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Bush Ad Claims His Tax Cuts Exceed Reagan's

It says his cuts are "the largest tax relief in history." Some experts disagree.

June 8, 2004

Modified: June 8, 2004

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Summary

 

A Bush ad set to run on cable networks starting June 7 makes a questionable claim when it lists "the largest tax relief in history" amid Bush's accomplishments. Bush's cuts are indeed historically big. But whether they are bigger than Ronald Reagan's depends on any number of assumptions. Reagan's looks larger by several measures.

Analysis

 

The campaign has taken a positive turn: with this ad, Bush paints himself as a bigger optimist than Kerry. The President says, "I believe in the people of America." He's responding to a June 1 Kerry ad in which Kerry says, "We're a country of optimists; we're the can-do people." The Bush ad is named "Pessimist" and the Kerry ad is called "Optimists ."

Bush Cheney '04

"Pessimism"

Bush: I'm George W. Bush and I approve this message.

I'm optimistic about America because I believe in the people of America.

Announcer: After recession, 9-11 and war, now our economy has been growing for ten straight months.

The largest tax relief in history.
1.4 million jobs added since August.
Inflation, interest and mortgage rates low.
Record homeownership.
John Kerry's response?
He's talking about the Great Depression.

One thing's sure . . . Pessimism never created a job.

The Bush ad is accurate when it states that the economy has been growing for 10 straight months, that 1.4 million jobs have been added since August (making up more than half the jobs lost after Bush took office), and that home ownership is at a record high. All that is true.

And it's also on target when it cites -- as evidence of Kerry's alleged "pessimism" -- that Kerry keeps "talking about the Great Depression." After Friday's report that the economy had gained 947,000 jobs in the past three months, the Kerry campaign issued a news release saying, "America is still in the worst job recovery since the Great Depression." Now that is looking on the dark side.

Whose is Biggest?

The one place where Bush's ad may go too far is when it claims his tax cuts are the largest -- exceeding even Ronald Reagan's historic 1981 tax cut and the cut proposed in 1963 by John F. Kennedy. Tax experts have been debating that question for some time.

Bush's cuts are clearly the largest if one looks at raw dollars alone, ignoring inflation and the size of the economy. But once those important factors are considered, Reagan's tax cut looks larger to some.

According to apaper published last July by a tax expert in Bush's own Treasury Department, Reagan's Economic Recovery Tax Act of 1981 (ERTA) clearly exceeded any one of Bush's cuts. "By every measure used here, ERTA was by far the biggest tax change (and the biggest tax cut) over the past 35 years," wrote Jerry Tempalski of the Office of Tax Analysis.

But what about all three of Bush's cuts, the cuts for individuals enacted in 2001 and 2003, and the business tax cut enacted in 2002? In raw dollars, Bush wins. Tempalski's tables show that Reagan's 1981 cut was estimated to average $111 billion per year during its first four years on the books, while Bush's three cuts average a combined total of $160.4 billion annually during the comparable four-year period.

But Bush loses when inflation is taken into account. A dollar today is worth much less than a dollar in 1981. And Reagan's cut is 12% larger than Bush's combined cuts in "real" dollars (dollars adjusted for inflation) according to Tempalski's tables, again comparing four-year averages for both tax cuts.

But wait -- Reagan's cuts never fully took effect. They were scaled back in 1982 by a tax increase that averaged $37.5 billion over its first four years. Subtract the '82 Reagan increase from the '81 Reagan cut, and the combined Bush cuts once again look bigger, even adjusted for inflation.

Hold on, though. The economy has doubled in size since 1981. According to Tempalski's tables, Reagan's cut would have amounted to 4.15% of the economy by the fourth year, and the Bush cuts total less than 1%.  Reagan's cut is four times bigger than Bush's measured this way, as a percentage of Gross Domestic Product (GDP). Even subtracting the effect of the '82 Reagan tax hike, we calculate from Tempalski's tables that Reagan's net cut is roughly three times bigger than all of Bush's put together.

We could go on. The cuts look different depending on whether one looks at only the first-year effects, or the fourth-year effects, or the average of the first two years or the first four years. And that's just using the figures provided by one neutral expert.

Who's Doing the Figuring?

Other figures differ even more, depending on who's doing the figuring. The conservative National Taxpayers Union (NTU), for example, has argued that Bush's combined tax cuts are smaller than either  Reagan's or Kennedy's. The way NTU's expert Paul Gessing figured it, the Bush cuts amounted to 1.6% of GDP while Reagan's 1981 cut came in at 3.3% and Kennedy's 1963 proposal at 2.0%. "The effect of Bush’s 2003 tax cut proposal – even in addition to the 2001 tax cut – is small in historical terms," Gessing wrote.

But Peter Orszag, a tax expert who writes for the liberal Center on Budget and Policy Priorities, says Bush's cuts actually amount to roughly 2.2% of GDP which he says, is "about the same" as the size of the Reagan cut, which he puts at 2.1%. That would make Bush the winner by a whisker.

Orszag's conclusion rests on several assumptions, however.  He values Reagan's 1981 cut initially at 5.6% of GDP but then reduces that figure to reflect the 1982 tax increase and something called "indexing." Before the 1981 Reagan law, inflation pushed taxpayers into higher tax brackets, automatically increasing their tax burden without any action from Congress. The Reagan law started the current practice of adjusting tax brackets each year to reflect inflation. Orszag figures that about 40% of the estimated effects of the Reagan law came from indexing, which amounted to preventing future tax increases and shouldn't be counted as a tax reduction.

There's one other assumption, too. Orszag assumes Congress will eventually have to enact changes in the Alternative Minimum Tax. The AMT originally was aimed at millionaires, but Congress neglected to index it and so it is predicted to take away the benefits of the Bush cuts for millions of middle-income taxpayers in future years. Orszag says Bush's cuts will amount to only 1.7% of GDP by the year 2014 unless the AMT is changed. If not, that would make Reagan's cut bigger and Bush the loser again.

And so it goes. The Bush campaign would be fully justified in claiming credit for one of the largest tax cuts in history. Too big, according to Kerry, who's promised to repeal it for those making more than $200,000 a year. But whether Bush's cuts are the largest will be debated, probably inconclusively, for years to come.

Sources

 

John Kerry for President Campaign, "Kerry Campaign Statement on New Unemployment Numbers," 4 June 2004.

Jerry Tempalski, "Revenue Effects of Major Tax Bills," U.S. Department of the Treasury, Office of Tax Analysis, OTA Working Paper 81, July 2003.

Paul Gessing, "President Bush's Combined Tax Cuts: Smaller Than Kennedy's or Reagan's" Issue Brief 143, National Taxpayers Union, 14 April 2003.

Peter R. Orszag, " The Bush Tax Cut Is Now about the Same Size As the Reagan Tax Cuts ," Center on Budget and Policy Prioties, 21 April 2001.

Tax Foundation, "The Bush Tax Plan: How Big is the Tax Cut?" 29 May 2003.

Peter R. Orszag, "The Bush Tax Cut Is Now about the Same Size As the Reagan Tax Cuts," Center on Budget & Policy Priorities, 19 April 2001.

Peter R. Orszag, interview and exchange of e-mails with author, 4-7 June 2004.

 

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