Prisoners of Bush

The Bush tax cuts: How a 10-year-old blunder haunted, then doomed, the supercommittee.

U.S. President George W. Bush announces his tax cut plan.
U.S. President George W. Bush announces his tax cut plan in the White House February 5, 2001 in Washington, DC.

Photograph by Pool Photo/Newsmakers.

The death of the supercommittee was announced, in classic Washington fashion, by two lung-emptying interviews on Meet the Press. Sen. Jon Kyl, the debacle’s senior Republican, bemoaned Democrats for being “unable to cut even $1 in spending without saying it has to be accompanied by tax increases.” Meanwhile, the thwarted Republican heroes of the committee had proposed a plan under which “the wealthiest Americans would pay more taxes than they do now.”

It was left to Sen. John Kerry, the committee Democrat who’d staked the most on a deal, to put Kyl’s words through the shredder. By saying people would pay more taxes than they do now, Kyl was only affirming that Republicans wanted to make the Bush tax cuts permanent, then start tinkering. The tax cut deal of 2010 only extended the Bush rates to January 2013. Republicans wanted to rewrite the deal, extend the rates forever, and add an estimated $2 trillion to the debt in exchange for a smaller number of revenue-raisers and loophole-busters.

The “most significant block to our doing something right now, tomorrow,” said Kerry, “is their insistence, insistence, insistence on the Grover Norquist pledge and extending the Bush tax cuts. Now, we are not a tax-cutting committee. We’re a deficit-reduction committee.”

By failing, the supercommittee will still have reduced the deficit. (It leaves the current tax code, including the expiration of the Bush tax cuts, in place, and it will result in automatic spending cuts unless Congress decides it won’t.) But it could have done more. The Bush tax cuts cut the top marginal tax rate by 4.6 percentage points and the other rates by 3 points. They were passed 10 years ago, were all set to expire 11 months ago, were extended by a glum President Obama, and—this is probably the important part—made it impossible to shrink the deficit or fix the tax code. By extension, they prevented Democrats from giving in and reforming entitlements.

That’s not the pathetic part. The pathetic part is that all of this was predictable when the tax cuts were passed 10 years ago. There were plans that would have prevented us from getting locked in to tax rates too low to fund a country heading into an entitlement crunch. The plans were rejected. They were sold as a stimulus, as a solution to a unique problem—high surpluses—that soon evaporated. Ten years later, the supercommittee was trapped by a tax policy that stopped making sense within a year of being passed.

This story begins in January 2001, at the beginning of George W. Bush’s presidency. He’d promised to enact a $1.3 trillion tax cut. (The number had increased during the campaign.) He took office with wan Republican majorities in favor of tax cuts—with conditions. His treasury secretary, Paul O’Neill, and his inherited Federal Reserve chairman, Alan Greenspan, had conditions, too. On Jan. 5, 2001, the two men met and agreed on a way to cut taxes without risking huge deficits. They would back them, but suggest “triggers” that canceled them out if the surpluses melted way. “A good enough idea,” said O’Neill, “if it can be sold.”

It wasn’t sold. For starters, the Bush administration didn’t want the triggers. Republicans running the House and Senate budget committees didn’t want them, either. The coup de grace was Greenspan’s Jan. 25 testimony on the tax plan. When Greenspan gave the remarks to Sen. Kent Conrad, the ranking member of the committee, the Democrat warned him that he’d “unleash the deficit dogs,” and “all those who want more tax cuts will see this as confirmation that they’re right.” Former Treasury Secretary Robert Rubin gave him the same advice.

Greenspan gave his testimony. The “trigger” stuff made it in there, albeit in murky Greenspanese. He floated a “phased in” tax plan that “would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied.” He had to: “What if, for example, the forces driving the surge in tax revenues in recent years begin to dissipate or reverse in ways that we do not now foresee?”

Almost nobody noticed. The headline was the Maestro of the Markets backing tax cuts, not any of the nuance. “It turned out that Conrad and Rubin were right,” Greenspan wrote in his memoirs. “The tax-cut testimony proved to be politically explosive.” When I brought up this comedy of errors to Conrad, he remembered—without much joy—that Greenspan told him he “wished he’d followed my advice.”

“I supported a trigger, because it was better than the tax cuts with no trigger,” said Conrad. “It was rejected by those who insisted on the whole enchilada.”

Had the triggers been put in place, the events of 2001 would have started taking the tax cuts apart. Instead, the tax cuts went into effect just as the government spent more money on emergencies. In 2002, the deficit returned at $159 billion. Bush OMB director Mitch Daniels told the nation to relax; “the unexpected surge in revenues toward the end of the last decade was temporary, and that revenues are returning to historic levels for reasons unrelated to legislated change.” In 2003, the deficit grew to $374 billion. That was the year that the Iraq war began, and it was the year that Republicans, back in control of the entire Congress, passed a new tax cut package that accelerated the changes of 2001.

Democrats seemed to have an out. Sure, the Bush rates were incompatible with the costs of war and the welfare state. They would also expire on Jan. 1, 2011, a timeline that reflected the limits of long-term budgeting and made the tax cuts look less costly. They wouldn’t bind a hypothetical future Congress. They’d just bet on the tax cuts being hard to undo. “The idea,” said former Majority Leader Dick Armey—now chairman of the Tea Party group FreedomWorks—“was to get the best we could for the longest we could.”

But some Democrats realized that the tax cuts would be hard to kill. “If you look at most expiring tax cuts, they get renewed,” said John Spratt, formerly the top House Democrat on budget issues, who was defeated in 2010. “I knew if the taxes would expire, someone would eventually say it would hammer the economy, regardless of the condition of the economy. If it was good, it would weaken us. If it was bad, it would exacerbate the problem.”

The 2010 tax extension fight went as Spratt and the rest of them expected. The supercommittee fight was a little more surprising to Democrats. Kerry wasn’t the only one distraught that Republicans wanted to move the goalposts, yet again, to make the Bush tax rates permanent or make them the basis of tax reform. Hadn’t the last decade proved that it wouldn’t work? Didn’t S&P say specifically that its downgrade decision had a lot to do with fear that obstinate Republicans would refuse to let the Bush tax cuts expire?

Sure it did. Yet Republicans had kept the Bush tax cuts alive and unmolested through two wars and an expiration date through sheer stubbornness. They’ve made a series of winning bets. One: They’ll have political clout to revive the tax cuts when the time comes. Two: There’ll be no move away from their mantra that “we have a spending problem, not a revenue problem.” Three: Having got the best possible tax deal in 2001, they can wait to reform the system when they control all the levers of power.

“There’s a low tax, tax reform committee ready, kind of biding their time,” theorized Dick Armey. “There’s a high confidence that we will have a conservative majority of the majority in the House, a conservative majority in the Senate, and a conservative in the White House. And then we’ll have people with whom we can work.”