posted April 26, 2017
The Great American Tax Shift 1980-2005

Excerpt from ‘The Great American Tax Shift’ Chapter 2
The War at Home: Corporate Offensives from Reagan to Bush
Copyright 2004 Jack Rasmus

(For the evolution of US tax policy from 1913 to 1978, see the book)

The Coming Tax Storm: 1978

While Carter essentially did nothing about bracket creep and rising income taxes on workers and then turned and raised payroll taxes, two important tax events occurred on his watch that would have importance in the years to come. One was the ‘shadow’ tax challenge to his policies that was growing in the US Congress, driven by a coalition of right wing Republicans. This challenge became known as the Kemp-Roth bill. The other important event with historic import was the State and Local level tax revolt in California embodied in that state’s ‘Proposition 13’ Initiative. Prop 13 targeted the roll back of property taxes and provided an example for countless ‘me too’ efforts that followed thereafter elsewhere in the country.

The 1977 Kemp-Roth bill proposed a radical reduction in the top rate of the federal income tax, from the 70% level it had been at since 1964 to a new sharply lowered rate of 50%. It also proposed a three year 30% overall reduction in the federal income tax plus indexing of the tax brackets for inflation to deal with ‘bracket creep’. Kemp-Roth didn’t pass that year but it did become the tax policy centerpiece for Reagan’s 1980 Presidential election campaign. It later became the core idea for Reagan’s even more dramatic tax cuts for the rich in his first term.

While Kemp-Roth (and Reagan’s subsequent 1981-82 tax cuts) claimed to cut taxes for the middle class, in reality “Kemp-Roth was always a Trojan horse to bring down the top rate”, as Reagan’s Director of the Budget and his central tax architect, David Stockman, would later admit in 1986 once all the damage had been done. 18 In an act of ideological contrition, Stockman would later describe in his memoir of the period that the Reagan tax cuts of 1981 were simply driven by outright corporate greed. As he put it himself in an exclusive interview, “The hogs were really feeding. The greed level, the level of opportunism, just got out of control”. 19

The main target of Kemp-Roth was bracket creep. By the late 1970s rising inflation was beginning to significantly increase the federal income tax’s impact on a growing number of workers, particularly those in the 60%-80% income percentile range. Having begun to flex its new political muscle circa 1978, the nascent Republican radical right sensed the power of the bracket creep-inflation issue even if Carter and the Democrats did not. The origin of what would later be called the ‘Reagan Democrats’—i.e. working class voters who turned to Reagan in 1980—had much to do with this bracket creep issue and the increasing tax bite from the federal income and payroll tax hikes under Carter.

The second warning event was the Prop 13 revolt in California in 1978, which also had its origins in inflation and a kind of bracket creep but this time bracket creep associated with rising property taxes. Rapid increases in property values due to inflation pushed local property taxes to intolerable levels by the late 1970s for many mid and upper income level workers. Corporate and right wing forces grabbed the political initiative here once again.

The major beneficiaries of Proposition 13 in the long run, however, were business property owners and not working class homeowners. Prop 13 was written such that if a homeowner sold his property the property tax cap would lapse for the new owner who bought it and for the original owner buying another home in California. Given home sales turnover in California, this meant over time home property owners as a group would lose the benefit of Prop 13. In contrast, property values for business property, which seldom turned over, would remain over the long run. Even worse, business property owners could ‘buy and sell’ rights to each other if they did turn over property. A feature not extended to the individual homeowner. Efforts to reform or amend this inequity for the past 25 years have failed to pass the legislature or have been defeated by massive lobbying campaigns by business interests targeting the state legislature or financed by business through the Initiative process.

Proposition 13 was significant in yet another way. It meant California’s pre-1978 state budget surplus of $6.8 billion would quickly turn into chronic long term deficits, which in fact happened, requiring significant cuts in education and social services and equally significant increases in regressive sales taxes to make up for the revenue losses that resulted from Prop 13.

California was thus a kind of dress rehearsal for subsequent income tax cuts to follow under Reagan. The similarities were notable in terms of who benefited, in the massive reductions in social services that followed the tax cuts, and in the growing reliance on regressive tax hikes to make up for the losses in revenue from lower income taxes enjoyed by the wealthy and corporations. Parallels exist here too with today, decades later. With taxes on capital incomes having been significantly reduced during George W. Bush’s first term, the talk has turned increasingly in his second term to how to impose some kind of regressive national sales tax to make up for the income losses and the budget deficits that have resulted from the big tax cuts during Bush’s first term.

In summary, the central dynamic of the last half of the 1970s was that inflation and bracket creep—whether impacting income taxes at the federal level or property taxes at the state and local levels—provided critical political ammunition for the emerging radical right and its corporate allies. They grabbed the issue while Carter, the Democrats, and Labor’s lobbyists sat idly by. They then creatively turned the real concern with inflation and bracket creep into proposals for tax cuts for the rich and corporations.

In the early 1950s the median income American family was paying barely 5% of its earnings for federal income taxes, and only 1%-2% of its earnings at most for the payroll tax. Even by the early 1960s the annual tax burden of $700 for a median income family earning $6,000 a year was nearly double, at 11.6%, but not yet especially burdensome. 20

But by Carter’s last year in office, 1980, the median
income working family in America was paying a total
federal tax burden (income and payroll tax) equal to
24% of that family’s income.

The corporate elite and its new radical right allies in 1978 jumped on the new tax discontent and opportunity. Their candidate, Ronald Reagan, made it the centerpiece of his 1980 election campaign, as well as his primary policy objective when first entering office in 1981. In contrast, Carter and the Democrats in 1977-78 chose to ignore the significant political dangers (and corresponding opportunities) posed by the inflation-induced tax burden shift to the working class. The consequences of those strategic choices, for the Democratic party and for workers alike, still reverberate today.

The Reagan Tax Revolution

The Reagan Tax Revolution was a double-edged sword: One edge reserved for capital incomes, subsidies and shelters, and still another for payroll taxes. One edge cut taxes for the wealthy; the other cut take home pay for workers. On the one hand a shift occurred within the federal income tax structure under Reagan with capital incomes benefiting at the expense of wages and salary income; on the other a second shift also occurred between taxes on capital incomes (i.e. the personal income tax, corporate income tax, capital gains tax, estate & gift tax, etc.) and the payroll tax levied on workers wages and salaries.

Reagan’s Record 1981 Tax Cuts

The Reagan 1981 Tax Act reduced taxes by $752 billion and provided the single largest tax cut to date. The majority of that $752 billion was targeted for high income groups and corporations. The 1981 cuts dwarfed all the preceding tax cuts in quantitative terms but nevertheless borrowed heavily in terms of ideas from the Kennedy Tax Cut of 1964, the Nixon cuts in 1971, and the Kemp-Roth proposals of 1978.

