The Presidential election of 2000 was one of the most controversial in history, as the final selection to settle a Florida vote challenge came down to a split vote in the Supreme Court, giving Republican Governor George W. Bush of Texas the Presidency over the Democratic candidate, Vice President Al Gore. The stock market collapse in the spring of 2000 and the disappearance of thousands of high tech companies and billions of dollars in market valuations left the economy on the edge of recession as the new President took office in January 2001.
The first economic proposal of the new administration was a $1.6 trillion tax cut to be spread over the decade, originally proposed as a means to reduce the size of a large and rapidly growing budget surplus. It was first proposed by candidate Bush during the campaign as a traditional Republican proposal to return money confiscated by Washington to its rightful owners. By the time Bush took office in January there were signs of an economic slowdown, so the proposal shifted to one necessary for economic stimulus. Bush proposed to reduce the existing five tax brackets that ranged from 15 percent to 39.6 percent to only four brackets, ranging from 10 percent to 33 percent. He also proposed doubling the child tax credit to $1,000 and reducing the so-called “marriage penalty” by allowing a couple to subtract 10 percent of the earnings of the lower paid spouse before figuring the tax. Finally, he would repeal the estate tax in stages by 2009 and allow taxpayers who do not itemize to deduct payments for charitable deductions.
Democrats argued that the Bush proposal was tilted decidedly towards the rich, giving as much as 45 percent of the income tax cut benefits to the richest 5 percent of taxpayers, while the entire $186 billion value of the estate tax repeal would benefit only the richest 2 percent of the nation’s families. By Bush’s own calculations, 30 percent of his cuts would go to those in the highest tax bracket when that bracket was reduced from 39 percent to 33 percent and when the estate tax (which is paid only on estates of the super wealthy) was repealed. Bush promoted the cuts as needed to restore fairness to the tax code, but completely ignored reforms to the payroll tax, the most burdensome tax for most taxpayers earning less than $100,000 a year. In fact, approximately three-fourths of American families now pay more in payroll taxes each year than they do in income taxes.
Congress approved a record tax cut of $1.35 trillion in May 2001. It provided for an immediate refund of $300 for single taxpayers and $600 for all married couples, and increased the child credit from $500 to $600. It decreased marginal tax brackets in stages over a ten-year period and also phased out the estate tax over the same period. But the 70 percent of taxpayers in the lowest bracket (15 percent) got no benefit from bracket reductions, and the annual tax reduction for most middle class families would amount to only a few hundred dollars. But the annual benefit for the richest 1 percent was estimated to average $40,000 or more during the decade.
When the economy continued to weaken throughout the year, the Federal Reserve Board responded by systematically cutting interest rates, but by summer 2001 it was clear that the country had slipped into the first recession since 1991. The recession deepened quickly following the terrorist attack on the Pentagon and World Trade Center on September 11, as consumers and producers both retrenched in the wake of uncertainty and fear of further attacks. But the September 11 attacks also had the remarkable result of bringing together the nation in a way that could not have been imagined or predicted a few months earlier. Americans began to proudly display the flag and openly talked about patriotism and the blessings of living in America. Millions reexamined their lives and changed their goals and priorities so friends and family replaced jobs and material goods as their primary focus.
The U.S. response to the September 11, 2001 attacks on the World Trade Center towers was to attack those responsible, the ruling Taliban in Afghanistan and the terrorist organization known as Al Qaida run by Osama Ben Laden of Saudi Arabia. The Taliban was protecting Ben Laden in Afghanistan when the U.S. invaded in November 2001. The 2001 tax cut was followed by another tax cut in 2003, and another war when Iraq was also invaded in March of 2003. The revenue loss from two tax cuts and the spending increases from two wars quickly turned the budget surpluses of the Clinton nineties into budget deficits of the Bush new millennium.
The budget surpluses from 1998 to 2001 had totaled $558.5 billion, reaching a high of $236.4 billion in fiscal 2000. The Bush deficits reached $374 billion in 2003, $413 billion in 2004, and $455 billion in 2008, and totaled $2,128.8 billion during his eight years in office. But Bush refused to finance the two wars with taxes, arguing that tax increases would stifle the economic recovery, so the deficits were allowed to increase and the wars were financed by new borrowing and debt.
