EGTRRA: The Economic Growth and Tax Relief Reconciliation Act of 2001
Why EGTRRA Failed
The Economic Growth and Tax Relief Reconciliation Act of 2001 is an income tax cut enacted on June 7, 2001. The Bush administration designed the tax cuts to stimulate the economy and end the 2001 recession. Families would spend the extra money, increasing demand. The name of the Act was .
- Increased the people could make to their IRA accounts.
- Doubled the child tax credit from $500 to $1,000.
- Expanded the Earned Income Tax Credit.
- Provided greater tax deductions for education expenses and savings.
- Reduced the gift tax.
- Provided relief from the Alternative Minimum Tax.
- Phased-out the estate and generation-skipping transfer taxes so that they were eliminated in 2010.
- Reduced the “marriage penalty” by doubling the standard deduction for married couples. It also doubled the income threshold for married couples for the 15 percent tax bracket. Those measures made the tax rates equivalent to what the couples would have had if they were single.
- Eliminated the planned phase-out of personal exemptions for those earning over $150,000, and the phase-down of itemized deductions for those earning over $100,000.
- Reduced tax rates as follows: 39.6 percent to 35 percent, 36 percent to 33 percent, 31 percent to 28 percent, and 28 percent to 25 percent. It created a new 10 percent rate for some of those who previously paid 15 percent.
EGTRRA saved taxpayers $1.35 trillion over a 10-year period. The Urban Institute said the tax cuts benefited families with children and those with incomes over $200,000 the most.
Since it was retroactive to the beginning of 2001, the Internal Revenue Service mailed out refund checks to taxpayers. That made people feel they were getting free money.
EGTRRA didn't end the recession for several reasons. First, the tax cuts were phased in through 2009, too slowly to boost the economy. Economic growth was 1.0 percent in 2001 and only increased to 1.8 percent in 2002, and 2.8 percent in 2003. To solve this, Congress passed JGTRRA in 2003 to speed up the tax cuts.
Second, many people saved their rebates instead of spending them. That's because those in the high-income tax brackets already had enough disposable income to cover their consumer spending. They used the extra tax savings to boost their investments.
In the long run, EGTRRA hurt the economy by dramatically decreasing government revenues. That increased each year’s budget deficit, and thereby the U.S. debt. This debt puts downward pressure on the value of the dollar, which started to decline in 2006.
Why EGTRRA Hurt the Economy
Both Bush tax cuts should have been reversed by 2005. The economy had recovered enough. GDP growth was 3.8 percent in 2004 and 3.3 percent in 2005. That's faster than the healthy growth rate of 2 percent to 3 percent. If the tax cuts had been reversed, the higher taxes would have slowed spending. That would have helped prevent the housing boom that ultimately led to the financial crisis of 2008.
Instead, EGTRRA and JGTRRA were designed to expire in 2010. That was during the Great Recession. No one would rescind tax cuts when economic growth was still tenuous. At the same time, Congress faced a record $13 trillion debt. It was caught between the rock of recession and the hard place of fiscal responsibility.
In the fall midterm elections of 2010, Republicans gained the majority in the House of Representatives. They wanted to extend EGTRRA for two years. Democrats agreed except they didn't want to prolong the tax breaks to those earning $200,000 ($250,000 for families) or more.
The Obama tax cuts of 2010 extended most of the Bush tax cuts. It , although at a lower rate. Obama also extended unemployment benefits and cut payroll taxes. In 2012, the cuts were made permanent as part of the deal to avoid the fiscal cliff. The only change was it restored the top tax bracket to 39.5 percent. (Sources: "," Brookings Institute, June 2002. "," Tax Policy Center. "
" The Heritage Foundation, February 20, 2013. "," The Heritage Foundation, April 27, 2001.)