From Kennedy and Johnson, Reagan took the idea of reducing the top income tax rates by lowering top rates from 70% to 50%. Taking a page from Nixon, the Reagan cuts increased the Investment Tax Credit, raising it once again back to 10% and then adding even faster business depreciation as well. From Kemp-Roth, it carried over the idea of an additional 25% reduction in total personal income tax rates phased in over two years. From Kemp-Roth it also borrowed the idea of indexing income taxes to offset bracket creep. But there was more. Much more.

A host of additional measures reduced the tax burden on the richest 5% even further. The capital gains top tax rate was reduced from 49% to 20%. The first 60% of long term capital gains were also made tax free. Estate and Gift taxes were cut. All limits on gifts to spouses were eliminated and ceilings tripled for other recipients of gifts. Estate taxes were eliminated for spouses, and otherwise ended altogether for 99.7% of all families. The remaining 0.3% still subject to Estate taxes had their rates reduced from 70% to 50%. Totally new items like the IRA and the ‘All Savers Certificates’ were also introduced, targeted in particular for taxpaying households in the 60%-95% income range.

In terms of corporate taxation, several generous new loopholes were introduced in 1981. Depreciation of equipment was compressed to just three categories of goods, with autos fully depreciable after only 3 years, business equipment after five, and buildings after fifteen. For small business, some equipment was fully depreciable in the first year. The top tax rate for small business was also reduced from 25% to 15%.

Oil facilities and railroad cars were also added to the Investment Tax Credit in 1981. Also for the first time, a corporation that didn’t use the Investment Tax 10% Credit could sell that credit to another corporation (which would now have a 20% credit). Credits could be bought and sold between corporations to avoid paying any tax altogether. This was called ‘Safe Harbor Leasing’. 21 The General Electric Corporation used ‘Safe Harbor Leasing’ not only to eliminate all tax liabilities in 1981 but to “pick up $110 million in refunds for previous years”. 22 According to one reputable source,

The sum of corporate-claimed depreciation for
1982-1987 was an extraordinary $1.65 trillion.23

Borrowing a page from Kennedy-Johnson and Nixon, the Reagan tax cut was wrapped in a public relations package promising 13 million more jobs by 1986. 24 However, what followed in 1982-84 was not more but fewer jobs, a recession even worse than that of 1974-75, and the highest unemployment rate since the Great Depression of the 1930s. In the two years immediately following the 1981 tax cuts unemployment shot up more than 10%. It was not until nearly three years later than unemployment started to come down, and then only to the 7%-8% range for much of the mid-decade—an unusually sluggish ‘jobless recovery’ by historical comparison to earlier recessions. Reagan’s recession following his 1981 tax cuts was thus a first in yet another important way: it marked the beginning of jobless recoveries that would become progressively worse in 1990-93 and 2001-04.

Apart from this failure to produce promised jobs, the nearly $600 billion in personal income tax cuts contained in the 1981 Tax Act did not mean significant tax reduction for the middle and lower income taxpayers. With median family income in 1980 around $25,000 a year, there was virtually no net tax reduction for those with annual incomes of $50,000 or less. Most of the cut in income taxes went to the top 5% of taxpayers, the lion’s share of which went to those with incomes of $100,000 and more. 25

The following Table 2.1 gives a representation of who benefited from the Reagan Tax Act of 1981:


Distribution Effects of Reagan 1981 Tax Cuts 26

Income Percent of All Taxpayers Net Change in Percent of Tax
($0000) (in 1981) Tax Liability Liability Changes

< $10K/Year 33.3% $125 27.7%
$10K-$15K 14.9 83 4.7
$15K-$20K 12.2 18 0.6
$20K-$30K 19.1 -26 -0.6
$30K-$50K 15.4 -84 -1.1
$50K-$100K 4.1 -756 -4.9
$100K-$200K 0.7 -4408 -11.4
>$200K 0.2 -19427 -15.1
(Source: R. Lekachman, Greed Is Not Enough, p. 66)

If $84 a year was the most a worker at the median income level got from the 1981 Reagan tax cuts, that paltry amount was soon more than offset by payroll tax increases beginning in 1984.

The Payroll Tax Revolution of 1983-84

In 1983-84 a major change in the payroll tax for Social Security and Medicare was enacted. This change would have momentous impact not only over the remainder of the decade of the 1980s but through the 1990s and up to the present. A special commission chaired by Alan Greenspan, later appointed his chief of the Federal Reserve system by Reagan, recommended a payroll tax hike to ‘save’ the Social Security System in 1983 and make it financially sound until the second half of the 21st century. Or so it was promised. A rise in the payroll tax would save Social Security for another century, Greenspan argued, avoiding the need for any additional ‘reform’ for another fifty years at least. Congress followed Greenspan’s recommendations and passed legislation and started raising the payroll tax effective 1984. Both payroll tax rates and the amount of annual income on which they were collected rose steadily thereafter. Two decades later, under George W. Bush the payroll tax would amount to a bigger deduction from many workers’ paychecks than the income tax.

One might logically argue that the payroll tax hikes were really deferred income that workers would collect after retirement. But not so. The surplus generated from the payroll tax hike over the next 20 years, 1984-2004, amounted to more than $1.6 trillion dollars. 27 But all of that $1.6 trillion would be spent by Congress during the 20 years to help cover the U.S. general budget deficit (caused to a significant degree, ironically, by the same huge tax cut of 1981-83 for the rich and corporations).

The following Table 2.2 illustrates the increases in the payroll tax rate and its taxable income base during the Reagan years, and includes the maximum payroll tax payment required by workers for the given rate and base.


The Social Security Payroll Tax Increase, 1980-1989

Year Tax Rate Tax Base Maximum Payment

1980 5.80% $25,900 $1,502
1981 6.65 29,700 1,975
1982 6.70 32,400 2,170
1983 6.70 35,700 2,391
1984 7.00 37,800 2,646
1985 7.05 39,000 2,749
1986 7.15 42,000 3,003
1987 7.15 43,800 3,131
1988 7.51 45,000 3,379
1989 7.51 48,000 3,604
(Source: Social Security Administration)

The record rise in the payroll tax after 1983—combined with the equally record cut in income and other taxes for the rich—meant that forces shifting the share of total federal taxes from the wealthy to workers occurred from two directions during the Reagan years.

The combined federal tax rate (income and payroll tax) for a median income worker in the early 1950s was only 6%-7%. By the mid-1960s, 11%. Under Carter 24%.

By the mid-1980s the total federal tax burden for
the same median income family had risen to 28%.
For taxpayers with annual incomes over $500,000
the total burden had fallen to 28%. 28

In addition to the combined federal tax rate, it is estimated the middle income family’s burden for state and local taxes in 1985 amounted to another 9.1% of the family’s income. 29 For federal and state together that’s a total tax burden of almost 40% of income for a median or average working class family.