The Second Bush Voodoo Tax Cut
President Bush proposed a second major tax cut in January 2003 which would accelerate the cuts of the 2001 law which were spread over an eight year period. Upcoming bracket reductions would be made effective in 2003 and the tax on dividends and capital gains would be eliminated totally. The proposal was estimated to cost $400 billion over the following 10 years. The second Bush tax cut of $350 billion was passed in May 2003 and did accelerate the pending cuts of the 2001 law to make them effective in 2003. The reduction in tax brackets was accelerated and a new 10 percent bracket was created, yielding six tax brackets of 10, 15, 25, 28, 33, and 35 percent.
Taxes on dividends and capital gains were not eliminated, but were greatly reduced. Dividends, which had been taxed as ordinary income with a maximum rate of 38.6 percent, would now be taxed at a maximum of only 15 percent. And capital gains, which had been taxed at a maximum of 20 percent, would also now be taxed at a maximum of 15 percent. Since dividends and capital gains are earned primarily by investors in the top two brackets, the maximum tax of 15 percent was an effective tax cut of over 50 percent.
The new law also provided for an increase from $600 to $1,000 in the credit for each dependent child under age 17. It also eliminated the “marriage penalty” for two years that made many couples pay more than they would have to if they were single and filing separately. The penalty was greatest for couples who earned somewhat equal incomes, but elimination provided the greatest relief for couples with only one income.
Like the 2001 bill, the 2003 tax cut was promoted as an economic stimulus and necessary to restore fairness to a tax system that taxed the wealthy at high and very burdensome rates. Bush also ignored the rising budget deficit as an inconvenience necessary to accomplish his more important agenda. Like Reagan, Bush argued that a deficit created by tax cuts was a wise and prudent use of the budget, but, also like Reagan, he ignored the impact of increased spending on the deficit and of spending hundreds of billions a year on defense and fighting two wars.
The Second Bush Term
By the election of 2004 the economy was growing steadily and the Democrats nominated Massachusetts Senator John Kerry to challenge Bush. Bush won reelection and Republicans were able to maintain control of both houses of Congress. Bush faced at least two more years of Republican control, and he used the time to push another favorite Republican “reform” of privatizing Social Security by allowing taxpayers to divert one-third of their Social Security taxes into private investment accounts. The proposal would shift a sizeable share of retirement risk from the government to individuals, but would also have the immediate effect of significantly reducing Social Security taxes and likely force the system to borrow additional sums to continue paying current Social Security benefits. Opposition turned out to be bipartisan and the proposal was defeated.
Bush promoted his second term budgets as the most disciplined since Reagan, but, in fact, he had already presided over the most fiscally reckless budgets in decades, increasing government spending at the fastest rate since the 1960s, and reducing tax revenues by over a trillion dollars during his eight years in office. In addition, until the Democrats won control of the Congress in 2006, Bush had never vetoed a spending bill and stood by and watched spending on ear-marked special interest legislation by fellow Republicans reach all-time high levels. But with Democratic victories in the mid-term elections of 2006, Bush suddenly became a deficit hawk and demanded an end to out-of-control ear-mark spending.
The 2001 and 2003 tax cuts were scheduled to expire by 2010, and Bush wanted to make them permanent before he left office. If the cuts were not allowed to expire, estimates were that the budget deficits would total an additional $3.3 trillion over the following decade. Bush proposed to reduce the pending deficits primarily by reductions in “discretionary” spending, which meant spending other than for defense, Social Security, and Medicare/Medicaid. Democrats in Congress blocked the President’s attempts to make the tax cuts permanent and the budget deficits continued to be an issue. Deficits were $413 billion in 2004, $319 billion in 2005, $248 billion in 2006, $162 billion in 2007, and $455 billion in 2008, and Bush had presided over the largest deficit totals in history and a resulting doubling of the national debt.
The Bush Economy
George W. Bush took office in January 2001 at the beginning of a rather mild recession, officially only six months long, but was clearly a Laffer/Reagan disciple in terms of economic policy. While he clearly planned his two major tax cuts, he could not have foreseen the 9/11 attacks or the resulting wars in Afghanistan and Iraq, with a doubling of military spending. But he also made deliberate decisions to avoid paying for the wars with tax increases, and they were criticized by some as “wars without sacrifice” because the only ones asked to make sacrifices were those sent to do the fighting. Most citizens and families were not touched directly by the wars. In fact, Bush prohibited media coverage of the bodies of the fallen being brought home.
