tax Proposals," available at www.taxpolicycenter.org/numbers/Content/PDF/T10-0186.pdf (accessed September 3, 2010).

10. Joint Committee on Taxation, Present Law and the President's Fiscal Year 2011 Budget Proposals Related to Selected Individual Income Tax Provisions Scheduled to Expire under the Sunset Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, 10.

11. George W. Bush, "Address before a Joint Session of the Congress" (speech, Washington, DC, February 27, 2001), available at www.washingtonpost.com/wp-srv/onpolitics/transcripts/bushtext 022701.htm (accessed September 3, 2010).

12. PBS, "President Bush's Tax Cut Plan," February 5, 2001, available at www.pbs.org/newshour/bb/economy/jan-june01/tax_2-5a.html (accessed September 5, 2010). The design and marketing of the Reagan tax cut in 1981 were quite different, as explained in Alan D. Viard, "Where's the Growth?" Forbes.com, April 7, 2007, available at www.aei.org/article/25909.

13. For example, on January 7, 2003, President Bush urged a dividend tax cut "for the good of our senior citizens, and to support capital formation across the land" ("Bush Offers Tax-Cutting Economic Stimulus Plan," About.com, January 7, 2003, available at http://usgovinfo.about.com/library/weekly/aastimulus.htm [accessed September 3, 2010]).

14. For simulation results on this point, see John W. Diamond and Alan D. Viard, "Welfare and Macroeconomic Effects of Deficit-Financed Tax Cuts: Lessons from CGE Models," in Tax Policy Lessons from the 2000s, 145-93.

15. Kevin A. Hassett and Alan D. Viard, "The Small Business Tax Hike and the 97% Fallacy," Wall Street Journal, September 3, 2010, available at http://online.wsj.com/article/SB10001424052748703959704575454061524326290.html?mod=WSJ_Opinion_LEADTop (accessed September 7, 2010). Despite the title the Wall Street Journal placed on the article, it explains that expiration of the high-income rate reductions will affect firms of all sizes.

16. Alan D. Viard and Amy Roden, "Big Business: The Other Engine of Economic Growth," AEI Tax Policy Outlook (June 2009), available at www.aei.org/outlook/100051. More recent research confirms the conclusion about small firms and job creation, such as John C. Haltiwanger, Ron S. Jarmin, and Javier Miranda, "Who Creates Jobs? Small v. Large v. Young" (Working Paper 16300, National Bureau of Economic Research, Cambridge, MA, August 2010).

17. See U.S. Department of the Treasury, "Secretary Geithner Remarks as Prepared for Delivery at Center for American Progress," news release, August 4, 2010, available at www.ustreas.gov/press/ releases/tg814.htm (accessed September 3, 2010); Chuck Marr and Gillian Brunet, Extension of High-Income Tax Cuts Would Benefit Few Small Businesses; Jobs Tax Credit Would Be Better (Washington, DC: Center on Budget and Policy Priorities, August 3, 2010), available at www.cbpp.org/files/8-3-10tax.pdf (accessed September 3, 2010); and Paul Krugman, "Now That's Rich," New York Times, August 23, 2010.

18. U.S. Department of the Treasury, "Secretary Geithner Remarks as Prepared for Delivery at Center for American Progress"; and Chuck Marr and Gillian Brunet, Extension of High-Income Tax Cuts Would Benefit Few Small Businesses; Jobs Tax Credit Would Be Better.

19. Congressional Budget Office, Options for Responding to Short-Term Economic Weakness (Washington, DC, January 2008), 12, 20, available at www.cbo.gov/ftpdocs/89xx/doc8916/01-15-Econ_Stimulus.pdf (accessed September 3, 2010).

20. Examples include Paul Krugman, "Now That's Rich," and "A Real Debate on Taxes," New York Times, August 24, 2010.

21. Republican National Committee chairman Michael Steele, quoted in "Michael Steele: $1 Million 'Not a Lot of Money,'" CBS News, February 5, 2010, available at www.cbsnews.com/8301- 503544_162-6178340-503544.html (accessed September 3, 2010).

22. Chuck Marr and Gillian Brunet advocate such policies in Extension of High-Income Tax Cuts Would Benefit Few Small Businesses; Jobs Tax Credit Would Be Better, 1. See also U.S. Department of the Treasury, "Secretary Geithner Remarks as Prepared for Delivery at Center for American Progress."

23. Some observers advocate this course of action. See James Surowiecki, "Soak the Very, Very Rich," New Yorker, August 16, 2010.

24. U.S. Department of the Treasury, "Secretary Geithner Remarks as Prepared for Delivery at Center for American Progress."

25. The Joint Committee on Taxation estimates a $2.465 trillion revenue loss from Obama's proposal to extend part of the Bush tax cuts. Subtracting $253 billion of estate tax relief, $26 billion of small-business expensing, and $238 billion of dividend and capital-gains tax relief yields a $1.948 trillion cost of extending the middle-class tax cuts. See Joint Committee on Taxation, Estimated Budgetary Effects of the Revenue Provisions Contained in the President's Fiscal Year 2011 Budget Proposal, 111th Cong., 2d sess. (March 15, 2010), JCX-7-10R, available at www.jct.gov/publications.html?func=startdown&id=3665 (accessed September 7, 2010). These revenue-loss estimates include the interaction between extension of the tax cuts and alternative minimum tax relief. The pay-go law requires that part of the revenue loss from this interaction be offset.

26. Sewell Chan, "Greenspan Calls for Repeal of All the Bush Tax Cuts," New York Times, August 7, 2010. See also "A Real Debate on Taxes" and Fareed Zakaria, "The Easiest Deficit Fix," Washington Post, August 2, 2010.

27. Congressional Budget Office, Average Federal Tax Rates in 2007 (Washington, DC, June 2010), available at www.cbo.gov/publications/collections/tax/2010/AverageFedTaxRates2007.pdf (accessed September 3, 2010).

28. "This Week," ABC News, July 25, 2010, available at http://abcnews.go.com/ThisWeek/week-transcript-geithner/story?id= 11245464 (accessed September 3, 2010).

29. I cite numerous observers in Alan D. Viard, "Denying the Obvious: The Limits of Taxing the Top 3%," Enterprise Blog, August 8, 2009, available at http://blog.american.com/?p=4619.

30. "The Kudlow Report," CNBC, July 7, 2010, available at http://kudlowsmoneypolitics.blogspot.com/2010/07/interview-with-treasury-secretary-tim.html (accessed September 3, 2010).

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