Barack Obama and the Bush Tax Cuts, Case Study Example

Abstract

The Clinton administration left the government with a surplus. However, due to the recession, terrorist attacks, and war, the surplus quickly spiraled into a deficit. With the Bush tax cuts, changes happened within the country. When Obama became president, he inherited a huge government, showing the end of the Reagan Era. With the Obama administration’s plan, taxes were reduced for middle class citizens, improving their circumstances, and forcing wealthier citizens to pay more taxes. This plan also increased the number of jobs available for citizens, which decreased the unemployment rate and improved the economy.

Keywords: Barack Obama; presidency; Bush; tax cuts

Barack Obama and the Bush Tax Cuts

As Obama’s presidency began, America was gripped in an economic and financial crisis. In fact, as a result of this crisis, all five of the major investment banks in the country were affected and required either conservatorship or bailouts by the federal government (Andrews, Merced, & Walsh, 2008; Jickling, 2008; Read, 2008; Stanton, 2008; Weinzierl & Werker, 2011). This bailout was supported by the Obama administration (Andrews, 2008; Bajaj, 2008; Weinzierl & Werker, 2011). With the downfall of the five major investment banks in the country, the crisis spread rapidly to the public economy. Therefore, in December 2007, the recession began as the stock market fell 40% from its high point in October, causing real estate prices to plummet and many American families to be unable to take equity loans to fund the losses (Business Cycle Dating Committee, 2008; Rochelle & Willis, 2008; Weinzierl & Werker, 2011). However, although Obama’s opponents viewed the crisis differently, he attributed the economic crisis to the Bush administration’s policies (Weinzierl & Werker, 2011).

Thus, it has been commonly believed that Obama was elected in order to repair the country’s economy and alleviate the crisis. Furthermore, it has been commonly believed that Obama was elected to regain the prosperity of the middle class (Elliott, 2008; Weinzierl & Werker, 2011). Obama swore to do this through repealing the Bush tax cuts for the wealthy, reduce taxes for the middle class, which would result in a relatively lower deficit than the opponent’s plans (Burman et al., 2008; Weinzierl & Werker, 2011). However, there were still concerns that the country’s debt level in 2009 could limit the ability of the Obama administration to address the economic crisis (Weinzierl & Werker, 2011). Significantly, it was noted that “due to weak economic growth,  two foreign wars, and the Bush tax cuts, the U.S. government budget had gone from a surplus in 1998 – 2001 to large deficits” (Weinzierl & Werker, 2011).

Although the Clinton administration made tremendous strides towards economic expansion, economists believed this could not have only been caused by policy changes (Weinzierl & Werker, 2011). In fact, one of the most significant beginnings towards the Clinton administration’s economic expansion was created through the Reagan administration’s policies (Mandel, 2004; Weinzierl & Werker, 2011). Clinton had the Council of Economic Advisors, whom believed the “aggressive deficit regression could throw the economy into recession or raise unemployment significant, neither happened. Rather the launching of a credible deficit reduction path helped plant the seeds of the 1990s boom” (Weinzierl & Werker, 2011). As the Clinton administration’s term ended, the Bush administration proposed re-establishing lower tax rates, which was expected to push the economic expansion further. However, as the Bush administration’s term began, the economic expansion declined (Weinzierl & Werker, 2011).

Despite the economic decline, the Bush administration introduced the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which focused on reducing marginal tax rates through the creation of a new tax bracket, sending payments to taxpayers, increasing the child tax credit, increasing the tax exemption level, and reducing real estate taxes (Weinzierl & Werker, 2011). However, the terrorist attacks in 2001 prolonged the recession and depleted the surplus left by the Clinton administration. This deficit was worsened through the Iraqi War (Weinzierl & Werker, 2011). Despite this, the original goal was a budget surplus. Thus, Bush recognized the need to “retire the Federal debt; provide tax relief; revitalize education; reform and modernize Social Security and Medicare; bring defense strategy and spending in line with the challenges of the next half-century; and support of community outreach efforts … At the same time, the president’s budget hinted that a more challenging economic environment might be looming. While some indicators appeared sanguine, three that were closely watched in Washington suggested trouble ahead: 1) the average number of new claims per week for state-administered unemployment benefits; 2) the University of Michigan’s Index of Consumer Sentiment; and 3) the aggregate level of Industrial Production” (Weinzierl & Werker, 2011).

