Each year the bipartisan Congressional Budget Office (CBO) completes a projected budget for the next decade.
The CBO projection in 2001 for the 10-year period of 2002 through 2011 indicated budget surpluses totaling $5.6 trillion dollars 1 This projection was based on the fact we had three straight years of surpluses; 1998, 1999 and 2000, for the first time since the 1920's and federal revenues were at a high rate of 20 percent of GDP. Federal Revenues had been rising for a period of several years due to the tax increases put in place by the Clinton administration.
President George W. Bush and the 107th Congress felt excess taxes should be returned to the taxpayers 2 therefore the first, of a series of tax cuts was passed. H.R. 1836, Economic Growth and Tax Relief Reconciliation Act of 2001, EGTRRA, P.L. 107-16, was signed into law by President George W. Bush on June 7, 2001, with retroactive provisions applying to taxable years after December 31, 2000.
EGTRRA incorporated a group of tax cut bills 3 into one and the finished product contained more than 80 different tax cuts and changes to the existing tax rates. In addition to adding a new 10 percent EGTRRA reduced tax rates in the top four brackets over a period of time:
The tax cuts in EGTRRA were so dramatic that by the time the CBO completed their 10-year projection in January of 2002 [for the period of 2003-2012] the surplus had dropped from $5.6 trillion to $1.6 trillion. Although the $4 trillion dollar reduction was made up of several items, the major factor affecting this reduction was the EGTRRA tax act alone, reducing the projected surplus by $1.275 trillion dollars. 4
Tax cuts effect budget projections in three separate ways. They reduce the amount of revenues going into the treasury, they increase the amount of outlays, and if there is a deficit they increase the amount of interest to be paid by increasing the deficit, also known as debt service.
How do they increase outlays? Many tax cuts include what is known as a tax credit, meaning the taxpayer can reduce the amount of taxes owed by the credit, or if no taxes are owed the treasury sends a tax refund to the taxpayer.
Why did this one tax bill have such a major impact on the deficit? The tentacles of this one tax act stretched far and wide from simple tax rate percentage changes for the average Jane and John Doe to excise tax relief, to changes in tax treatment of restitution payments to Holocaust victims, to major tax loopholes for the ultra-wealthy.
EGTRRA contains nine major sections as follows:
Due to the fact this particular tax bill was deficit financed; this one bill alone added an estimated $1.4 trillion dollars to the deficit [the difference between the $1.275 deficit estimated indicated by the Congressional Budget Office and the $1.352 deficit indicated by the Joint Commission on Taxation is the different time periods].
When a tax law is enacted it goes into effect on a specific date and it may or, may not, have an expiration date. EGTRRA had expiration dates, but were extended as part of the agreement on increasing the debt limit. As a result of these extensions, EGTRRA continues to add to the national debt each and every day and this law is just one of many. During the 107th Congress [January 2001-January 2003] alone there were more than 10 different bills passed affecting our tax laws, our budget deficit and subsequently our national debt.
Understanding the impact these laws have on our lives is difficult at best, due to the complexity of the issue, and the fact these taxes went into effect over a decade ago, but we're going to try to break it down in following articles so you'll be able to fully understand the deficit impact.
For now we'll simply include a chart indicating the big picture. The following chart is based on data from the Joint Commission of Taxation estimates from the period of 2001 through 2012.
We already know that EGTRRA increased the budget deficit by $1.4 trillion dollars as estimated by the Joint Commission on Taxation. The split is as follows; the deficit increased by $864 billion from the period of 2001-2008 and by $488 billion from the period of 2009 -- 2012.
In other words, when Congress passed this law back in 2001, they knew a few things, first that one of the provisions would not even become effective until 2010, second that it would continue to increase the deficit long after President Bush left office, and third that if the tax expiration dates were ever extended; EGTRRA would continue to create deficits indefinitely.
- Patricia L Johnson