Tax Reform Act of 1986

The third major tax event closing out the Reagan tax revolution of the 1980s was the so-called Tax ‘Reform’ Act of 1986. But reform in this case was certainly a misnomer.

The 1986 Act reduced the top income tax bracket further, from 50% to 28%, and included more than 650 special provisions—i.e. loopholes and shelters. Another remarkable feature of the 1986 Act is that it created what was called at the time the ‘bubble’. This meant that the very wealthiest households had their top income tax rate reduced to the 28% rate, but the income group just below them, households in the $70,000 to $170,000 range, actually were left with a higher top rate of 33%. The ‘Alternate Minimum Tax’ (AMT) designed to make sure even the richest paid some kind of tax despite all their loopholes and shelters was also changed to soften its impact on wealthier taxpayers. In addition, the corporate income tax top rate was further reduced from 46% to 34% and there were other reductions in taxes on capital incomes in the 1986 Act.

By 1986 a median working class family earning in the $30,000-$40,000 annual income range received a total annual income tax cut of $467 while a millionaire received a cut of $281,033. 30 But much of that $467 cut in taxes was largely offset by rising payroll taxes. What little the American worker got in the way of income tax cuts in Reagan’s first term was taken away by payroll tax hikes and other tax increases in Reagan’s second term.

Republicans and Democrats, Liberals and Conservatives alike, hailed the passage of the 1986 Act as legislation that would make tax “unfairness a thing of the past” and permit “the American people to move once again to trust their federal government”. 31 The Democratic National Convention refused to actively take up the question of raising top tax rates or closing loopholes for the rich in the 1988 election year. And its Presidential candidate, Michael Dukakis, said virtually nothing about the issue during the election campaign of that year.

Perhaps the best summary of the effects of the Reagan tax cuts by mid-decade was expressed by Nobel Prize winning economist, James Tobin, who wrote that the Reagan program would neither stimulate productivity nor revive jobs. “What it is sure to do is redistribute wealth, power and opportunity to the wealthy and powerful and their heirs. That is the legacy of Reaganomics.” 32

It was claimed that the Tax Reform Act of 1986 redressed some of the worse excesses of the preceding Reagan tax cut legislation. But that view conveniently ignores the huge cuts in the top marginal income tax rate for the wealthy and the ever growing tax bite on workers from the rising payroll tax. The view also ignores the proliferating tax shelters and other avoidance schemes at the time. The 1986 Act was a good example of the ‘tax reform shell game’ mentioned earlier, in which periodically top tax rates were raised (or lowered) while tax shelters, loopholes, and legalized tax avoidance schemes were eliminated (or restored) so that, in the end, the top 5% households and corporations continued to have their net taxes reduced from one source or the other.

To cite just a few examples of the loopholes and shelters introduced or expanded in Reagan’s second term and the 1986 Tax Act:

Among the more notable was the interest on loans deduction for corporations. With the boom in corporate borrowing in the 1980s, this loophole resulted in more than $100 billion a year loss to the US Treasury. Then there was the Net Operating Loss (NOL) deduction, which allowed corporations to reduce current year taxes and carry forward what was not used in the current year as tax deductions to future years. That loophole also cost at least $100 billion. Write offs for intangible property, for incorporation of shipping companies offshore, and hundreds of similar special interest tax breaks for individual companies and entire industries resulted in a cut in corporate Capital income tax revenues which more than offset any temporary increases in other taxes in 1986 affecting corporations and personal income taxes of the top 5% households.

George Bush Senior Targets the Middle Class

Under George H.W. Bush and Clinton the shift in taxes continued but at a slower pace.
The Reagan tax and defense spending policies of the 1980s had produced huge, record U.S. budget deficits. A second critical legacy of Reagan was the Savings & Loan scandal and the widespread bankruptcies of S&Ls throughout the country. The federal government had the burden of cleaning up that debacle, at a cost to the taxpayer of $500 billion to $1 trillion, depending on the estimates. 33 The onset of another recession in 1990-92 still further exacerbated the deficit problem. Bush senior’s administration was left to task of trying to cope with the growing deficit crisis. It turned to raising taxes.

But the focus and target of George Bush senior’s tax increases was not on the wealthy 1%. It was on those in 60% to 90% incomes ranges—families earning annually between $58,000 and $150,000 at the time. Their effective top income tax rate was raised to 33% to 37%, actually higher than the top rate for the wealthiest 1%. They would now also have to pay an additional 1.45% for the Medicare tax, which previously had a ceiling of $53,400 but now was raised to a $125,000 income base. Bush senior clearly avoided taxing his super-wealthy friends and instead went after professionals, mid-level managers, self-employed small business, and upper income level workers.

On the other hand, while tax rates were raised for some, between 1990 and 1993 tax loopholes and tax shelters were added back in by the dozens as amendments to various bills in Congress.

Bill Clinton’s ‘Republican Lite’ Tax Policy

For the Clinton period, 1992-2000, three further notable tax events took place.

The first was the diversion of the huge surpluses then beginning to appear in the Social Security fund as a result of the major hike in Social Security payroll taxes in 1983-84. Throughout the 1990s under both Bush senior and Clinton, payroll tax rates and the taxable income base were permitted to rise further. Larger and larger surpluses began to occur in the Social Security Trust Fund. During the 1992 election campaign both parties, Democrat and Republican, promised that the Social Security surplus would be reserved in a ‘lock box’ and not opened or diverted to other federal uses—such as covering the chronic and growing yearly U.S. general budget deficits.

But the ‘lock box’ was broken into every year during Clinton’s eight year term in office and the more than $1 trillion surplus it generated by 2000 was diverted to offset federal budget deficits.

The second notable tax event under Clinton was his decision in 1993 to provide some modest tax cuts in order to stimulate recovery from the Bush recession and the slow jobless recovery. When Clinton took office in 1993, modest tax rebates were given to workers with this intention. However, as rebates they were one time events and never structured in as permanent cuts and changes to the tax system—in contrast to that done for tax cuts for the wealthy under Reagan. At the same time taxes were increased for upper income levels of workers, professionals, and those in the 60%-90% income ranges. They were not raised, on the other hand, for those in the wealthiest 5%-10% category.

The third tax event occurred in Clinton’s second term. In 1997 yet a third benchmark tax bill called the Taxpayer Relief Act of 1997 was passed. This amounted to yet another, and in this case the largest, personal income tax cut for the rich and wealthy during the decade. It focused primarily on changing the capital gains tax.

