The economic policy and legacy of the George W. Bush administration was characterized by significant income tax cuts in 2001 and 2003, the implementation of Medicare Part D in 2003, increased military spending for two wars, a housing bubble that contributed to the subprime mortgage crisis of 2007–2008, and the Great Recession that followed. Economic performance during the period was adversely affected by two recessions, in 2001 and 2007–2009.

Overview

President Bush was in office from January 2001 to January 2009, a complex and challenging economic and budgetary time. In addition to two recessions (2001 and the Great Recession of 2007–2009), the U.S. faced a housing bubble and bust, two wars, and the rise of Asian competitors, mainly China, which entered the World Trade Organization (WTO) in December 2001.

According to the National Bureau of Economic Research, the economy suffered from a recession that lasted from March 2001 to November 2001. During the Bush Administration, Real GDP has grown at an average annual rate of 2.5%.

During his first term (2001–2005), President Bush sought and obtained congressional approval for the Bush tax cuts, which mainly comprised the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). These acts decreased many income tax rates, reduced the capital gains tax, increased the child tax credit and eliminated the so-called "marriage penalty", and were set to expire in 2010, while increasing federal deficits by an estimated 1.5% to 2.0% GDP each year. Among the many stated rationales for the large income tax cuts of 2001 and 2003 was the 2001 recession, which followed the bursting of the Dot-com bubble in late 2000 and early 2001. Further, some influential conservatives such as Alan Greenspan believed that the nearly $5 trillion in budget surpluses forecast by the CBO for the 2002-2011 period should be given back to taxpayers rather than used to pay down the national debt.

The U.S. responded the September 11, 2001 attacks with the invasion of Afghanistan shortly thereafter. The invasion of Iraq followed in 2003. Military expenditures approximately doubled in nominal dollars to pay for these wars, rising from around $300 billion in 2001 to $600 billion in 2008.

While President Bush generally continued the deregulatory approach of his predecessor President Clinton, an important exception was the Sarbanes–Oxley Act of 2002, which followed high-profile corporate scandals at Enron, World Com, and Tyco International, among others. It required auditors to be more independent of the firms they audit, corporations to rigorously test their financial reporting controls, and top executives to attest to the accuracy of corporate financial statements, among many other measures.

Regarding entitlement programs, President Bush signed Medicare Part D into law in 2003, significantly expanding that program, although without new sources of tax revenue. However, an attempt to privatize the Social Security program was unsuccessful in his second term.

His second term (2005–2009) was characterized by the housing bubble peak and bust, followed by the worsening subprime mortgage crisis and Great Recession. Responses to the crisis included the $700 billion TARP program to bail out damaged financial institutions, loans to help bail out the auto industry crisis, and bank debt guarantees. The vast majority of these funds were later recovered, as banks and auto companies paid back the government.

Economic performance overall suffered as a result of the 2001 and 2007–2009 recessions. Real GDP growth averaged 1.8% from Q1 2001 to Q4 2008. Job creation averaged 95,000 private sector jobs per month, measured from February 2001 to January 2009, the least of any president since 1970. Job creation during the 2001–2007 period was slow by historical standards and arguably unsustainable, as nearly all the net job creation was reversed during the subsequent Great Recession. The employment recoveries from both the 2001 and 2007–2009 recessions were protracted; the peak employment level for private sector workers in January 2008 was not regained until 2014. Income inequality continued to worsen pre-tax (a trend since 1980) and was accelerated after-tax by the Bush tax cuts, which dis-proportionally benefited higher-income taxpayers, who pay the majority of income taxes.

The U.S. national debt grew significantly from 2001 to 2009, both in dollar terms and relative to the size of the economy (GDP), due to a combination of tax cuts, wars and recessions. Measured for fiscal years 2001–2008, Federal spending under President Bush averaged 19.0% of GDP, just below his predecessor President Bill Clinton at 19.2% GDP, although tax receipts were substantially lower at 17.1% GDP versus 18.4% GDP. Income tax revenues averaged 7.7% GDP under Bush, versus 8.5% GDP under Clinton. The sizable national debt increases during his administration represented a reversal from a sizable surplus projection by the Congressional Budget Office just prior to his taking office.

As of 2017, a major legacy of President Bush's economic policy was his tax cuts, which were extended indefinitely by President Obama for roughly the bottom 99% of taxpayers, or about 80% of the value of the tax cuts.

Tax policy

2001 tax cut

Between 2001 and 2003, the Bush administration instituted a federal tax cut for all taxpayers. Among other changes, the lowest income tax rate decreased from 15% to 10%, the 27% rate went to 25%, the 30% rate went to 28%, the 35% rate went to 33%, and the top marginal tax rate went from 39.6% to 35%. In addition, the child tax credit went from $500 to $1000, and the "marriage penalty" reduced. Since the cuts got implemented as part of the annual congressional budget resolution, which protected the bill from filibusters, numerous amendments, and more than 20 hours of debate, it had to include a sunset clause. Unless congress passed legislation making the tax cuts permanent, they were to expire after the 2010 tax year.

