Bush Tax Cuts Failed To Deliver from PoliticalCorrection.org
During Bush Years, Household Income Declined For First Time On Record. According to a report by the Center for American Progress: “The Bush economic cycle saw the first decline in median household incomes of any cycle since 1967, when the Census Bureau began tracking household data.”
[Center for American Progress, February 2009]
Proponents of extending President Bush’s 2001 and 2003 tax cuts for people with incomes over $250,000 argue, in part, that allowing them to expire after 2010 would weaken the economy by hurting small businesses. In reality, however, extending the tax cuts would do little for small business because only the top 3 percent of people with any business income, let alone income from a small business, would benefit.  Over the long term, an extension would likely harm the economy — and thus small business — by adding about $1 trillion to deficits and debt over the next decade and even larger amounts in subsequent decades.
Opponents of letting the high-income tax cuts expire on schedule often cite the potential impact on small-business job creation. But when CBO analyzed the job-creating efficiency of various stimulus policies, extending the high-end Bush income tax cuts came in dead last.
In fact, during the 1950s and early 1960s, when America experienced its most impressive stretch of sustained growth, marginal tax rates on the rich were the highest they’ve ever been — 91 percent for the top bracket. Meanwhile, during the last decade, when top tax rates were at one of their lowest points in recent history, the US economy experienced its slowest annual growth rate since the Great Depression.
An additional problem with extending the Bush high-income tax cuts to aid small businesses is that it would be very poorly targeted. Most small businesses are just that — small — so their incomes are not high enough to face the top marginal rates. Allowing the two top tax rates to return to their pre-2001 levels would have no impact whatsoever on 97 percent of taxpayers with business income, according to the Joint Committee on Taxation. Only the top 3 percent of such taxpayers are in the top two brackets.
Those who claim that raising the top rates would seriously harm small businesses also tend to rely on an extremely broad definition of “small business.” Because the IRS does not publish specific, satisfactory data on the taxes that small businesses pay, analysts are left to examine various sources of business income that individuals receive. Some analysts define any taxpayer who shows any business income on a tax return — including passive income that very wealthy investors secure — as a small business. Defining small businesses in this manner greatly overstates the actual number of small businesses, particularly among households with very high incomes.
For example, most Americans would not describe the nation’s wealthiest 400 individuals, some of whom are billionaires, as small businesses. Yet the “Top 400” individuals have a great deal of money to invest and consequently receive significant business income — which means that they qualify as “small business owners” under the broad definition of the term. The 400 highest-earning taxpayers received nearly $17 billion in S corporation and partnership income in 2007 (the most recent year for which we have these data) — an average of $83 million each, according to the IRS.  In addition to the wealthiest 400 taxpayers, the following types of individuals are commonly included in the definition of “small business” used in tax debates:
- partners in very large corporate law firms,
- partners in lucrative medical practices, and
- Wall Street bond traders who receive multi-million dollar bonuses and invest some of their income in investment partnerships.
The commonly used definition of “small business” also includes many wealthy executives of the nation’s largest corporations and financial institutions, who are considered “small business owners” if they rent out their vacation homes.