Definition: The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) is an income tax cut that was enacted on June 7, 2001. The Bush Administration hoped the tax cuts would stimulate the economy and end the 2001 recession. Since it was retroactive to the beginning of 2001, the IRS mailed out refund checks to taxpayers. Read the actual Public Law 107-16 .
(Sources: Samara R. Potter and William G. Gale, The Bush Tax Cut: One Year Later , Brookings Institute, June 2002. Wealth Transfer Taxes , Tax Policy Center. Curtis S. Dubay, The Bush Tax Cuts Explained: Where Are They Now? The Heritage Foundation, February 20, 2013)
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.
It initially helped the economy by stimulating spending during the recession of 2001. It gave income tax relief to families who would then spend the extra money. This increase in demand would boost the economy and lift it out of recession. It also had incentives for taxpayers to save more. (Source: D. Mark Wilson and William W. Beach, The Economic Impact of Bush s Tax Relief Plan , The Heritage Foundation, April 27, 2001)
EGTRRA didn t end the recession for several reasons. First, the tax cuts were being phased in through 2009, too slowly to boost the economy. Economic growth was 1.0% in 2001 and only increased to 1.8% in 2002, and 2.8% in 2003. To solve this, JGTRRA was passed 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 usually have enough disposable income to cover their consumer spending.
They would usually invest any extra tax savings from EGTRRA.
In the long run, EGTRRA hurt the economy by dramatically decreasing government revenues. That increased each year’s annual deficit, and thereby the U.S. debt. This debt puts downward pressure on the value of the dollar. which started to decline in 2006.
Both Bush tax cuts should have expired in 2004 or 2005 at the latest. That s when GDP growth was 3.8% and 3.3%, respectively. The economy was growing faster than the healthy growth rate of 2% to 3%. The resultant higher taxes would have slowed spending. That would have helped prevent the housing boom that ultimately led to the financial crisis of 2008 .
Instead, they were designed to expire at the end of 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. They thought the recession didn t affect the wealthy as much, and were concerned about adding to the deficit. The Republican majority won.
The full extension of EGTRRA was added to the Obama tax cuts of 2010. In addition to extending the Bush tax cuts, Obama extended unemployment benefits and cut payroll taxes. In 2013, the cuts were made permanent as part of the deal to avoid the Fiscal Cliff.