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Case Report: Barack Obama and the Bush Tax Cuts

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1. The tax cut of 2008: as a business person, would you have wanted your congressman to vote for the tax cut of 2008?

If rebates were given to Americans, then traditional economists would have expected those Americans to save. However, in early 2008, evidence and research available following the tax cuts of 2001 and 2003 pointed towards quick spending of any additional dollar in the hands of Americans and businesses. Furthermore, the Bush administration was optimistically projecting that the $158 billion stimulus package would create jobs and increase production lines. In turn, businesses would begin to spend and purchase equipment. That expected jolt of economy would motivate any businessman to encourage their congressmen to vote for the 2008 Tax Cuts.

- Would the tax rebates be spent?

Yes, research on the results of the 2008 Tax Cuts showed that "the typical family increased spending by 3.5% when the rebate arrived" rather than putting it away as savings, as traditional 20th-centry economists would have expected. This fiscal policy did stimulate the economy, but the "effects...were quickly overtaken by the financial crisis of late 2008." In other words, even with the successful outcome of the 2008 Tax Cuts stimulus by the end of the 2nd quarter 2008, it was not nearly enough to sideline the crisis sparked by the defaults in the U.S. subprime mortgage market.

- Why just not use monetary policy?

Monetary policy, when used alone, would not have been the best approach to stimulate the economy in early 2008. The reason: interest rates nearing zero were not enough to pull the economy out of recession. Fiscal policy (tax cuts) was a good approach to take in early 2008 because the spending jolt temporarily motivated businesses to not slash jobs or reduce spending. However, monetary policy, such as quantitative easing, could have also been introduced in early 2008 to influence the demand and supply of money. If used alongside a fiscal policy, such as the spending jolt spurred by the $158 billion stimulus package of early 2008, quantitative easing could have increased the money supply, motivated banks to lend and increase consumer confidence.

2. The tax cut of 2001 / 2003: In the lead up to the 2000 presidential election, would you have supported the Bush tax cut proposal?

A determination on whether or not to support Bush's tax cut proposal leading up to the 2000 presidential election should be based on the state of the economy and future outlook. At that time, the United States economy was prospering with significant real GDP growth and low unemployment rates. America experienced "the longest economic expansion ever recorded" and budget surpluses driven by tax hikes passed by Presidents George H.W. Bush and Bill Clinton were achieved. Although projections changed subsequent to the enactment of the 2001 Bush tax cut, leading up to the election many economist believed the government would achieve a budget surplus around $5.6 trillion in the next decade.

Although the current state of the economy was bright in the late 1990's, projections by the Bush administration hinted that a more challenging economic environment might be looming. Specifically, the projected average number of new claims per week for state-administered unemployment benefits was rising, the University of Michigan's Index of Consumer Sentiment decreasing, and the aggregate level of Industrial Production was on the decline. Additionally, many voters argued that unspent government funds should be returned to tax papers: a concept for which Bush himself agreed. In aggregate, the projected government surpluses and less than desirable economic projections did not appear to be of sufficient justification for the proposed Bush tax cuts.

- What is the difference between 2001 tax cut and the tax cut of 2008?

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) signed by Bush in June 2001 was intended to prevent an unwanted deepening of an economic slowdown and to help boost the economy's underlying rate of long-term growth. The act contained both significant changes in several areas of the US Internal Revenue Code and a tax rebate. Specifics of EGTRRA included:

* A new 10% tax bracket for the lowest-income earners was created and the current rates of 28%, 31%, 36%, and 39.6% were to be gradually reduced to 25%, 28%, 31%, and 35% over the years 2002 through 2006.

* An increase in the child tax credit for $600 to $1000 over the years 2001 through 2010.

* A gradual increase in the estate tax exemption level and a reduction in estate tax rates.

* An immediate payment of $300 to each single taxpayer and $600 to each married, jointly filing household.

Contrary to EGTRRA, the Economic Stimulus Act of 2008 was an urgent reaction to an increased risk of recession driven by the subprime mortgage crises. It was intended to immediately stimulate the economy by boosting consumer confidence as well as available cash. It was also different from the 2001 EGTRRA in the fact that it was primarily a tax rebate and did not include significant changes to the US Internal Revenue Code. Approximately $100 billion in rebates were sent to American household in the spring of 2008. Rebates were as large as $600 per person for those who owed at least that much in income taxes, and they were $300 for most others who earned some income.

- Did the 2001 - 2003 tax cuts work?

There is considerable controversy over



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