What Was the 10 Year Cost of the 2001 Bush Tax Cuts?

When the initial Bush tax cuts were passed in 2001 with a 10 year expiration date they were budgeted to cost 1.6 trillion over the next 10 years. To extend the same Bush cuts in 2011 for 10 more years would cost an estimated 4.0 trillion this time. The cuts were ultimately extended for two years. Both estimates make the assumption that people’s behavior does not change as a result of tax law changes. This is simply not true. The federal government has extracted between 18-20% of GDP in the form of taxes since 1950. This number has only not moved substantially even though the top income tax rate started at 91% during this period and now stands at 35%.

In 2000, the peak of the dot com bubble with the NASDAQ north of 5000 the government collected $2.023 Trillion in taxes. In Bush’s first year the government collected $1.994 Trillion. Holding everything equal you would expect a drop of $160 Million per year as a result of the Bush tax cuts. Sure enough in 2002 revenue came in at $1.856 Trillion. However, by 2005 the government pulled in new record revenue of $2.153 Trillion, and was up to $2.571 trillion in taxes by 2007. So by 2007 not only was the “lost” $160 million per year restored, we were also pulling in an additional $578 Million a year in additional taxes. Growth in the economy does wonders for tax receipts, and you can’t rule that out as a factor in the extra tax money flooding in under Bush.

Was the economy really primed to grow in 2001?

2001 was the end of the Dot Com bubble, and the end of a multiple year run-up of the major stock indexes. People were fat and happy on free money extracted from the stock market during the late 1990s through the year 2000 when you could do no wrong. Then in late 2000, early 2001 the stock market began to violently crash leading to 10 years of zero returns for the S&P 500, and a NASDAQ market that is still more than half way below its peak. Then on September 11th 2001 we had the biggest terrorist attack ever on US soil for a second massive shock to the US economy. Getting the economy to recover from September 11th, and withstand a massive devaluation of everyone’s stock holdings was no guarantee. If getting the economy moving was so simple, Obama would have done it by now. So Bush put in place tax cuts and got the economy going again, and Tax receipts were way up over even the peak 2000 levels in just a few years. So how do you account for the tax cuts costing 1.6 Trillion? You simply can’t. The number was made up then and was never validated making the 4 Trillion estimates today just as bogus. It gets tough to factor changes in the economy that tend to drive up tax receipts, but I will take a stab at it.

During the Go-Go Clinton years the government collected an average of 18.9% of GDP in taxes hitting an all-time high of 20.6% in 2000 at the peak of the Dot Com Bubble. The 30 year average GDP extraction rate is 18.1%. During Bush’s 8 years in office the government extracted 17.6% of GDP in taxes below both Clinton and the long-term average. But we know that the out years in the Clinton presidency were an anomaly due to the building Dot Com Bubble. We also know that Bush started his presidency at the beginning of the a stock market crash, and was also hit with a major terrorist attack in his first year. To expect baseline type tax extraction under this scenario is quite a stretch, but I will go ahead and assume that is what would have happened without the Bush tax cuts. This gives you a 17.6% extraction rate with the Bush tax cuts and an 18.1% extraction rate without the cuts. Taking 0.5% of the 97.4 trillion in GDP over eight years gives you an eight year cost of $487 Billion. Prorating that to ten years gives you a $609 Billion cost vs. the $1.6 Trillion budgeted for the Bush Tax Cuts. Nobody seemed to notice this discrepancy when they claimed extending them again would cost a much larger 4 trillion.

The facts are pretty simple. The cost of the Bush tax cuts were more like 60 Billion per year, which is about what they just spent to extend unemployment insurance. It is a drop in the bucket compared to the 1.4 Trillion deficit in 2010. The 60 billion per year “lost”, was not lost at all, but kept by hard working tax payers. The tax cuts were able to help the economy recover and grow from two gigantic shocks that hit it in 2001. Now the deficit did rise significantly under Bush, but this was not a result of his tax cuts. This was a result of spending increases far out pacing revenue increases. There was a huge debate on not extending the Bush tax cuts for the top earners, but they only accounted for less than 25% of the cost. Is $15 billion a year going to fix your 1.4 trillion deficit hole? Think again. Spending needs to be cut fast, and extending the Bush tax cuts may even help on the revenue side if they can help get the economy going again. The United States has a spending problem not a tax problem.