The Bush-Era Tax Cuts and Their Lasting Legacy

At the turn of the millennium, the United States economy was navigating a period of uncertainty. The dot-com bubble had given way to a recession that began in March 2001, creating a challenging environment for the incoming administration of George W. Bush. This economic downturn, coupled with shocks from corporate accounting scandals and the September 11th terrorist attacks, formed the backdrop for a shift in fiscal policy. The administration’s central economic philosophy was that reducing the tax burden on individuals and businesses would spur investment and job creation, positioning tax cuts as a tool for stimulus.

Individual Income and Family Tax Relief

The cornerstone of the initial tax changes was the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This legislation directly impacted the tax liabilities of individuals and families through provisions that were phased in over several years.

A structural change introduced by the act was the creation of a new 10% income tax bracket, below the previous low of 15%. This new bracket applied to the first several thousand dollars of taxable income, providing a tax reduction for all taxpayers. Many people received a rebate check in the summer of 2001 as an advance on this new lower rate.

EGTRRA also enacted a gradual reduction of the higher marginal income tax rates. Over a period of six years, the following rates were scheduled to decrease:

• The 39.6% rate was lowered to 35%.
• The 36% rate was lowered to 33%.
• The 31% rate was lowered to 28%.
• The 28% rate was lowered to 25%.

The legislation also expanded the Child Tax Credit, doubling it from $500 to $1,000 per child over a decade. A portion of the credit was made refundable for many families, meaning that if a family’s tax liability was zero, they could still receive a payment from the government. This feature provided financial relief to lower-income working families.

Finally, the act sought to alleviate the “marriage penalty,” which can occur when a married couple’s combined tax liability is greater than if they filed as two single individuals. EGTRRA addressed this by increasing the standard deduction for married couples filing jointly to double that of single filers. It also increased the income threshold for the 15% tax bracket for married couples.

Investment Tax Reductions

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) accelerated many of the 2001 provisions, but its main impact was reducing taxes on investment income. The primary targets were long-term capital gains and qualified dividends.

A long-term capital gain is the profit from selling an asset, such as stocks or real estate, that has been held for more than one year. Qualified dividends are payments a corporation makes to its shareholders from after-tax earnings that meet certain requirements. Before JGTRRA, gains were taxed at a maximum of 20%, while dividends were taxed at higher ordinary income tax rates.

The 2003 act created a new, lower tax rate for both long-term capital gains and qualified dividends, reducing the top rate for both to 15%. For taxpayers in the 10% and 15% income brackets, the rate on this investment income was lowered to 5%, and later to 0% for a period. This reduction was intended to encourage investment by lowering the tax cost of selling successful investments and receiving dividends.

The Estate Tax Phase-Out

A component of EGTRRA was its treatment of the federal estate tax, which is a levy on the transfer of a person’s assets after death. The law put the tax on a path to temporary elimination. It steadily increased the exemption amount, which is the value of an estate not subject to tax, from $675,000 in 2001 to $3.5 million by 2009.

Simultaneously, the act lowered the top estate tax rate from 55% in 2001 to 45% by 2007. This combination of a rising exemption and a falling rate progressively lessened the impact of the tax throughout the decade.

The phase-out culminated in a full, one-year repeal of the federal estate tax for 2010. For that single year, the tax ceased to exist, regardless of an estate’s size. This meant the estates of individuals who died in 2010 faced no federal estate tax liability.

Sunset Provisions and Subsequent Legislation

A defining characteristic of the 2001 and 2003 tax cuts was their temporary nature. Both laws included “sunset” provisions, meaning all changes were scheduled to automatically expire at the end of 2010. This structure was a procedural necessity related to Senate budget rules.

As the 2010 expiration approached, a political debate ensued over extending the cuts. In late 2010, Congress passed a compromise bill that extended all of the Bush-era tax cuts for an additional two years. This postponed decisions on long-term tax policy until the end of 2012.

This new deadline created the “fiscal cliff,” a term for the simultaneous expiration of the tax cuts and automatic spending cuts. Congress passed the American Taxpayer Relief Act of 2012 (ATRA), which made some Bush-era tax changes permanent while allowing others to expire. ATRA kept the lower income tax rates for most Americans but allowed the top rate to revert to 39.6% for high incomes.

The act also made the 10% bracket and marriage penalty relief permanent. The 15% tax rate for capital gains and dividends was kept for most taxpayers, though a new 20% rate was created for those in the top income bracket. The estate tax was set with a high exemption amount and a 40% top rate.

The Tax Cuts and Jobs Act of 2017 (TCJA) again reshaped the tax code, but most of its individual tax changes are temporary. Through 2025, the TCJA replaced the prior rate structure with seven new brackets. It also temporarily doubled the Child Tax Credit to $2,000 and nearly doubled the standard deduction, which further reduced the marriage penalty.

The TCJA kept the 0%, 15%, and 20% rates for capital gains and dividends. For the estate tax, it maintained the 40% rate but doubled the exemption amount. These TCJA provisions are scheduled to expire at the end of 2025, and unless Congress acts, the tax code will largely revert to the rules established by ATRA.