President Obama is not the first president to mete out big tax cuts, and he will likely not be the last. Though the White House's extension of the Bush tax cuts are largely viewed by Democrats as too big a compromise, the president defended it on Tuesday, insisting "it's a good deal for the American people."
Measured against tax deals of presidents past, Obama's move is in many ways par for the course. History shows that when the going gets tough, the president cuts taxes. Daniel Mitchell, an economist with the Cato Institute, put it another way.
"As a general rule, the American people don't like taxes, and when the economy's weak especially, there's a demand to help the economy by reducing the tax burden," said Mitchell.
The great historical tax cuts belong to just a trio of presidents: Kennedy, Reagan and Bush.
Progressive tax rates in the United States date back to the 19th century, when Congress enacted the nation's first income tax law – The Revenue Act of 1862 – to support the Civil War effort. Like today's modern tax structure, the Civil War taxes were graduated: a person earning more than $600 per year was taxed 3 percent, those earning more than $10,000 were taxed 5 percent.
Fast forward to the biggest presidential tax acts in recent history: John F. Kennedy's Revenue Act of 1964, Ronald Reagan's Economic Recovery Act of 1981 and Tax Revenue Act of 1986, and George W. Bush's Economic Growth and Tax Relief Reconciliation Act of 2001 and Job Growth Tax Relief Reconciliation Act of 2003.
Before Kennedy stepped in, the tax rate for the wealthiest Americans was a staggering 91 percent – a number that would send today's top earners fleeing for Switzerland in droves. Rate reductions, also known as the Kennedy Tax Cuts drove that number down to 70 percent.
Alan Viard, an economist with the American Enterprise Institute, measures the impact of tax cuts by the effects on GDP or on national income. By that yardstick, Kennedy's tax cuts take top prize. The nonpartisan Tax Foundation found the 1964 tax cuts accounted for nearly 2 percent of national income.
Later in the decade, however, workers would see a continual rise in their payroll taxes: Social Security rose from 7.25 percent in 1965 to 8.4 percent in 1969. By comparison, Obama's package would reduce Social Security to 6.2 percent, or two percentage points, for one year. For a family earning $50,000 per year, that would amount to $1,000 in savings.
"On the Republican side, this is their holy grail, the tax cuts for the wealthy," Obama said on Tuesday.
If that's the holy grail, President Ronald Reagan might as well be Indiana Jones; by the time he was done with them, tax rates for the wealthy had plummeted from 70 percent in 1981, to a mere 28 percent by 1986.
Mitchell, of the Cato Institute, said economists measure the size of tax cuts in a variety of ways, some in nominal dollars, some – like Vaird of the American Enterprise Institute – gauge by percentage of GDP, others in inflation-adjusted dollars. Mitchell, however, singles out the measurement most taxpayers can immediately identify with.
"It's the marginal tax rate that matters," said Mitchell. People want to know how policy will affect their tax bracket.