The main features of the 1997 Clinton Act were a reduction in the top rate for capital gains from 28% to 20%, with a further reduction after 2001 (to 18%) for long term gains. The Estate tax minimum level was raised from $600,000 to $1 million, plus small business was provided with an Estate tax exemption for the first $1.3 million value of a business passed on to heirs. Gift taxes were also allowed to rise and the Alternative Minimum Tax for small businesses was also repealed. There were also other tax rules included in the 1977 legislation that were decidedly favorable to business. For example, the Corporate Alternate Minimum Tax, which would have raised taxes paid by corporations as their profits grew in the 1990s, was changed in 1993 and again in 1997 in order to prevent its impact on businesses. 34 Capping off the 1997 Act the following year was an addendum tax bill called the IRS Restructuring and Reform Act of 1998. It made it highly difficult for the IRS to challenge and collect back taxes in cases where the estate and gift tax provisions of the 1997 Act were involved.

To get these reductions through Congress various provisions were added to the 1997 Act that provided some benefit for working class taxpayers. The child tax credit was raised modestly and tuition tax credits were introduced, along with modest changes in IRAs. Individual company and industry tax breaks and shelters were also part of the legislation. In all, more than 800 changes to the tax code were included in the 1997 Act, a large number of them special interest company and industry changes.

George W. Bush’s tax cuts would look very much like the Clinton cuts in some ways. Minor concessions to working families in the form of credits and modest one time rebates, which collectively made up less than a third of the total tax cut, were similarly offered by Bush in his tax bills. But the overwhelming weight of the cuts went to the wealthiest taxpayers and to corporations. Bush’s 2004 corporate tax cuts also followed the Clinton trend set in 1977 by providing hundreds of pages (literally 600) containing specific tax cuts for individual companies and industries.

As with Bush, tax cuts for business and the wealthy were at the heart of the 1997 Clinton tax proposals. It was estimated the 1997 Act reduced taxes by an amount of $100 for every upper income household compared to only $5 for median income households.

With the passage of the 1997 Tax Act the wealthiest 1%-5%, who owned most of the publicly traded stock in the country, were now well poised to reap the benefits of the boom of 1996-2000. Clinton’s focusing in 1977 primarily on capital gains was not a mere coincidence. From 1996 on the stock markets began their record march upward, driven by the new technology industries where compensation to CEOs, executives, and top shareholders came not in the form of salaries but in stock options and shares. It would soon be time to ‘cash in’ on the speculative gains in stock prices. In addition, the latter half of the 1990s was a period of major real estate profits. The significantly reduced 1977 capital gains tax would allow realization of record gains from real estate as well.

Those within the Clinton administration maintained at the time that the impetus for the 1997 capital gains cuts was the desire to increase federal revenues. In the short run, they argued, a capital gains cut meant stockholders would ‘cash in’ and thus pay more taxes. This was true—but only over the very short run. And at the expense of eventually less revenues later in the longer run, which is what in fact occurred after 2000. In a way, Clinton tax policy in the area of capital gains contributed in a delayed fashion to the sharp fall in U.S. government revenues that would later occur under George W. Bush.

The true total estimate of the cost of collective tax cuts during the 1990s is even higher than official estimates. Not just the reductions in top rates for capital gains, estate and other income taxes on the wealthy were involved, but countless new tax loopholes and new tax shelters were passed during the decade as well. Due to the shelters and loopholes,

The number of individuals who filed income taxes
but did not pay a penny increased from 24 million
in 1990 to 29 million in 1997. This trend was the
opposite of the years 1950 to 1970 when those who
filed but paid no taxes declined by 3 million. 35

As Joseph Stiglitz, Nobel economist and head of Clinton’s Council of Economic Advisers in the 1990s, would admit much later that Clinton “raised taxes on upper-middle-income individuals who worked for a living, but he had lowered taxes on very rich individuals who made their money from speculation, and on CEO’s who were making millions from stock options…It was a pure gift to the rich”. 36

In a number of other ways Clinton’s 1997 Tax Relief Act was also a forerunner of Bush’s 2001 tax cut legislation. In particular, the Clinton Act introduced the idea of a major restructuring of Estate and Gift Taxes even before George W. Bush, producing huge tax savings for the richest 1% taxpayers. ‘Selling’ the Tax Act with sweeteners for the general public in the form of tuition credits and token IRA improvements was also a Clinton ‘first’, adopted later by George W. Bush. It might even be argued that Bush’s subsequent 2001 tax cut proposals were Clinton’s 1997 Tax Cuts simply “writ large”.

By the end of Clinton’s second term tax avoidance, both individual and corporate, as a result of spreading shelters and loopholes had become a scandal. According to IRS data

In 2000, 63% of all companies in the U.S. reported
they paid no corporate income tax from 1996
through 2000 on revenues totaling $2.5 trillion.

And the effective tax rate for the 37% of companies that did pay some taxes in 2002 was only 12%, compared to 18% as recently as 1995. Clinton’s 1997 tax bill and the many gifts it provided to the wealthy and to corporations had much to do with this dramatic tax avoidance trend.

George W. Bush 2001-2004: The Tax Revolution in High Gear

In each of the four years of George W. Bush’s first term major tax cut legislation was passed that overwhelmingly benefited the richest households, corporations, and capital incomes in general. The total dollar value of Bush’s first three tax cuts enacted between 2001-03 was initially estimated at more than $3.3 trillion. However, that $3.3 billion does not include the costs of interest payments due to the budget deficits created by the tax cuts. When interest on the deficit caused by the cuts and other indirect costs are included, the full cost of the Bush tax cuts rises to $4.5 trillion. 37

The Bush Plan Year One (2001): Slash Taxes on Personal Capital Incomes

Like Reagan before him, tax cuts were Bush’s first policy priority if elected. There were many other issues and programs discussed in the course of the 2000 elections campaign, but tax cuts were at the top. Once in office, major tax legislation was proposed by Bush within days of his inauguration in January 2001.

Bush’s first tax bill was called the Economic Growth and Tax Relief & Reconciliation Act of 2001, or EGTRRA for short. But as in the case of Reagan’s tax cuts in 1981-82 and promises of job creation twenty years earlier, the recession continued to deepen following the passage of Bush’s first tax cut in June 2001. Three years later jobs were still millions short of January 2001 levels when Bush first took office. 38

Both conservative and liberal think tanks alike estimate the lost revenue due to the 2001 tax cuts at approximately $1.35 trillion. 39 The $1.35 trillion does not include, moreover, interest costs of $383 billion due to increased debt service payments.

