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The Economy: 5 Things You Should Know for 2020 (and Beyond) – Part 3

Posted by Bahr, Kevin - December 18, 2019 - Center for Business and Economic Insight

Number 3: The Timing of Those Tax Cuts

Part of what made the recent tax cuts unique is that they occurred in a growing economy with near historic lows in unemployment. Prior to 2018, recent tax cuts occurred when the economy was struggling and unemployment was relatively high.

In the current economic recovery, the payroll tax for Social Security was temporarily reduced under President Obama. In 2011 and 2012, the payroll tax was reduced from 6.2% to 4.2%.  Payroll taxes are paid up to a salary limit; the salary limit was $110,100 in 2012 and $106,800 in 2011.  In essence, the payroll tax cut provided a 2% tax reduction on income below the salary limit. The objective was to help a struggling economy recover from the financial crisis, and quickly give working individuals a reduction in taxes. As indicated previously, in 2010 the unemployment rate was nearly 10%; the economy had contracted in 2009 with two consecutive quarters of negative GDP growth. At the time of the tax cut, the economy was struggling, with relatively high unemployment.

In 2003 The Jobs and Growth Tax Relief Reconciliation Act was passed under President Bush in an effort to kick-start the economy after a series of troubling events. Several factors adversely impacted the economy after the turn of the century, including an economic slowdown beginning in early 2001, the terrorist attacks of 2001, and the bursting of the dot.com (overpriced internet/technology stocks) bubble. Tax rates were generally reduced across all income brackets; tax rates on capital gains and dividends were also reduced. After ending 2000 at 3.9%. the unemployment rate had gradually increased to over 6.0% in 2003.  After growing at 4.8% in 1999 and 4.1% in 2000 respectively, GDP grew an only an annualized 1.0% rate in 2001 with negative growth in the first and third quarters. At the time of the tax cut, the economy was struggling, with relatively high unemployment.

The tax cuts implemented in 2018 were different. The economy had over eight years of economic growth; the unemployment rate had declined gradually from approximately 10% in 2009 to nearly 4% at the end of 2017. Contrary to recent tax cuts, the 2018 tax cuts were implemented when the economy was expanding and the unemployment rate was relatively low.  The tax cuts contributed to a cost yet to be paid – a growing federal budget deficit and record levels of federal debt. But at some point, they will be paid.

A side effect of the 2018 tax bill was how the resulting split between individual and corporate taxes comprised total federal tax revenues. In fiscal year 2018, corporate income taxes comprised 6.1% of federal tax revenue. The 6.1% rate was not only the lowest of the decade, it was the lowest rate ever based on Office of Management and Budget data available since 1934. Conversely in fiscal year 2018, the contribution of individual income taxes to total federal tax revenue increased. Federal income tax revenue from individual income taxes comprised 50.6% of federal tax revenue in fiscal year 2018. The 50.6% rate for individual income taxes was not only the highest of the decade, it was the highest rate ever based on Office of Management and Budget data available since 1934.

For further information:

CBEI Blog Series: The Economy: 5 Things You Should Know for 2020 (and Beyond)
Part 1: Economic Growth and Unemployment – Positive Trends for a Long Time
Part 2: What’s Been Driving Economic Growth
Part 3: The Timing of Those Tax Cuts
Part 4: The Yet to be Paid Increasing Costs of the Federal Deficit and Debt
Part 5: Drivers of The Stock Market
Part 6: Summary and Future Challenges

Kevin Bahr

Kevin Bahr, Ph.D. is the chief analyst of the Center for Business and Economic Insight and Professor of Business in the University of Wisconsin-Stevens Point School of Business and Economics.

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