Thus, in 2008, the Reagan Era was declared over (Weinzierl & Werker, 2011). Although the economy recovered slightly, the Bush administration ran the risk of another recession after the 2008 housing market collapse. This meant that the Bush administration would propose another rebate plan. However, Democrats and Republications debated about where the stimulus should go. Democrats felt that low-income citizens should get the stimulus, whereas Republicans felt that those that paid income taxes on their returns should get the stimulus (Weinzierl & Werker, 2011).

Therefore, when Obama was elected president, he had numerous previous policies to consider when determining how best to repair the economy as it was then. As a result, the government he inherited was huge, as compared to what existed while Reagan was president. In fact, the Reagan Era was founded on the precept that “government is not the solution to [the] problem; government is the problem” (Weinzierl & Werker, 2011). This period stretched to the end of the Bush presidency and “over that period, regulation, marginal tax rates, and federal government spending as a share of GDP fell” (Weinzierl & Werker, 2011). Furthermore, the stakes were exceedingly high for this administration as “choosing the wrong policies could lead to massive ripple effects throughout the global economy” (Weinzierl & Werker, 2011). For instance, increased government borrowing could cause the debt burden to increase significantly annually. This could cause interest rates to increase significantly, hindering the ability of borrowing (Weinzierl & Werker, 2011). However, the Obama administration introduced the Economy Recovery Plan, aimed at creating jobs. Other measures within this plan involved decreasing the federal electricity bill (Weinzierl & Werker, 2011).

There were numerous effects of this policy on the citizens. For instance, the wealthy found themselves paying more in taxes, whereas the middle class found themselves paying less due to the tax cuts. Furthermore, with Obama’s plan, more jobs were created. Ultimately, the plan was beneficial to help the country have more jobs established, reducing the unemployment rate, and increased economic expansion.

References

Andrews, E. L. (2008). Bush Officials Urge Swift Action on Rescue Powers – NYTimes.com. Retrieved from http://www.nytimes.com/2008/09/20/business/20fed.html?ref=senate

Andrews, E. L., Merced, M. J. de la, & Walsh, M. W. (2008). Fed’s $85 Billion Loan Rescues Insurer. Retrieved from http://www.nytimes.com/2008/09/17/business/17insure.html?pagewanted=all&_r=0

Bajaj, V. (2008). Whiplash Ends a Roller Coaster Week. Retrieved from http://www.nytimes.com/2008/10/11/business/11markets.html?pagewanted=all

Burman, L. E., Khitatrakun, S., Leiserson, G., Rohaly, J., Toder, E., & Williams, R. (2008). An Updated Analysis of the 2008 Presidential Candidates’ Tax Plans. Retrieved from http://www.taxpolicycenter.org/publications/url.cfm?ID=411741

Business Cycle Dating Committee. (2008). Determination of the December 2007 Peak in Economic Activity. Retrieved from http://www.nber.org/cycles/dec2008.html

Elliott, L. (2008). A financial crisis unmatched since the Great Depression, say analysts. Retrieved from http://www.theguardian.com/business/2008/mar/18/creditcrunch.marketturmoil1

Jickling, M. (2008). Fannie Mae and Freddie Mac in Conservatorship.

Mandel, M. J. (2004). Reagan’s Economic Legacy. Retrieved from http://www.bloomberg.com/bw/stories/2004-06-20/reagans-economic-legacy

Read, M. (2008). Treasurys drop as investors anticipate bank rescue – USATODAY.com. Retrieved from http://usatoday30.usatoday.com/money/economy/2008-09-19-2302975194_x.htm

Rochelle, B., & Willis, B. (2008). Bankruptcies Top 100,000 for First Month Since 2005 (Update1). Retrieved from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2Im.Pr5oAf4&refer=us

Stanton, E. (2008). U.S. Stocks Post Biggest Post-Election Drop on Economic Concern. Retrieved from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aj_ayFUP0riQ

Weinzierl, M., & Werker, E. (2011). Barack Obama and the Bush Tax Cuts (A). Harvard Business School.