Bush-Era Tax Cuts and the Budget Deficit

The battle over the federal budget deficit was thrown into sharp relief when Congress was deadlocked in 2011 over a routine bill to raise the national debt ceiling. The national debt is so high (over $14 trillion at last count), because the U.S. federal government needs to continually borrow money to balance its budget. With an annual budget deficit of over $1 trillion, that's a lot of borrowing. As the debt ceiling debate demonstrated, Democrats and Republicans are deeply divided over how to close the budget gap. Republicans believe large spending cuts are the only answer. Democrats agree to some spending cuts, but argue that budget cuts must be balanced with increased revenue (taxes).

Politics aside for a moment, let's look at the numbers. The Bush-era tax cuts lowered the effective tax rates on the four highest tax brackets, raised the child tax credit, eliminated the marriage penalty, and dramatically lowered tax rates on investments and capital gains. If you calculate the cost of all of those cuts (i.e. the tax dollars that would have been collected if the rates had remained unchanged), the figure is $1.812 trillion over the length of the Bush administration. That is the largest "new cost" to the government under Bush, even larger than the $1.469 trillion spent on the Afghanistan and Iraq wars [source: Tritch]. Even though the cuts were made when the economic outlook was far brighter, the effect on the deficit is undeniable. Bush took office with a $230 billion budget surplus and left with a $1.2 trillion deficit.

The Bush-era tax cuts are still at the center of the budget debate because they were set to expire at the end of 2010. President Obama proposed a compromise with the Republican leadership to extend tax cuts for 97 percent of Americans and let the tax cuts expire for the wealthiest of households, but the Republicans rejected any plan that would raise taxes. The two sides reached a last-minute agreement in December 2010 to extend all tax cuts until the end of 2012.

In the meantime, the president called for a Congressional "super committee" of Republicans and Democrats to find a way to reduce government borrowing by $1.2 trillion over the next decade [source: Ohlemacher]. The super committee talks broke down when the two sides couldn't agree over what to do with the Bush-era tax cuts. Again, the Democrats called for an end to the tax cuts for the wealthiest Americans, while the Republicans insisted that all reductions be made through spending cuts.

The Congressional Budget Office estimates that the budget deficit will grow by $3.9 trillion over the next 10 years if the Bush-era cuts are permanently extended. If all cuts expire at the end of 2012, the budget deficit would drop from $1.1 trillion in 2012 to $585 billion in 2013 and $345 billion in 2014 [source: Pear]. But does the president or Congress have the political will to raise taxes on nearly every American in an election year? Unlikely. And that's why it's increasingly likely that the Bush-era tax cuts are here to stay.