The total revenue loss and costs associated with the
Bush 2001 tax cut alone amount to more than $1.7
trillion through 2011, and $2.2 trillion if the cuts
were made permanent after that. “The funds that
finance the tax cut would be more than sufficient to
completely resolve the Social Security financing
problem through 2075”. 40

$875 billion of this $1.35 trillion was the result of cuts in personal income tax rates, especially for those taxpayers in the four top rates of 39.6% to 28%. These rates were reduced 1% each year for the next three. According even to the conservative think tank, The Heritage Foundation, this reduction in the top tax rates would affect at most only 4.7% of the 131 million taxpaying households at the time in 2001. 41 In contrast, more than 72% of tax households (95 million taxpayers) received no tax cut benefit at all from the rate reduction feature of the 2001 Bush Act. The 95 million taxpayers include not only virtually all working class taxpayers, but 70% of all small businesses and the self employed as well. 42

A second major tax cut element favoring capital incomes in the 2001 Act was a $138 billion further reduction in the Estate Tax. Once called the ‘Inheritance Tax’, then ‘Estate Tax’, and since 2001 the Bush spin has been to refer to is as the ‘Death Tax’. But of the roughly 2.5 million taxpaying heads of households who die each year in the U.S., barely 2400 families, or less than 0.1% of all families, were subject to the Estate tax prior to 2001. That’s before Bush’s further reduction in the Estate Tax. With 99.9 of families exempt today after the Bush cuts, it is nonetheless still called the ‘Death’ tax by radical tax cutters in Congress.

The trend toward eliminating the Estate Tax was begun in 1997 under Clinton. Bush merely took up where Clinton left off and accelerated the process of phasing out the Estate tax. Whereas Clinton raised the exclusion for the Estate Tax from $600,000 to $1 million and exempted small businesses with estates less than $1.3 million, Bush simply went one step further. He raised the exclusion to $3.5 million ($7 million per couple) and lowered rates on estate values above $7 million from 55% to 45%. What Clinton therefore began in terms of reducing Estate and Gift taxation, Bush finished by virtually eliminating Estate and Gift taxes altogether, providing another $138 billion windfall for the wealthiest 1% of taxpaying households.

To ensure the 2001 tax handout was supported by the public the 2001 tax act provided for a token $100 increase in the childcare credit, minor adjustments to education tax credits and a temporary reduction in the marriage penalty. Altogether these three elements amounted to around $265 billion over the decade, or about one-fourth of the total tax cut. This compares to the $1.013 trillion for income tax rate reduction, the estate and gift tax cuts which the top income group benefited from almost exclusively. The remainder of the $1.35 trillion in the 2001 Tax cuts were for minor changes in IRAs, adjustments to the alternative minimum tax, and other measures.

Nearly all sources admit the 2001 tax cut was skewed strongly toward the wealthiest taxpayers. The top 5% richest households—those with annual incomes on average of more than $373,000—received 47% of the total $1.35 trillion cut. The next richest 15% households received an additional 24% of the $1.35 trillion. That’s a total of approximately 6 million out of 132 million households. The remaining 126 million taxpaying households—the lower 80% of which are predominantly working class and earn less than $76,000 in annual incomes on average—were left to share the remaining 29% of the 2001 tax cuts. And much of that 29% would be absorbed by rising payroll taxes and major increases in state and local income, sales and residential property taxes.

The wealthiest taxpayers earning more than $147,000
a year in annual income will receive 71% of the total
2001 Bush tax cut, or nearly $1 trillion. 43

As a well-known tax economist summed up, “by a variety of reasonable measures, the (2001) tax cut is disproportionately tilted toward high income households”. 44

The following Table 2.3 summarizes the skewed distributional character favoring the wealthiest taxpayers in Bush’s first 2001 tax cut, the EG&TRRA.


Distributional Effects of Bush 2001 Tax Cuts 45

Income Group Income Range Ave. Value of 2001 Share of
Percentile Ending At Tax Change Tax Cut

Top 1% — -$45,715 36.7%
Next 4% $373,000 -$3,326 10.7%
Next 15% $147,000 -$1,978 23.8%
Fourth 20% $72,000 -$951 15.3%
Third 20% $44,000 -$570 9.2%
Second 20% $27,000 -$368 5.9%
First 20% $15,000 -$67 1.1%

Source: William Gale and Samara Potter, “An Economic Evaluation of the Economic
Growth & Tax Relief Reconciliation Act of 2001, National Tax Journal, March 2002,
Tables 4 and 5.

The Bush Plan Year Two (2002): Expand Corporate Tax Subsidies

One of the largest areas of tax subsidy in the U.S. tax code involves what’s called corporate depreciation write-offs. The 2001 Tax Cuts focused primarily on capital incomes associated with the personal income tax, but it was quickly followed the next year with the Job Creation and Worker Assistance Act of 2002.

As in the case of its 2001 predecessor, the 2002 tax cuts created jobs in name only. Job losses accelerated in 2002 compared to 2001, even though the recession of 2001 officially ended by November 2001. 2002 may have been a recovery for those earning capital incomes, but not for workers who earn virtually all their income from wages and salaries and for whom jobs were continuing to disappear at a faster rate in 2002 and 2003 than in 2001 during the ‘official’ recession.

The jobless economic recovery phenomenon that began under Reagan and was repeated under Bush senior was once again underway by 2002. This time, under George W. Bush, it was an even slower jobs recovery than occurred during the two prior recessions. Jobless recoveries were becoming progressively more drawn out, with Bush’s 2001-03 the worst of the three recessions since 1980. Despite the jobless recovery in progress, Bush linked tax cuts with jobs once again in 2002. It was not the first time such a false claim had been made since 1980; nor would it be the last.

The 2002 Tax Act provided a new bonus depreciation deduction equal to 30% of the cost of new equipment. Now businesses could take the regular depreciation write off, plus 30% more. But even this was not all. In addition to the regular and the 30% bonus, there was an additional ‘Section 179’ expense deduction which permitted the full write off in the first year of the first $24,000-$59,000 of equipment costs. In other words, three layers of depreciation were now available to companies as a consequence of the 2002 Tax Act. Businesses in general and corporations in particular could now immediately write off—that is deduct the cost from their taxes owed—of up to two-thirds or more of the cost of equipment in the very first year. That compared with depreciation rules prior to 2002 that permitted writing off equipment over 15 years, not one year, with only one simple depreciation opportunity. Another huge change in 2002 allowed full depreciation on commercial buildings within five years instead of what was previously 39 years. 46

The 2002 Act also increased the amount of depreciation claimable on luxury SUVs by $4,600 in the first year. How this particular provision related to job creation is, of course, even more questionable.

Still another major element of the 2002 act benefiting corporations was a significant change in “Net Operating Loss’ rules. A loophole originally expanded under Reagan in the 1980s, NOL allows a company to re-file taxes and get refunds if its losses in a current year exceeded its tax claims in that same year. NOL means a company can ‘go back’, re-file tax returns for past years, and claim further refunds for those past years based on current year losses. It’s like allowing a worker who is unemployed in a current year to re-file his back taxes and get refunds on taxes paid in the past equal to the drop in his normal income in the current year due to unemployment. Of course, that’s not allowed for workers. But it is for corporations and businesses. This provision constitutes a ‘tax subsidy’ pure and simple.

In the 2002 Act the NOL provision was expanded, increasing from two to five the years over which a company could carry its losses backward to get refunds for previous taxes paid. The NOL carry back provision of the 2002 Act resulted in many corporations avoiding having to pay any taxes at all, despite attaining significant profits growth in that year.