Bush was a disciple of Reagan in more than tax cuts for the wealthy. He was also a believer in the ability of markets to regulate themselves, and pushed for reductions in government regulations in banking and finance, energy, and housing. As a consequence, corporate excesses increased while incomes of corporate leaders exploded. The housing crisis that followed was not a consequence of just lax regulation, but also of corporate greed, Federal Reserve monetary expansion, mismanagement at the two major Federal housing authorities, Fannie Mae and Freddie Mac, unscrupulous mortgage brokers and bankers, and millions of home buyers all too willing to sign mortgage loan agreements that they knew they could not afford.
Mortgage lenders expanded and created new instruments allowing homebuyers to borrow at very low initial interest rates, with the corresponding low initial payments. They then sold the suspect, and sometimes fraudulent, mortgages to Fannie Mae and Freddie Mac, who bundled them into large “mortgage securities” and sold them to investors. Housing prices soared throughout the country, construction expanded, and speculation in housing and mortgage securities all but guaranteed an eventual collapse.
The collapse began in 2007, when housing reached market saturation and prices began to level off and then fall. Speculators began to dump houses, buyers withdrew, and prices fell. Falling prices led to bank foreclosures and an uncertain market for all those mortgage securities sold to investors, many of whom were large commercial and investment banks. Investors knew that some of the mortgages in their bundled securities were now bad, but couldn’t tell which ones or how many were good and/or bad. The market collapsed and investors held hundreds of billions of dollars of worthless or suspect securities. The financial system was on the edge of collapse when Bush and his Treasury Secretary Henry Paulsen took action in September 2008.
The “bank bailout” initiated by Bush in 2008 was designed to save the largest banks from failure. Bush proposed to make over $800 billion in loans to banks and other financial institutions by purchasing “troubled assets” and allowing banks sufficient funds to continue lending. The bailout was passed by a bipartisan majority, although most in Congress in both parties were unhappy with some or most of its provisions. But many banks, which had grown used to extremely high profits and the resulting ability to pay executives very large bonuses, used the bailout funds to continue paying bonuses and shoring up their weakened capital reserves. Lending by banks continued to decline and the bailout became one of the most unpopular government programs in decades.
The financial collapse also led to a general recession, which began in December 2007, and became known as the “Great Recession” since it was generally recognized as the worse downturn since the Great Depression of the 1930s. Unemployment rose to 10 percent before dropping to 9.1 percent, where it remained for the next several years. Housing prices in many metropolitan areas fell by 50 percent or more, and housing foreclosures reclaimed millions of homes throughout the country.
The recession and housing crisis cost Republicans both the Presidency and Congress in 2008, as the policies of President Bush were blamed for two increasingly unpopular wars, continuing deficits, and now rising unemployment and housing problems. Barrack Obama was elected President on a platform of “hope and change” and became the first black President in history. But Obama found that promising new hope and change were easier than providing them. By the mid-term elections in 2010 unemployment was still over 9 percent and the housing crisis was getting worse as foreclosures continued to rise. Obama and the Democrats passed a major fiscal stimulus package of $787 billion in February 2009, but it was attacked by Republicans as too large and by many Democrats as too small. While the recession technically ended in June of 2009, the resulting recovery was extremely slow and most families still felt the effects of recession by the 2010 mid-term elections. In addition, Obama had pushed through Congress a health care reform bill in March 2010 that was attacked by Republicans as a government takeover of health care and by some Democrats as too little reform and a boost primarily to health providers and insurance companies.
Obama’s stimulus and health care policies and lack of progress in solving the problems of unemployment and housing led to a Republican takeover of the House of Representatives in 2010, but Democrats kept a slim majority in the Senate. In December 2010 Obama reached agreement with Republicans in Congress on extending the Bush tax cuts for an additional two years in exchange for an extension of unemployment benefits. But new House Republican leaders were intent on making sure Obama was a one-term President by blocking his entire economic recovery package. The deficit of more than $1.4 trillion became a major Republican issue throughout 2011, but they steadfastly refused Obama’s demands that any reduction in spending be accompanied by some tax increases on those who earned over $250,000 a year. The continuing deficit, the issue of tax increases for the wealthy, and the opposite issue of reducing government spending for social welfare programs became the political issues that would shape the impending 2012 Presidential election campaign.
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