Why Were the Bush Tax Cuts Not Initially Made Permanent?

Republicans are still patting themselves on the back because the so-called Bush tax cuts were made permanent in the American Tax Relief Act of 2012 that was passed by the lame duck 112thCongress to avert the “fiscal cliff.”

But the American Tax Relief Act only provides tax relief for some Americans.

About half of Americans pay no income tax to begin with. According to the latest data from the IRS, in tax year 2010, the top one percent of taxpayers (in terms of adjusted gross income) paid 37.38 percent of all federal income taxes. The top five percent of taxpayers paid 59.07 percent. The top 10 percent of taxpayers paid 70.62 percent. The top 25 percent of taxpayers paid 87.11 percent of the taxes, and the top 50 percent paid a whopping 97.64 percent.

For Americans who do pay income taxes, the American Tax Relief Act simply keeps things the way they have been since 2010 for the majority of them.

For the rest of Americans who pay the bulk of the income taxes, the American Tax Relief Act punishes success by increasing the highest marginal tax rate and decreasing the availability of tax deductions.

If the Bush tax cuts had already been made permanent then the American Tax Relief Act would have been unnecessary; that is, the Republicans would not have had to compromise with the Democrats.

The question, then, is why were the Bush tax cuts not initially made permanent? For the answer we must first go back to the presidency of Bill Clinton.

As set by the Omnibus Budget Reconciliation Act of 1993, the income tax rates under Bill Clinton were 15, 28, 31, 36, and 39.6 percent. Additionally, the child tax credit was $500, the maximum long-term capital gains rate was 20 percent, qualified dividend income was taxed as ordinary income, the section 179 expense deduction for small businesses was limited to a maximum of $25,000, personal exemptions and itemized deductions began to be reduced once income reached $250,000 ($300,000 for married filing jointly), and the estate tax had a maximum rate of 55 percent with a $1 million exemption.

Under George W. Bush, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) added a 10 percent tax bracket and set the tax rates of the others at 15, 25, 28, 33, and 35 percent. The Bush tax cuts also increased the child credit to $1,000, lowered the long-term capital gains and qualified dividend tax rates to 15 percent (0 percent for those in the two lowest tax brackets), increased the Section 179 expense deduction to $250,000, gradually eliminated the personal exemption and itemized deduction reductions, and gradually eliminated the estate tax. That’s right, for those dying in 2010, there was no estate tax.

The problem with the Bush tax cuts (aside from the problem that the tax cuts themselves needed to be cut) is that they were set by the Republican Congress that passed them to expire at the end of 2010. This necessitated the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) to extend them. The six tax brackets and the rates on dividends and capital gains were extended for two years, as were the $1,000 child credit and the elimination of the personal exemption and itemized deduction reductions. The Section 179 expense deduction was extended and increased. However, the estate tax was revived with a maximum rate of 35 percent and a $5 million exemption.

But because all this was only temporary and had actually expired at the end of 2012, Congress passed the American Tax Relief Act of 2012 on January 1, 2013. The tax brackets of 10, 15, 25, 28, 33, and 35 percent were made permanent (which only means until Congress changes them), but only for those making up to $400,000 a year ($450,000 for married couples). The top marginal tax rate increased to 39.6 percent, the estate tax increased to 40 percent, the alternative minimum tax was permanently indexed to inflation, the top marginal tax rates on long-term capital gains and dividends was raised to 20 percent for those making over $400,000 a year ($450,000 for married couples), the personal exemption phase-out and itemized deduction limitation were reinstated with an income threshold of $250,000 ($300,000 for married couples), the expansion of the earned income credit, the child tax credit, and the American opportunity credit was extended for five years, and some other tax deductions and credits were temporarily extended

Now we can return to our question: Why were the Bush tax cuts not initially made permanent?

The technical answer is the Byrd rule, but the real answer is the Republicans who passed the Bush tax cuts in the first place.

Named after Senator Robert Byrd (D-WV) and found in section 313 of the 1974 Congressional Budget Act, as amended, the Byrd rule prohibits “extraneous matter” in any reconciliation legislation considered by the Senate. Under the rule, “extraneous matter” includes anything that would increase the budget deficit in a fiscal year beyond those covered by the reconciliation legislation. Thus, the provision of the EGTRRA of 2001 had to expire at the end of 2010.

The Republicans controlled the Congress and the presidency from the inauguration of George Bush on January 20, 2001, until May 24, 2001, when Republican senator Jim Jeffords switched from Republican to Independent. The Republicans regained control of the Senate in the 2002 election, and controlled both Houses of Congress from January 2003 until January of 2007. This means that for a period of four months and then for a period of four years without interruption the Republicans controlled both Houses of Congress and the White House. The Byrd rule could simply have repealed, just like the Gephardt rule was. It really is that simple.

But that is not the only blunder the Republicans made when Bush was president. On the day of Bush’s first inauguration, the federal debt stood at $5.73 trillion. But then Bush and his Republican-controlled Congress went on a spending spree that rivals FDR and LBJ. By the time of Bush’s second inauguration, the national debt had increased by almost $2 trillion to $7.61 trillion. On the last day of Bush’s second term, the national debt stood at $10.63 trillion. So, during the eight-year reign of George Bush, with a Republican majority in both Houses of Congress for over half of that time, the national debt almost doubled.

The Republicans have only themselves to blame for all the hand wringing that occurred at the end of 2010 and 2012 over the expiration of the Bush tax cuts. They are also entirely to blame for the falsely-named American Tax Relief Act since it passed a Republican-controlled House.

The late Sam Francis was right: the GOP is the Stupid Party.