Theoretically, depreciation tax cuts are supposed to generate investment in replacement plant and equipment faster than otherwise would be the case. In practice, depreciation is seldom linked to actual job creation. But that doesn’t stop businesses from claiming the tax write off since proof of job creation is not required and, in fact, proof of investment by the IRS is not even demanded in many cases. The benefits of faster write-off of equipment go directly to the corporate bottom line. When depreciation does result in actual equipment replacement, the greater productivity that results often eliminates the need to hire and create new additional jobs. Thus depreciation often means the destruction of jobs, not the creation of net new employment.

The focus on depreciation in the 2002 tax cuts was part of a long tradition of expanding depreciation write-offs since the 1960s and the Kennedy tax cuts. Every major tax cut over the past three decades has expanded the depreciation loophole for corporations. The result has been huge tax reductions for corporations and business in general and greater corporate net income as a result.

The Bush Plan Year Three (2003): Dividends, Capital Gains, & Accelerated Write Offs

Once more with the political spin machine in gear, Bush named the 2003 tax cut the Jobs and Growth Tax Relief and Reconciliation Act of 2003. But no sooner was the bill signed in June 2003 that the much heralded jobs recovery, predicted by Bush to create 300,000 jobs a month, began to stall. The Bush jobs recovery once again aborted in the second half of 2003 for a second time in three years.

The third year of the Bush Tax offensive revisited the 2001 and 2002 tax cuts and went even further in expanding tax cuts for the rich and for corporations by combining even more generous personal income tax reductions and corporate depreciation write-offs.

At the heart of the 2003 Bush tax cut were even more radical reductions in dividend and capital gains taxes, nearly all of which accrued to those with the highest incomes, plus a speeding up of the 2001 reduction in top individual income tax rates for the wealthy. On the corporate side, depreciation write offs and other tax subsidies were also accelerated.

Reductions in the top income tax rates scheduled for 2003 were now also made retroactive to 2001. The tax rate on dividend income, previously at 39.5%, was dramatically reduced to a maximum 15% rate. And the Capital Gains top rate was lowered further from 20% to 15% as well. When combined with the cuts in the estate tax, these measures reduced taxes on capital incomes and provided a record windfall for the top 5% of taxpaying households. As recently as1990 the top rate for the capital gains tax was 28%, nearly twice that in effect today.

On the corporate side of the 2003 tax cuts, the ‘Section 179’ depreciation-deduction allowance for businesses was raised from $25,000 to $100,000. A business could now deduct off the top in the first year $100,000 in spending on equipment, including software. In addition, the 30% ‘bonus’ depreciation write-off passed in 2002 was also raised significantly in 2003, to 50%. After the first $100,000 in write-offs, half of all remaining expenditures on business equipment could now also be written off. And after these two special write-offs, normal depreciation could also be taken on whatever cost of equipment purchases remained. These further expanded write-offs were estimated alone at around $30 billion in savings every year for businesses. 47

For the remaining 100 million taxpayers unable to enjoy such tax largesse, the 2003 tax cuts slightly improved the child credit, marriage penalty, and 10% bracket eligibility—but only temporarily. In contrast to the 2003 tax cuts’ huge reductions for dividends and capital gains, the provisions for child care, marriage penalty, and similar consumer elements of Bush’s 2003 proposals were made temporary for only two years in order to make the total cost of the 2003 tax legislation appear lower (and thereby no doubt to help sell the package to holdouts in Congress and to the public).

The child credit was raised from $600 to $1000 for 2003-04 but was set to revert back to $700 levels thereafter. The marriage penalty was improved, but also for 2003-05 only,
reverting back to previous levels in 2005. Similarly, the low income bracket was improved but only for two years. In contrast, tax cuts involving dividends, capital gains, top tax rates for the rich, and corporate write-offs and tax subsidies were etched in stone for the life of the tax act, until 2013.

The Bush tax cuts of 2002 and 2003 will result in a
reduction in corporate taxes amounting to at least
$414 billion for the period 2002 through 2013. 48

The official estimate of the revenue loss due to the 2003 personal income tax cut provisions (Dividends, Estate Tax, Capital Gains Tax) in the 2003 Act was $350 billion. But if provisions are made permanent through 2013, which is highly likely given the composition of the 2005 Congress, the personal income tax reductions are estimated at $800 billion.

Distributional Effects of the 2001-03 Tax Cuts

In terms of income distribution the 2003 tax cuts were even more generous to capital incomes than were the 2001 and 2002 tax cuts combined.

According to the Institute on Taxation and Economic Policy’s Tax Model the cumulative three years of Bush tax cuts (2001-2003) mean the top 20% richest taxpayers get more than 70% of the combined tax cuts in 2004. The wealthiest 1% of taxpayers do even better than the top 20%. They get 30% of the total tax cuts in 2004 and their share of the cuts rises to 39% by 2010. 49 In contrast, the bottom 80% income groups—mostly workers with average annual incomes no higher than $76,400 a year—get only 14% of the three years’ of tax cuts by 2004. And their share of the cuts not only do not grow by 2010 but drop from 14% to 10%. 50

In 2005 it is projected that of the more than $100 billion of the tax cuts taking effect that year, 73% will go to the top 20% of tax payers. Those with incomes over $1 million a year in 2005 will receive a tax cut of $135,000 a year. All those with incomes less than $76,400 will get about $350 on average with millions receiving no tax cuts at all.

Stated another way, as skewed and biased the Bush tax cuts are, this skew and bias grows worse over time between 2003-2013. Tax cuts for corporations and the super rich are ‘back loaded’ in the Bush cuts. The worse is yet to come.

The following two tables show this highly skewed character of the Bush personal income tax cuts, 2001-2003. Table 2.4 illustrates the ‘Shares of the Tax Cuts by Income Groups’ for three select years. Table 2.5 shows the ‘Effect of the Tax Cuts on After-Tax Incomes’ of the different income groups.


Shares of Tax Cuts 2001-03 by Income Groups 51

Income Average Average Share Share Share
Income Group Range Income Tax Cut 2004 2007 2010

Lowest 20% <$16K $9,800 -$61 0.9% 0.9% 0.7%
Second 20% $16-$28K $21,400 -$327 4.6% 4.0% 3.6%
Middle 20% $28-$48K $35,300 -$586 8.7% 6.6% 5.9%
Fourth 20% $45-$73K $57,400 -$967 15.5% 11.9% 10.6%
Next 15% $73-$145K $97,500 -$1,538 25.4% 22.1% 19.2%
Next 4% $145-$337K $200,100 -$2,907 15.0% 18.9% 21.2%
Top 1% $337K or more $938,000 -$66,601 29.8% 35.5% 38.9%

Source: Institute on Taxation and Economic Policy Tax Model, June 2003

The above table 2.4 shows that while the richest 20% will get just over 70% of the tax cut share in 2004, their share will rise considerably by 2010 to nearly 80% of the total cuts. The data also illustrate that the approximately 71% share going to the wealthiest 71% in the 2001 tax cuts, noted previously above, continued in roughly the same distributional mix in the combined tax cuts from 2001 through 2003.


