Profiles in Tax Cuts: Presidents in Tough Times

Dec. 9, 2010— -- 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.

Kennedy: The First Cut Is the Deepest

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.

Unlike Kennedy, Obama Lowered Social Security Tax

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.

Whose Was Bigger?

"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.

Tax Rates Matter

"It's the marginal tax rate that matters," said Mitchell. People want to know how policy will affect their tax bracket.

By that measure, Kennedy may have started the ball rolling in 1964, but it was Reagan who truly knocked it out of the ball park.

The Economic Recovery Act of 1981 reduced taxes for all incomes; tax rates fell from 70 percent to 50 percent for top earners, and rates for low-income earners went from 14 percent to 11 percent.

Reagan's second tax act in 1986 made history for being the first in the history of U.S. income tax to simultaneously reduce the top income rate while increasing the bottom rate; the rich got richer, and the poor got pinched. While the top tax rate was nearly halved, from 50 percent to 28 percent, the bottom rate increased from 11 percent to 15 percent, after a consolidation of tax brackets reduced 15 levels of income to just four. The ultimate result: the upper income level of that bottom tax bracket increased more than five-fold, ballooning from $5,720/year to $29,750/year.

The 1986 act also created just two income tax brackets – those who earned less than $29,750 were taxed 15 percent, and those who earned more were taxed 28 percent.

Not That Big

The Bush tax cuts of 2001 came with a $1.25 trillion price tag. The 10-year deal lowered marginal tax rates for nearly all American taxpayers. For the country's lowest earners, Bush introduced a new 10 percent tax rate for annual joint incomes under $12,000. Top earners saw a decrease of almost 5 percentage points, which is not that much when compared with the tax cuts of his predecessors.

"Look what Bush did, he brought the top tax rate from 39.6 percent to 35 percent," said Mitchell, of the Cato Institute. "That's trivial compared to what Reagan did and what Kennedy did."

Permanent is a 'Term of Art in Washington'

Similarly, the Bush tax cuts' place in history is muted relative to the legislative reform ushered in during the 1960s and 1980s. Kennedy and Reagan's acts were pushed through as permanent legislation (though permanent, as one economist put it, "is a term of art in Washington"). Bush's tax cuts of 2001 and 2003 were reconciliations; they were designed to expire after a certain number of years – hence the recent political clashes over extending the cuts. However, the debate, as Vaird, of the American Economic Institute emphasized, is for the top 2 percent of the population – the high-income earners.

"Let's keep in mind there seems to be broad support, for good or ill, to make these cuts permanent for 98 percent of the population," said Viard.

If that is the case, Bush's cuts, and Obama's hand in extending them or even making them permanent, will likely be one for the history books.