Facing opposition in Congress for an initially proposed $1.6 trillion tax cut (over ten years), Bush held town hall-style public meetings across the nation in 2001 to increase public support for it. Bush and some of his economic advisers argued that unspent government funds had to be returned to taxpayers. With reports of the threat of recession, Federal Reserve Chairman Alan Greenspan said tax cuts could work but must be offset with spending cuts.

Bush argued that such a tax cut would stimulate the economy and create jobs. Ultimately, five Senate Democrats crossed party lines to join Republicans in approving a $1.35 trillion tax cut program — one of the largest in U.S. history.

2003 cuts and later

The United States Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) on May 23, 2003, and President George W. Bush signed it into law five days later. Nearly all of the cuts (individual rates, capital gains, dividends, estate tax) were to expire after 2010.

Among other provisions, the act accelerated certain tax changes passed in the Economic Growth and Tax Relief Reconciliation Act of 2001, increased the exemption amount for the individual Alternative Minimum Tax, and lowered taxes of income from dividends and capital gains. JGTRRA continued on the precedent established by the 2001 EGTRRA, while increasing tax reductions on investment income from dividends and capital gains. JGTRRA accelerated the gradual rate reduction and increase in credits passed in EGTRRA. The maximum tax rate decreases originally scheduled to be phased into effect in 2006 under EGTRRA were retroactively enacted to apply to the 2003 tax year. Also, the child tax credit increased to what would have been the 2010 level, and "marriage penalty" relief accelerated to 2009 levels. In addition, the threshold at which the alternative minimum tax applies was also increased. JGTRRA increased both the percentage rate at which items are depreciated and the amount a taxpayer may choose to expense under Section 179, allowing them to deduct the full cost of the item from their income without having to depreciate the amount.

In addition, the capital gains tax decreased from rates of 8%, 10%, and 20% to 5% and 15%. Capital gains taxes for those currently paying 5% (in this instance, those in the 10% and 15% income tax brackets) are scheduled for elimination in 2008. However, capital gains taxes remain at the regular income tax rate for property held less than one year. Certain categories, such as collectibles, remained taxed at existing rates, with a 28% cap. In addition, taxes on "qualified dividends" reduced to the capital gains levels. "Qualified dividends" includes most income from non-foreign corporations, real estate investment trusts, and credit union and bank "dividends" nominally interest.

CBO scoring The non-partisan Congressional Budget Office has consistently reported that the Bush tax cuts (EGTRRA and JGTRRA) did not pay for themselves and represented a sizable decline in revenue for the Treasury: The CBO estimated in June 2012 that the Bush tax cuts of 2001 (EGTRRA) and 2003 (JGTRRA) added approximately $1.5 trillion total to the debt over the 2002-2011 decade, excluding interest. The CBO estimated in January 2009 that the Bush tax cuts would add approximately $3.0 trillion to the debt over the 2010-2019 decade if fully extended at all income levels, including interest. The CBO estimated in January 2009 that extending the Bush tax cuts at all income levels over the 2011-2019 period would increase the annual deficit by an average of 1.7% GDP, reaching 2.0% GDP in 2018 and 2019.

Commentary on the Bush tax cuts House Minority Leader Richard Gephardt said the middle class will not benefit enough from the tax cut and the wealthy will reap unfairly high benefits. Senate Majority Leader Tom Daschle argued that the tax cut is too large, too generous to the rich and too expensive.Wallace, Kelly (June 7, 2001). "$1.35 trillion tax cut becomes law". CNN InsidePolitics archives. Retrieved December 29, 2010.

Economists, including the Treasury Secretary at the time Paul O'Neill and 450 economists, including ten Nobel prize laureates, who contacted Bush in 2003, opposed the 2003 tax cuts on the grounds that they would fail as a growth stimulus, increase inequality and worsen the budget outlook considerably (see Economists' statement opposing the Bush tax cuts). Some argued the effects of the tax cuts have been as promised as revenues actually increased (although income tax revenues fell), the recession of 2001 ended relatively quickly, and economic growth was positive.

The tax cuts had been largely opposed by American economists, including the Bush administration's own Economic Advisement Council. In 2003, 450 economists, including ten Nobel Prize laureate, signed the Economists' statement opposing the Bush tax cuts, sent to President Bush stating that "these tax cuts will worsen the long-term budget outlook... will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research... [and] generate further inequalities in after-tax income."

The Bush administration had claimed, based on the concept of the Laffer Curve, that the tax cuts actually paid for the themselves by generating enough extra revenue from additional economic growth to offset the lower taxation rates. However, income tax revenues in dollar terms did not regain their FY 2000 peak until 2006. Through the end of 2008, total federal tax revenues relative to GDP had yet to regain their 2000 peak although it was increasingly between 2004 and 2007.