During the 2000 U.S. Presidential campaign, the U.S. economy was stagnant and sliding toward recession (Moore). A major plank in the platform of Texas Governor George W. Bush was a comprehensive cut in Federal tax rates. Following his election and inauguration, in June, 2001 Congress passed, and President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA included lowering of marginal income tax rates for all taxpayers, lowering taxes of many married couples by increasing the standard deduction for married joint filers, and increased child tax credits. The Act also decreased rates on dividend income as well as capital gains, and introduced sweeping changes to retirement plans (United States Code, 2001). In May, 2003 the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which accelerated some provisions of the 2001 Act, doubled the child tax credit, and calls for a phased-in repeal of the estate tax, was signed into law (United States Code, 2003).
The proposal of wide-ranging tax cuts sparked vociferous political debate both before and after the election. Proponents adhered to the supply-side philosophy, arguing that the tax cuts were necessary to stimulate economic growth, as had been the case during the Coolidge, Kennedy and Reagan administrations. Opponents of the cuts argued that they would lead to dangerously high budget deficits, and that the cuts benefited “the rich” to the detriment of most taxpayers. This group argued the Keynesian position that government spending was necessary to stimulate economic activity.
The purpose of this paper is to examine the arguments made by both sides of the issue by examining the results, in economic activity and federal revenues, of EGTRRA.
Fiscal policy, that is how government determines levels of taxation and spending, is at the core of any discussion of tax cuts. Therefore, consideration must be given to levels of government spending,...