Percent Total After-Tax Income 52
(Before & After 2001-03 Tax Cuts)

Income Group Before After Percent Change

Lowest 20% 4.0% 3.9% -0.1%
Second 20% 7.8% 7.7% -0.1%
Middle 20% 12.1% 12.0% -0.1%
Fourth 20% 19.3% 19.2% -0.1%
Next 15% 24.3% 24.1% -0.2%
Next 4% 13.8% 13.6% -0.1%
Top 1% 18.8% 19.6% +0.8%

Source: Institute on Taxation and Economic Policy Tax Model, June 2003. Figures
do not include corporate taxes, payroll taxes or state and local income taxes.

Table 2.5 shows it is clear that only the richest 1% have a significant gain in after tax income due to the Bush tax cuts. That top 1% wealthiest taxpayers +0.8% gain is equivalent in dollar terms to $1.078 Trillion in tax cuts from 2001 to 2010 alone. 53 In other words, the wealthiest 1% gain at the relative expense of the other 99%.

The Brookings and Urban Institute’s Tax Policy Center estimates the annual transfer in income to the rich and super rich flowing from the Bush 2001-2003 tax cuts is $113 billion a year from 2003 through 2013. And this does not even include the Corporate Tax cuts of 2004.

The cost of the 2001-03 tax cuts is estimated at $3.4 trillion for the first decade, while the total impact of the Bush 2001-2003 tax cuts when made permanent through 2075 is $11.6 trillion—45% of which will go to the wealthiest 5% of taxpayers and 70% to the wealthiest 20%. Once again, these numbers reflecting after-tax income redistribution do not include the corporate tax cut provisions in the 2004 tax act passed in late fall 2004. Nor do they address the income redistribution occurring before taxation even begins. As two highly respected economists in the field of tax policy, William Gale and Peter Orszag, have recently noted, “all the proposed tax changes are taking place against a backdrop of increasingly unequal pretax income that has continued largely unabated since the late 1970s.” 54

Shelters: Reducing Taxes Before the IRS Gets To See

Most assessments of the distributional effects of taxes and relative tax burdens do not consider the amount of taxable income that the wealthy and corporations ‘put aside’ (i.e. shield) as a result of tax subsidies and tax shelters. In recent decades more and more pre-tax income is shielded and never allowed to enter the tax system and tax determination process.

The cost of the Bush tax cuts above do not include the proliferation of countless tax shelters building up over the last two decades prior to 2004, and the new shelter provisions contained in the 2004 Act, all of which skim pre-tax income off the top before IRS tax rules and procedures even come into play. Like a mafia-run casino, a certain percentage of revenues, especially those earned offshore in subsidiary operations or foreign branches of a corporation, are put aside. They may even be run through the corporate calculating machine in a back-room in Bermuda, or some Caribbean bank. Whichever the case, they are not even considered in the process of determining a company’s taxation. Not even the US government has an accurate estimate of how much is shielded in pre-tax income, especially for corporate income generated or held offshore. A similar difficulty exists for estimating accurate corporate depreciation claims when companies ‘mix’ their U.S. and foreign business.

The scope and magnitude of the pre-tax skimming is indicated in that relatively small portion of foreign tax shelters for U.S. companies and wealthy individuals that get reported. 55

One of the biggest scandals of Bush’s first term was how big U.S. accounting companies advised and urged their corporate clients to deny their U.S. citizenship and relocate, on paper, to Bermuda. In other words to become a foreign company in order to shelter and avoid U.S. taxes. Yet the Bermuda connection represents only “a tip of a vast iceberg of corporate offshore tax sheltering—all designed to shift U.S. profits, on paper, outside the United States”. 56 Estimated at more than $50 billion a year in Bermuda-based tax losses to the U.S. Treasury in 2002, corporate tax sheltering extends well beyond Bermuda and has gone global.

In 1983 offshore tax havens sheltered $200 billion.
Today that total has grown to more than $5 trillion.

Of 370,000 corporations registered in Panama, only 340 bothered to file income tax reports in the US. And according to a study by the Federal Reserve Bank of New York, U.S. deposits in the Cayman Islands tax haven amount to more than $1 trillion and are growing by $120 billion a year.

Instead of working to reduce tax shelters, the Bush tax radicals in the U.S. House of Representatives have been doing all they can to expand them. In 2003 the Chairman of the Ways and Means Committee, Bill Thomas, for example, publicly declared he favored an expansion of offshore tax sheltering and proposed amendments that would promote $83 billion in additional offshore tax avoidance in the corporate income tax cut bill introduced at the end of that year. 57

Why Have Payroll Taxes Not Been Cut?

With all the broad cuts in taxes on personal incomes and the corporate income tax, it is perhaps at least curious why cuts in the payroll tax have been so assiduously avoided by Bush and his radical friends in Congress? The answer, however, is not so difficult. There are at least three major reasons why payroll taxes are not reduced.

First, payroll taxes have created trillion dollar surpluses in the Social Security Trust fund since 1984. Those surpluses are politically convenient for Bush, as they have been for all his predecessors since Reagan. That Trust Fund surplus amounts to $1.6 trillion since 1984 through 2004, not counting several trillions more in interest earned. That surplus has been ‘permanently borrowed’ by the U.S. government every year to help offset the chronic U.S. general budget deficits that have averaged hundreds of billions each year since 1981. Cutting payroll taxes would mean less to borrow and therefore even greater budget deficits each year than now occur.

Second, the continued growth of payroll tax revenues is necessary for Bush to implement his plan to privatize Social Security over the next decade. The Social Security Trust fund is expected to generate another $1.1 trillion surplus between now and 2018. Cutting payroll taxes would require Bush to propose even more borrowing from bond markets to finance his Private Investment Accounts for Social Security or cutting benefits for retirees to cover the transition costs for the privatization of Social Security. These issues are addressed in more detail in Chapter Ten on Social Security in this book. For the moment, it is sufficient to note that, in all likelihood, payroll taxes will be raised by some amount as part of a political settlement in Congress should Bush’s plan pass.

Third, payroll taxes include 12.4% for Social Security plus another 2.9% for Medicare funding. Within Medicare there are two plans, ‘Plan A’ which covers hospitalization expenses, and ‘Plan B’ which covers non-hospitalization medical costs. At present, funds are transferred every year in large amounts from Plan A where there is a surplus to Plan B where there is a major deficit. Growing payroll tax revenues allow this transfer to continue. It allows Congress not to have to address raising taxes to properly finance Plan B. If it did, there would be less available for income and corporate tax cuts. Were the 2.9% Medicare tax reduced, in other words, the transfer of funds from Plan A to Plan B would no longer be possible and tax increases would be necessary. Congressional tax radicals would face an untenable political situation of permitting tax cuts for their rich friends and corporations while they refused to provide funds for elderly Americans’ doctor visits. Allowing Medicare payroll tax revenues to rise conveniently allows with game to continue. Cutting the Medicare payroll tax rate would jeopardize it.

