The 2003 Bush Tax Cuts--Is this Any Place to Draw A Sacred Line in the Sand?

 2013 will mark a decade since the Bush administration enacted the Jobs and Growth Tax Relief Reconciliation Act of 2003.  Given the growth of the economy between 2001 and 2005, and the imminent costs of the Iraq War and Bush drug plan (not to mention the planned missions to the Moon and to Mars!) were the second round  of  tax cuts in 2003 wise?   Economists, including Bush's own  Treasury Secretary at the time, Paul O'Neill, and 450 economists, including ten Nobel prize laureates, who contacted Bush in 2003, opposed the 2003 tax cuts on the grounds that they would fail as a growth stimulus, increase inequality and worsen the budget outlook considerably.  

To be sure, a smaller group of conservative economists, including Martin Feldstein and Gregory Mankiw at Harvard,  thought that the tax cuts were a good idea.  But it is less clear to me that they were taking the government's spending plans fully into account in making that assessment.  In addition, a significant driver of economic growth during the Bush administration was home equity extraction, in essence borrowing against the value of the home to finance personal consumption. And we all know how well that turned out.

Furthermore,  the public debt as a percentage of GDP rose from 1.4% in 2001 to 6.8% in 2007;  that was before the Financial Crisis even happened. . Most of this debt was accumulated as a result of tax cuts and increased national security spending.  

Now that the Fiscal Cliff Negotiations appear to be faltering because of tea party adoption of the Bush tax levels as the sacred line in the sand--"Washington has a spending problem not a revenue problem" in Boehner's words-- it is worth asking whether recent history validates such a point of view. Of course, President Bush's coupling of tax cuts with military adventure and reckless spending programs also lends credence to the view that it is spending that is the primary culprit. But I think that the verdict of history  must be that  the 450 economists and ten Nobel laureates who opposed the Bush tax cuts have been vindicated.

Their statement reads as follows:^[4]

Economic growth, though positive, has not been sufficient to generate jobs and prevent unemployment from rising. In fact, there are now more than two million fewer private sector jobs than at the start of the current recession. Overcapacity, corporate scandals, and uncertainty have and will continue to weigh down the economy.

The tax cut plan proposed by President Bush is not the answer to these problems. Regardless of how one views the specifics of the Bush plan, there is wide agreement that its purpose is a permanent change in the tax structure and not the creation of jobs and growth in the near-term. The permanent dividend tax cut, in particular, is not credible as a short-term stimulus. As tax reform, the dividend tax cut is misdirected in that it targets individuals rather than corporations, is overly complex, and could be, but is not, part of a revenue-neutral tax reform effort.

Passing these tax cuts will worsen the long-term budget outlook, adding to the nation’s projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.

To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to expand demand, and it should also rely on immediate but temporary incentives for investment. Such a stimulus plan would spur growth and jobs in the short term without exacerbating the long-term budget outlook.