His signature means that
Bush and the Republican Congress have fundamentally changed the U.S. tax
code in ways large and small, for struggling individuals and corporate
giants, bow-and-arrow makers and billionaires. Tax experts and academics
remain deeply divided about the wisdom and effectiveness of these tax
changes, but few disagree on their importance.
"Taken together, those policies and proposals represent a major shift in
the structure, incentives, revenues and distributional effects of the
American tax system," Brookings Institution economists William G. Gale
and Peter R. Orszag wrote last week in the journal Tax Notes.
Since 2001, Bush has signed tax cuts of $1.35 trillion, $42 billion,
$350 billion, $146 billion and $143 billion over 10 years. He has
lowered income tax rates at every income level and carved out a new,
10-percent bracket from the 15-percent bracket that had been the lowest.
The child tax credit was expanded from $500 to $1,000. Married couples,
especially those in the middle-income range, received a significant tax
break.
And the estate tax is scheduled to disappear in 2010. Already, Bush's
cuts have raised the value of an estate exempt from taxation from
$700,000 to $1 million. By 2006, an inheritance worth $2 million will be
tax free.
But those tax cuts are only the most visible. The president has also
raised the amount of child-care and dependent-care costs that can be
written off a tax bill and has greatly expanded the amount of retirement
savings that can be shielded from taxation. Taxpaying couples with
incomes up to $160,000 can deduct thousands of dollars in tuition costs
from their taxes until the end of 2005.
Businesses -- especially small businesses -- can deduct significantly
more of their investments from their taxes. Investors have received a
major cut in the tax rates on dividends and capital gains.
Until yesterday, large corporations complained that they had not been
included in the tax-cutting bonanza. Not anymore: The new law showers
businesses large and small with $143 billion in tax breaks over the next
10 years, with that cost offset by revenue raisers and loophole
closures.
The $76.5 billion centerpiece of the new law effectively lowers the
corporate income tax from 35 percent to 32 percent for domestic
"producers" -- broadly defined to include old-line manufacturers,
newspapers, home builders, even architectural and engineering firms.
Also included is $42.6 billion of tax cuts for overseas profits.
Beyond those major provisions are hundreds of smaller measures that
benefit restaurant owners and Hollywood producers; makers of bows,
arrows and sonar fish finders; NASCAR track owners; and importers of
Chinese ceiling fans. The law also includes a significant perk for some
individuals, allowing taxpayers in states with no local income taxes to
deduct sales taxes from their federal tax bill.
But all of this has come with a cost. All totaled, Bush has enacted more
than $2 trillion in tax cuts since he took office. The budget deficit of
$413 billion for the fiscal year that ended Sept. 30 was a record in
dollar terms, surpassing the record of $377 billion set in 2003.
Even as the economy has recovered from the 2001 recession, taxes as a
percentage of the economy have fallen for four straight years, to an
estimated 16.2 percent of the gross domestic product in fiscal 2004.
That is the lowest level since 1959.
To many conservative economists, such deficits are necessary to get the
economy moving again. Edward C. Prescott, who won the Nobel prize for
economics this year, commented after the prize was announced: "Tax rates
were not cut enough."
A number of recent reassessments have given the tax cuts some credit for
the recovery. Economists at Goldman Sachs wrote this week that
households spent about two-thirds of the $38 billion in tax rebates
mailed out in 2001, boosting growth in July, August and September of
that year by 2.2 percent.
But other economists say the tax cuts could have been structured to have
far greater economic benefits at lower long-term costs. They have also
been fundamentally unfair, shifting more of the federal tax burden from
the affluent to the middle class, critics say.
Although all income levels received a tax cut, a Congressional Budget
Office study in August concluded that the share of total federal tax
liabilities rose on the middle 20 percent of households from 10 percent,
when the first tax cut was passed in 2001, to 10.5 percent this year.
The share of the richest 20 percent fell from 65.3 percent to 63.5
percent.
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