Individual income taxes after 2010: post-permanence-ism.

INTRODUCTION

Tax policy changes during the last six years have been significant. A dozen tax bills with gross revenue changes in excess of $1 billion have been enacted into law and the total estimated reduction in tax receipts is approximately $2.1 trillion as measured on a rolling, ten-year basis from year of enactment. The cumulative total reduction in taxes for fiscal year 2007 is $223 billion or approximately nine percent of total receipts. On a dollar-weighted basis, the majority of these changes constitute what this paper will define as the Bush Tax Cuts: the 2001 and 2003 tax proposals by President Bush. The key elements of the President's 2001 tax relief proposal were to reduce marginal tax rates on ordinary income, provide "marriage penalty" relief, increase the child tax credit and repeal the estate and gift tax; and the 2003 proposal was to end the double taxation of corporate income and accelerate the phase-in of the 2001 bill. Neither legislative proposal was enacted as proposed nor were the Bush Tax Cuts accomplished in just two acts; in total, there were five bills that collectively created current law with regard to these policies.

With a few exceptions discussed later, the Bush Tax Cuts are set to expire at midnight on December 31, 2010. Under current law, these policy changes then revert to their pre-2001 constructions. The Bush Administration has maintained a position of advocating that all of the Bush Tax Cuts be made permanent (e.g., Ritterpusch (2007)).

However, while the outcome of the 2008 Presidential election is uncertain, one thing is known: George W. Bush will not be in the White House in 2010 to advocate to preserve his tax policies. Whoever is President will have proposed a budget with his or her own tax ideas and a politically unimaginative policy stance such as the status quo seems unlikely. Furthermore, budget constraints and likely Congressional resistance are further restraints on the likelihood of making the Bush Tax Cuts permanent. While a straightforward extension of 2010 law (i.e., complete permanency) is nearly impossible in the author's view, a total lack of legislative action is equally improbable, given the historical frequency of tax code changes and broad applicability of the pending tax increase. Therefore, among the set of policy options for the individual tax code post-2010, perhaps the only two elements excludable from the set are total extension of present law and a reversion to pre-2001 law.

The purpose of this paper is to look for lessons to be learned from studying the legislative process by which these policies were enacted and to measure the magnitude and distribution of the pending tax increase. Taken together, these observations may suggest potential parameters for the types of changes Congress could consider as 2010 approaches.

The paper contains three parts. First, a review of the legislative process by which the Bush Tax Cuts became law highlights the multi-step nature of the process and the typical differences between the House and Senate approaches to tax legislation. It also serves as a good case study of the differences between what was proposed by the President and enacted into law. Next, results are presented from a simplified tax calculator designed to highlight the effects of the pending expiration of these tax policies on typical taxpayers across a spectrum of incomes. Finally, under the assumption that permanence is not a realistic option, the paper discusses the range of options that could be considered, including trade-offs between political and economic issues, and presents tax-calculator results for one reform option, a broad-base low rate structure.

A HISTORY OF THE BUSH TAX CUTS

While over a dozen tax cuts were enacted between 2001 and 2006 for relief totaling $2.1 trillion, this paper will define the Bush Tax Cuts as consisting of portions from five tax bills and two major tax policy initiatives. Those two initiatives were President Bush's keystone tax proposals made in 2001 and in 2003. Table 1 lists the five tax bills that created the structure now in place.

Generally, the Bush Tax Cuts are set to expire at the end of 2010. The exception to this statement is that a series of important changes to savings and pension policy from 2001 were made permanent in the Pension Protection Act of 2006. (1) Notably, while these provisions were a significant part of the 2001 tax cut, they were not originally proposed by the President and the support for these provisions, unlike other parts of the package, was overwhelmingly bipartisan.

