Solution to the Bush Tax Cut Expiration

Solution to The Bush Tax Cut Expiration

Bush tax cut background

The phrase "Bush tax cuts" refers to changes to the United States tax code passed originally during the presidency of George W. Bush.

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA): significantly reduced tax liabilities between 2001 and 2010 by cutting individual income tax rates, increasing the child tax credit, repealing estate taxes, raising deductions for married couples who file joint returns, increasing tax benefits for pensions and individual retirement accounts, and creating additional tax benefits for education.

Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA): increased the exemption amount for the individual alternative minimum tax, reduced the tax rates for income from dividends and capital gains, and expanded the portion of capital purchases that businesses could immediately deduct through 2004.

In 2010, when the acts are supposed to expire, President Obama announced a temporary two years' extension. As the tax cut is going to expire again at the end of this year, whether continuing the tax cut become another topic.

The effect of tax cut

Tax is always a complicated topic. No one can say tax cut is good or bad. The goal for the Bush tax cut is to recovery the economic. If government collects less tax, more money is available for consumers so that they can buy more products they need. In this way, tax cut can promote demands and incentivize investment, which help the economic recovery.

However, extending the tax cut may increase the budget deficit to a higher level and reduce the revenue, which reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. How to balance the two sides? Whether or not extend the tax cut?

The solutions government can choose

In summary, there are three solutions the government can choose: Allow all tax cuts to expire; Extend all tax cuts to all taxpayers; Extend all tax cuts to some taxpayers (i.e. individuals making less than $200K and married couples making less than $250K)

For the first one, letting the tax cut expire may suddenly give a large burden to middle-class and low-income person. Because of the financial crisis, they are tightening their belt to live and cannot always afford all things they need. The tax increase is no doubt pushing them into a worse situation.

Also, the tax increase may slow the economy recovery. Mark Zandi, the chief economist at Moody's Analytics, estimates that allowing tax cuts for Americans who earn above $250,000 to expire at the end of 2012 would reduce gross