In 2001, the Bush administration was faced with a recession and a budget surplus. Keynesian economic policy suggested that the use of an expansionary fiscal policy could counter the recession. The Bush administration chose to cut taxes because this was also a policy that it had campaigned on in 2000. The tax cuts did, in fact, provide a stimulus to the economy in the short run. The tax cuts also were designed to shift the largest sums of tax savings to upper income groups because the Bush administration used the supply-side economics argument that these tax cuts would stimulate saving and thus investment. The result would be economic growth and a long-run increase in income levels. Ultimately, the level of income in the economy would rise so much that the resulting increase in tax revenues would eliminate any deficit that might result.

The Congressional Research Service estimated that the economic stimulus that the Bush tax cuts had caused had become virtually negligible by 2006. The deficits primarily caused by these cuts were very large and had resulted in a significant growth in the deficit and resulting government borrowing. The interest payments on this new debt offset about a quarter of the growth of revenue that occurred. In the long run, it appears that tax cuts, especially large ones, ultimately add to the deficit.

Where on the Laffer curve did the Bush administration think the economy was located?