2001 Tax Cut

From a political perspective, the Bush tax cut proposals began on the campaign trail in 2000. From a legislative perspective, the initial official proposal was President Bush's first budget proposal. In February 2001, the White House submitted to Congress the President's Fiscal Year 2002 Budget Proposal, which contained roughly 30 tax proposals. Here I identify a subset of those proposals as being the elements of the 2001 Bush Tax Cut: the ten percent bracket, the reduction of other ordinary tax rates, the marriage penalty relief, the doubling of the child tax credit to $1000, and the repeal of the estate tax. (2) The other roughly two dozen provisions cover a range of issues and vary in size from less than $1 billion to $70 billion (the healthcare tax credit proposal) and also include other major policy initiatives of the President such as proposals to encourage charitable giving. In total, these five provisions accounted for 85 percent of the cost of the entire tax proposal made by President Bush in his first budget.

The President's budget proposed these policies to take effect January 1, 2002, but the idea of accelerating these provisions and making some retroactive to January 1, 2001 soon began to circulate in Congress. In fact, on February 5, 2001, three days before the Administration officially submitted the President's Budget, President Bush indicated support for this idea (Office of the Press Secretary, 2001).

House of Representatives

Congressional action on the President's proposal began in the House of Representatives as a series of bills that addressed the President's proposal in pieces. (3) H.R. 3, Economic Growth and Tax Relief Act, containing the ten percent bracket and reduction in other tax rates as proposed by the President, was reported by the Committee on Ways and Means on March 1, 2001 and passed the House on March 8 by a vote of 230-198, with ten Democrats voting "yea" along with all Republicans. Marriage penalty relief and the child tax credit increase was reported by Ways and Means on March 22, 2001 and passed on the House floor on March 29 by a vote of 282-144, with 64 Democrats joining all Republicans in voting "yea." Estate tax repeal was reported by the Committee on March 29 and passed the House on April 4, 2001 by a vote of 274-154, with 58 Democrats joining all Republicans. Retirement savings legislation raising contribution limits for IRAs from $2,000 to $5,000, raising contribution limits on 401(k) plans and making other pension law reforms (generally known as Portman-Cardin; notably not in the President's Budget) was marked up in the Committee on April 25, 2001 and passed the House on May 2 in an overwhelming bipartisan vote: 407-24. (4,5)

In the eight weeks between March I and May 2, the U.S. House of Representatives voted 96 times. Eleven votes were on final passage of legislative bills under regular order and four of those eleven were tax bills. Put differently, there was a clear focus on working methodically through the Committee and on the floor to allow Members to cast separate, individual votes on all the aspects of the 2001 Bush tax cut. (6) From this vote data, it is simple to observe that tax credits and increased tax deductions for low-and middle-income taxpayers are more politically popular than across-the-board reductions in marginal rates. However, there has been bipartisan support for estate tax repeal, a policy that is more distributionally skewed than the rate cut proposal. Finally, reducing the tax on savings through expanded tax-deferred retirement savings was overwhelmingly bipartisan and may suggest that tax reform proposals designed around tax-free savings vehicles may be more feasible than other approaches.

Senate

On May 15, 2001, the Senate Finance Committee marked up a comprehensive version of the President's proposal that contained the ten percent bracket, $1,000 child tax credit, reduced marginal rates, marriage penalty relief, expansion of pensions and IRAs, a temporary AMT relief provision and a few dozen other smaller provisions. This bill had a revenue loss of $1.347 trillion over ten years, reflecting the Senate's budget resolution.

On May 16, the House passed H.R. 1836, which contained only tie House version of the marginal rate provisions. The vote was nearly identical to that of H.R. 3: 230-197, with 13 Democrats and all Republicans voting "yea."

On May 23, the Senate amended H.R. 1836 with the Finance Committee's bill and passed it by a vote of 62-38, with 12 Democrats and 50 Republicans voting "yea." The Senate then requested a conference with the House. Two days later, a conference report was signed. (7) The House vote was 240-154, with 28 Democrats voting "yea." The Senate vote was 58-33, with two Senators voting present. Two Republicans voted "nay" and 12 Democrats voted "yea."