Bush Administration Tax Policy: Summary and Outlook

Peter R. Orszag and
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

November 29, 2004


This is the eighth and final installment in a series that evaluates tax policy in the Bush administration, covering the years 2001 to 2004. The article summarizes our principal findings, and discusses some of the key tax and fiscal issues facing the administration in its second term.

Tax policy was the central economic policy focus of the Bush administration from 2001 to 2004. Ultimately, no fewer than five significant tax acts were enacted, at least four of which were publicly and strongly advocated by the administration. Those policies alone represent a major shift in the structure, incentives, revenues, and distributional effects of the American tax system. Additional changes proposed by the administration — to dramatically expand tax-preferred saving accounts and to make the existing tax cuts permanent — would move the system even farther in new directions.

A special difficulty in evaluating the tax legislation enacted over the past few years is the presence of several prominent “loose ends.” First, the 2001, 2002, and 2003 tax cuts are scheduled to expire by the end of 2010, but virtually no one expects those expirations to be fully implemented. Second, even before the tax cuts were enacted, the number of taxpayers facing the alternative minimum tax was projected to rise markedly over time. The tax cuts, however, have substantially exacerbated the problem, helping to create a situation that is widely regarded as unsustainable. Finally, neither the enacted legislation nor the administration itself describes which specific future tax increases or spending cuts will pay for the tax cuts, even though those tax increases or spending reductions are the only way to finance the tax cuts over the long term. While those “loose ends” may appear to be technical distractions, their resolution is central to any conclusions about the effects of tax policy in the Bush administration. For the most part, our analysis focuses on scenarios in which (a) the provisions of the 2001 and 2003 tax cuts, but not the 2002 tax cuts, are made permanent; and (b) the AMT is adjusted so that the number of taxpayers facing the AMT in any future year is the same as it would have been in that year had the Bush tax cuts never been enacted. We also examine the effects of alternative methods of financing the tax cuts.