Wednesday, January 2, 2019

The George Herbert Walker Bush Tax Cuts

The George Herbert Walker Bush Tax Cuts

Many of us remember George Herbert Walker Bush for his famous declaration: “Read my lips; no new taxes.” Being a man of financial prudence he decided his own federal budget deficits forced him to renege. He raised taxes and then lost his bid for reelection in the 1992 elections.

The ideological part of the Republican party would never forgive him, although the Ross Perot third party bid probably cost him more votes than angry Republicans. It did after all give them an alternative to Democrats. What I would like to examine though is how much of a tax cut really occurred and also the timing of the cuts. Remember Mr. Bush did not take office until January 1989 and left office in January 1993. Before Mr. Bush took office President Reagan succeeded in getting substantial tax cuts.

Suppose we invent a hypothetical rich couple earning $900,000 in wages and salaries and $100,000 of capital gains and look at their federal personal income taxes for a joint return and a standard deduction each year in 1986, 1987, 1988 and 1991.

Taxes in 1986 had 15 different tax rates that started at 11 percent for the first $3,670 of taxable income for married couples filing a joint return and went up by 1 to 4 percent increments until it reached 50 percent for taxable income of $175,250 or more. The 1986 taxes for our hypothetical couple came to $514,876.00. Only 40 percent of reported capital gains was taxed in that year.

Their 1987 federal taxes were before George HW Bush became president where tax cuts by Congress and President Reagan left 4 different tax rates that started at 11 percent for the first $3,000 of taxable income for married couples filing a joint return. Rates went up by 4 to 13 percent income increments until it reached 38.5 percent for taxable income of $90,000 or more. Now with the Reagan tax cuts the 1987 their tax drops to $361,529.41, a savings of $153,448.59. That is a 29.7 percent reduction in taxes.

In 1988, again during the Reagan presidential years, the top tax rate dropped again. This time from 38.5 percent to 33 percent on the first $149,250 of taxable income. Therefore not only is the rate lower but also the lower rate applies to more income. Now with the Reagan tax cuts in 1988 our hypothetical couple would pay $278,600 in federal income taxes, a savings of $82,929.41. That is 22.9 percent reduction over 1987 taxes and a 45.9 percent reduction over taxes in 1986.

Compare federal income taxes for a couple filing a joint return on the median household income in 1986, which was $24,897. Assuming the $24,897 was wage income this lower income couple paid $2,202.76 in federal taxes. After the tax cut for the rich the working class couple with the same $24,897 income in 1987 paid $2,480.55, a tax increase of $277.79. That is a 12.6 percent increase in taxes. It was called a rich persons tax cut with good reason.

In 1991 the top tax rate dropped from 33 percent to 31 percent for taxable income over $82,150, but the 1990 exemption amount of $4,100 for a married couple filing a joint return was suddenly subjected to a means test. For couples earning over $157,900 started losing the exemption deduction until it became negative and had to be added to taxable income. Beginning in 1991 during George Bush’s presidency our hypothetical couple had to pay $306,079.91 in taxes, an increase from $278,474.00 in 1990, or $27,605.91 more tax in 1991. The 1991 increase was 9.9 percent over 1990, but still 40.6 percent below the taxes from 1986.

If the taxes of 1986 had remained the same from 1987 through 1992 our hypothetical couple would have paid $1,279,952.43 more in taxes that they did. I did not adjust for interest earnings or it would have been more. The Reagan-Bush tax cuts from 1987 to 1992 cut taxes for our hypothetical rich couple by 41.4 percent.

It’s always good to quantify the arrogance of the idle rich, but gee poor ol’Herbert Walker lost his job. The new President Bill Clinton and the Democrats had the Trifecta for two years: control of the White House and both houses of Congress. The Democrats raised 1993 taxes although they remained well below 1986. Our hypothetical rich couple saved $145,793.88 in 1993 taxes over taxes for 1986.

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