Awakening to the reality of what tax cuts have done since 2001
After Decades of Costly, Regressive, and Ineffective Tax Cuts, a New Course Is Needed
Testimony of Samantha Jacoby, Senior Tax Legal Analyst, Center on Budget and Policy Priorities, Before the Senate Committee on the Budget
MAY 17, 2023
Chairman Whitehouse, Ranking Member Grassley, members of the Committee, thank you for the opportunity to testify before you this morning at this important hearing. I am Samantha Jacoby, Senior Tax Legal Analyst at the Center on Budget and Policy Priorities, a nonpartisan research and policy institute in Washington, D.C.
In my testimony, I will make three main points:
First, tax cuts enacted in the last 25 years — namely, the tax cuts enacted in 2001 and 2003 under President Bush, most of which were made permanent in 2012, and those enacted in 2017 under President Trump — gave windfall tax cuts to households in the top 1 percent and large corporations, exacerbating income and wealth inequality. These tax cuts cost significant federal revenue, adding to the federal debt and limiting our ability to invest in policies that broaden opportunity and contribute to shared prosperity.
Second, extending the Trump tax cuts that expire at the end of 2025 would continue to mostly benefit the well-off and, if not paid for, would add considerably to the nation’s long-term fiscal challenges. Permanently extending the cuts would benefit households in the top 1 percent more than twice as much as those in the bottom 60 percent as a share of their incomes — providing a roughly $41,000 annual tax cut for the top 1 percent compared to $500 for households in the bottom 60 percent, on average — at a cost of around $300 billion per year. This would be on top of the large benefits high-income households will continue to receive from the 2017 tax law’s permanent provisions.
Third, instead of doubling down on the failed trickle-down path of the Bush and Trump tax cuts, policymakers should set a new course by partially reversing the 2017 law’s flawed corporate tax cut, strengthening its international tax provisions, and reconsidering the tax code’s large tax breaks for high-income and high-wealth households. Doing so would make the tax code more progressive and raise substantial revenues that could be used to address the nation’s long-term fiscal challenges and pay for important policy priorities. This approach stands in stark contrast to the House Republican debt limit bill, which would force deep cuts in a host of national priorities; leave more people hungry, homeless, and without health coverage; and make it easier for wealthy people to cheat on their taxes.[1]
The Wealthy and Corporations Have Received Massive Tax Cuts in Recent Decades
U.S. policymakers have substantially reduced taxes for wealthy households in recent decades. The 2001 and 2003 Bush tax cuts[2] reduced individual income tax rates, taxes on capital gains and dividends, and the tax on estates, all of which provided the largest benefits to the highest-income taxpayers. Though policymakers let many of the Bush tax cuts for high-income households expire in 2013, the 2017 Trump tax cuts again lowered individual income tax rates (including the top rate) and weakened the estate tax, so that it applied only to the wealthiest estates: those worth more than $11 million per person or $22 million per couple, indexed for inflation. The 2017 law also created a large new tax deduction on “pass-through” business income (business income from partnerships, S corporations, and sole proprietorships) and enacted large and permanent tax cuts for corporations.
Taken together, these tax cuts disproportionately flowed to households at the top and cost significant federal revenues, adding trillions to the national debt since their enactment.[3] By shrinking revenues, these tax cuts limit policymakers’ ability and willingness to make public investments that pay off in tangible and important ways for individuals, families, communities, and the country as a whole.
Bush Tax Cuts Disproportionately Benefited High-Income Households
The 2001 tax cuts dramatically reduced the top four marginal income tax rates.[4] The top rate dropped from 39.6 percent to 35 percent, and the next bracket fell from 36 percent to 33 percent. The 2001 law also phased out the estate tax, repealing it entirely in 2010.
The 2003 law cut taxes on capital gains and dividends. Before the law, long-term capital gains were taxed at 20 percent and dividends were subject to ordinary income tax rates. The law reduced the rate on long-term capital gains and qualified dividends to 15 percent.
In addition, the tax cuts included three components that are often referred to as “middle-class” tax cuts, including a new bottom income tax rate of 10 percent, an increase in the Child Tax Credit from $500 to $1,000 per child and changes that made many working families with low incomes eligible for the credit, and “marriage penalty relief” that reduced taxes for some married couples. Many higher-income people benefited from these provisions as well.[5]
The largest benefits from the Bush tax cuts flowed to high-income taxpayers. From 2004-2012 (the years for which the Tax Policy Center (TPC) provides data that are comparable from year to year), the top 1 percent of households received average tax cuts of more than $65,000 each year, totaling nearly $700,000 in tax cuts over this period.[6]
High-income taxpayers also received the largest tax cuts as a share of their after-tax incomes. TPC estimated that in 2010, the year the tax cuts were fully phased in, they raised the after-tax incomes of the top 1 percent of households by 6.7 percent, while only raising the after-tax incomes of the middle 20 percent of households by 2.8 percent.[7] The bottom 20 percent of households received the smallest tax cuts, with their after-tax incomes increasing by just 1.0 percent.[8]
These cuts lost significant revenue: the cost of the tax laws enacted during George W. Bush’s administration is equal to roughly 2 percent of GDP in 2010.[9]
Evidence suggests that instead of “paying for themselves” by delivering increased economic growth, as advocates promised, the tax cuts enacted in 2001 and 2003 — particularly those for high-income households — ballooned deficits and debt and contributed to a rise in income inequality.[10] And there is little evidence they boosted growth. An analysis of the tax cuts by Brookings Institution economist William Gale and Dartmouth professor Andrew Samwick, former chief economist on George W. Bush’s Council of Economic Advisers, found that “there is, in short, no first-order evidence in the aggregate data that these tax cuts generated growth.”[11]
Nearly all of the tax cuts were originally scheduled to expire at the end of 2010, but policymakers extended many of their provisions for two years as part of a budget deal in December 2010. This agreement reinstated the estate tax starting in 2011, but with a lower tax rate and higher exemption levels, applying only to the wealthiest estates (those worth more than $5 million per person or $10 million per couple, indexed for inflation). And in 2012 policymakers agreed to make permanent the tax provisions affecting households with low and moderate incomes, but allowed certain tax rate cuts that affected only the highest-income taxpayers to expire, including restoring the top income tax rate to its previous level of 39.6 percent. This agreement made about 82 percent of the cost of the Bush tax cuts permanent.[12]
Trump Tax Cuts Created New Costly Tax Advantages for the Wealthy
Like the Bush tax cuts, the tax cuts enacted in 2017 under President Trump benefited high-income households far more than households with low and moderate incomes. The 2017 tax law will boost the after-tax incomes of households in the top 1 percent by 2.9 percent in 2025, roughly three times the 0.9 percent gain for households in the bottom 60 percent, TPC estimates.[13] The tax cuts that year will average $54,220 for the top 1 percent — and $220,310 for the top one-tenth of 1 percent. (See Figure 1.) The 2017 tax law also widens racial disparities in after-tax income.[14]
https://www.cbpp.org/research/federal-tax/after-decades-of-costly-regressive-and-ineffective-tax-cuts-a-new-course-is