The Bush Plan Year Four (2004): Manufacturers & Multinationals Have Their Turn

Conservatives continually rail against ‘double taxation’ of the rich—aimed first at their companies and then at their incomes derived from those same companies. What the Bush record shows, however, is that the U.S. under Bush has been experiencing a new policy of ‘double reverse taxation’—record tax cuts for the rich as individuals as well as tax cuts for their companies.

The first four years of Bush’s administration witnessed an alternating shift in tax policy focus. Initially, Bush’s 2001 proposals targeted tax cuts for individuals. In 2002 the focus was primarily on small business and corporate tax cuts. In 2003 once again the tax cuts mostly reduced taxes for wealthy individuals by lowering capital gains, reducing dividends, phasing out estate taxes, and the like. In 2004 the focus shifted back yet again almost exclusively to further tax cuts for corporations—for large multinational corporations in particular.

The corporate tax top rate alone declined from 1988 to 2003 from 27% to 17%. But this was only part of the picture. Total corporate tax revenues were reduced by various other means as well.

A study done by the Institute on Tax and Economic Policy (ITEP) in September 2004, on the eve of the passage of the 2004 Corporate Tax Cut Act, showed the corporate tax provisions in Bush’s 2002 and 2003 tax cuts amounted to $75 billion for the period, 2002-04, for the largest 275 corporations in the survey. While pretax profits of these 275 corporations went up 26% between 2001-03, “over the same period corporate income tax payments to the federal government fell by 21%”. 58 And this was before the additional major corporate tax breaks in the 2004 tax cut bill were passed.

The ITEP study focused not only on top tax rates but also on tax subsidies—i.e. the tax rebates these 275 companies received from 2001 through 2003. In at least one of the three years 82 of the 275 corporations paid no taxes at all due to subsidies, and they received significant tax rebates even though these corporations were highly profitable. Some of the more astounding examples of tax rebates received by profitable companies from the U.S. treasury are noted in Table 2.6 below.


Corporate Tax Rebates 59
Company Profits Tax Rebates Received

General Electic $11.9 billion -$33 mil.
Pfizer $6.1 bil. -$168 mil.
Verizon $5.6 bil. -$685 mil.
AT&T $5.6 bil. -$1.39 billion
Wachovia Bank $4.1 bil. -$164 mil.
Metlife $2.9 bil. -$67 mil.
JP Morgan Chase $2.5 bil. -$1.38 billion
Lehman Brothers $1.8 bil. -$39 mil.
Bank of New York $1.7 bil. -$29 mil.
Boeing $1.0 bil. -$1.7 billion

Source: Robert McIntyre and T.D. Coo Nguyen, “Corporate Income
Taxes in the Bush Years”, Center for Tax Justice, September 2004.

Tax rebates, corporate tax subsidies, expansion of offshore tax havens and tax shelters, the foreign tax credit, accelerated depreciation and investment credits, and scores of other special interest tax loopholes by the end of 2003 all played an important part in the freefall in the corporate income tax’s contribution to total federal taxes.

The corporate income tax’s contribution to total U.S.
tax revenues has declined from more than 20% in
the 1960s to 11% in the 1980s under Reagan, and
now to barely 6% under George W. Bush. 60

With the share of corporate income taxes at 6% at the close of 2003, yet another corporate tax cut, the Corporate Tax Reduction bill of 2004, was introduced. It provided a further major business tax cuts that would be called “the largest business tax relief program in more than a decade”. 61

Having just passed the 2003 tax cuts targeting personal incomes, capital gains, dividends, and estates in June of that year, Bush publicly declared in August 2003 he would seek no
further tax cuts. But within days tax radicals in the House of Representatives immediately proposed an additional $128 billion in corporate tax cuts, which was named once again ‘The American Jobs Creation Act of 2004’. The 2004 proposals originated in the need to repeal of U.S. export subsidies that were declared illegal by the World Trade Organization. The illegal U.S. export subsidies resulted in counter-tariffs imposed by European and other nations on the U.S.. This dispute served as an excuse to open corporate tax cut floodgates once again, allegedly to compensate for the eventual repeal of the export subsidies to comply with the WTO. But that compensation would end up a very minor part of the total corporate tax cut bill.

No fewer than three separate corporate coalitions lobbied for their preferred versions of tax cuts, bidding up a Congress stumbling over itself trying to satisfy all corporate comers.

One corporate lobbying group, the ‘Coalition for Fair International Taxation’, led by General Electric, sought to increase the foreign profits tax exemption, which allows US corporations doing business abroad to subtract from their US taxes the amount they pay in foreign taxes. As it would turn out, GE would prove to be one the biggest beneficiaries of the tax bill when passed. 62 A second group, led by Boeing and Microsoft, called the ‘Coalition for U.S. Based Employment’, lobbied for a $60 billion permanent reduction in the corporate tax rate, from 35% to 32%, to make up for the repeal of the export subsidy. A third, led by Hewlett-Packard, pushed for the one year ‘tax holiday’ on an accumulated $500 billion in profits made abroad that corporations continued to hold offshore to avoid paying US taxes. By mid-year 2004 all three groups ended up with nearly everything they each sought in the combined tax cut legislation that came before the House and Senate for a vote.

The pork barrel got even larger as other special interests and lobbyists jumped on board over the summer. A parallel $31 billion tax cut for oil and energy companies, which failed to pass in November 2003 by only two votes in Congress, was resurrected as a $19 billion add on to the general corporate tax cut by mid-2004. More than $10 billion was added for the Tobacco companies, to compensate them for tobacco subsidies previously received from the U.S. government and taxpayers. Other special interest provisions were thrown in for the wine industry, aerospace, and the child tax credit extended to families with annual incomes up to $309,000 by right wing tax radicals in the House of Representatives. By summer 2004 the various corporate and special interest tax cuts proposed amounted to $155 to $170 billion, depending on the House or Senate versions.

Initially the Bush legislative strategy in the summer of 2004 was to hold ‘hostage’ those modest provisions (child care, marriage penalty, 10% bracket, etc.) of the 2001 and 2003 laws that would benefit working families. Bush insisted tax cut provisions for the rich and super rich would have to be made permanent for the next 10 years first. Otherwise, he declared, he would veto any bill.

But as the drums of the November 2004 elections grew louder, in July 2004 Republican leaders in Congress attempted to cut a deal with moderates permitting a two-year extension of the modest provisions. This would have allowed the immediate extension of the child care credit, the marriage penalty, and other relatively minor benefits affecting working families,

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