The George W. Bush administration (2001–2009) passed a variety of tax cuts. For example, the highest marginal tax rate was lowered from 39.6% to 35%. However, these tax cuts were set to expire automatically at the end of 2010. According to the New York Times, the fight in Congress over what to do about these cuts has “such substantial economic and political consequences that it could shape the fall elections and fiscal policy for years to come.”
a. What do you expect that the effect of the original tax cuts would have been?
b. What would be the effect of allowing the tax cuts to expire?
c. The final agreement in Congress allowed for a two-year extension of the tax cuts. Problem 2.7 discusses the difference between permanent and temporary policy changes. Do you think that this distinction is relevant in the case of the Bush tax cuts? Briefly explain.