Thursday, June 14, 2012

…the echo chamber

By kay.e.strong

By definition, the echo chamber effect refers to any situation in which information, ideas or beliefs are amplified or reinforced by transmission inside an “enclosed” space. One outcome of the echo chamber effect is to give credence to false claims through sheer volume of repetition. The Bush-Era tax cuts exemplify such an effect transmitted inside the enclosed “politicking” space. 
                 
To understand the echo chamber effect of the Bush-Era tax cuts, we must revisit the period from which they sprang, the triggering events, their specific provisions and gross incongruence with reality.

First, the rationale for the 2001 tax cuts was to provide “tax relief” by returning excess federal budget surpluses to American taxpayers.  The tail end of the 120-month expansion which began in March 1991 had been very generous to the government coffers, generating more federal tax revenue than expenditure.  However, what the administration had not anticipated was a pending turning point in the economy.  Leading up to 2000, Y2K loomed larger than life.  The business sector responded to the hype by ramping up spending on new equipment and software: +14.5% (1998) and +14.1% (1999).  Then, having navigated the event successfully, businesses quite logically reduced spending (10.5% in 2000) which triggered the mini dot.com bust (2000-2001).  In 2001, businesses throttle back spending further with a -2.8 percent drop—split between a -1.5% on plant facilities and a -3.2% in purchases of equipment and software.  Unfortunately, a positive feedback loop gained momentum in 2002 with the business sector responding to the dot.com bust by further slashes in spending (-17.7% on plant expansion and another -4.2% on equipment and software). 

Intermeshed with the Y2K (2000) and dot.com bust (2000-2001) was September 11th (2001). However, despite all the press, September 11th does not figure prominently into the eight-month 2001 downturn. According to the National Bureau of Economic Research that brief downturn running from March 2001 (peak) to November 2001 (trough) was followed by a healthy 73 month expansion.

Interestingly, all other economic sectors sans business registered positive spending growth from the end of the 1991 (November) downturn through December 2007, the onset of the next eighteen-month contraction.  An economic expansion, albeit slow, has been underway since June 2009.

The Bush-Era tax cuts typically refer to two different pieces of legislation which both the President and his fellow Republicans had envisioned to be permanent revision to the tax code. The first known as the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) signed into law in June 2001, phased in lower tax rates over a period of nine years, provided a 2001 rebate ($300/ $500/ $600) for qualified taxpayers based on their 2000 earnings, while simplifying retirement and qualified plan rules for IRAs, 401(k), 403(b) and pension plans. The unanticipated sunset—reversion to earlier status—provision was scheduled for end of 2010. 

More specifically, the 2001 legislation provided for the following changes:
  • Individual Income Tax Rates to be eliminated in 2011:
Bottom Income Bracket: a new 10% bracket for single filers applied to first $7,550 for individuals and $15,100 for couples
The 15% bracket's lower threshold indexed to the new 10% bracket
The 28% bracket lowered to 25%
The 31% bracket lowered to 28%
The 36% bracket lowered to 33%
Ultra-high Income Bracket: the 39.6% bracket lowered to 35%
  • Marriage Penalty: Increased the standard deduction for joint filers from between 174% to 200% of the deduction for single filers to be eliminated in 2011.
  • Child Credit: Increased per-child tax credit ($500-$600 in 2001 and 2002 increased to $1000 in 2005) and amount eligible for dependent child care returning to $500 in 2011.
  • Estate Tax/ Gift Tax/ Generation-skipping Tax: top rate gradually reduced from 55% in 2001 to 45% in 2007; estate tax credit exclusion gradually increased from $675,000 in 2001 to $3.5 million in 2009.  In 2011, tax to be reinstated with top rate of 60% and $1 million exemption.
  • Alternative Minimum Tax (AMT): Increased the exemption to $40,250 for individuals and $58,000 for couples.
  • Created a new depreciation deduction for qualified property owners
The second revision, known as the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) introduced into the House in February 2003, was signed by Bush into law in May 2003. This legislation, while accelerating the individual credits and rate reductions in the 2001 Act, attacked the perceived obstacles standing in the way of pump up business expansion.  Taxpayers were permitted to deduct the full cost of specific items from their income without having to depreciate the amount. Capital gains tax decreased from rates of 8%-10%-20% to 5 and 15%.

Contrary to the echo chamber, the original legislation had NOTHING to do with jump starting the economy!  In fact, the economy had been so healthy that despite government’s best spending efforts—it generated four successive years of federal budget surpluses! Republicans seizing the opportunity rammed through “tax relief” for the ultra-rich—who else could take advantage of the Estate Tax/ Gift Tax/ Generation-skipping Tax, the Alternative Minimum Tax, an Income Tax break on par with the pre-relief rate of the middle-class, as well as Capital Gains Tax reductions?

The rationalizing echo in the political rhetoric-de jour for extending the Bush-Era tax cuts is just as disingenuous as the then-President Bush in his 2006 State of the Union address: “I urge the Congress to act responsibly and make the tax cuts permanent…and stay on track to cut the deficit in half by 2009”—which, incidentally, hit its historic hit—a trillion point four dollars in 2009!

I have to wonder, what might our political reality look like if politicians of all colors stretched their necks outside the echo chamber?


Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.