NCPA - National Center for Policy Analysis

Why the Bush Tax Cuts Worked

September 16, 2010

The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution.  These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship, says Jeffrey A. Miron, lecturer and director of undergraduate studies in economics at Harvard University and a senior fellow at the Cato Institute.

According to Miron:

  • The Bush tax cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance.  
  • Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States.  
  • And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue.

President Obama is opposed to extending the Bush tax cuts and is instead proposing to allow full write-off of business investment through 2011.  This proposal is reasonable, says Miron, but the impact is likely to be small; this policy merely allows businesses to deduct investment now rather than later as depreciation.  Given currently low interest rates, this shifting of expenditure is not worth much.

Source: Jeffrey A. Miron, "Why the Bush Tax Cuts Worked," The New York Times, September 10, 2010.

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