What Went Wrong with the Bush Tax Cuts
Mercatus Research, November 2012
16 Pages Posted: 3 Jan 2013 Last revised: 16 Oct 2014
Date Written: November 28, 2012
Critics of the Bush tax cuts often dismiss the tax changes as a failed experiment in free-market economics. Noting that economic growth was slower in the years following the cuts than in the years preceding them, some critics see the experience as evidence that tax cuts simply do not work. But the claim that these tax cuts exemplified free-market economic thinking is baseless. In this paper we show that the Bush tax cuts had a number of problems from a market-oriented perspective: they were phased in slowly, they were set to expire within a decade, they entailed a Keynesian emphasis on stimulating aggregate demand, and — above all — they were undertaken without any effort to reduce spending. In light of these problems, there is no reason to overturn decades of theoretical and empirical research supporting the link between low taxation and growth. The episode offers a cautionary lesson in how not to cut taxes.
Keywords: tax cuts, fiscal policy
JEL Classification: H20, H24, H31, D92, E62, E65, E22
Suggested Citation: Suggested Citation