When people refer to President Obama's tax cuts, they generally refer to the $858 billion tax cut deal signed in 2010. It extended the Bush tax cuts through 2012 and unemployment benefits through 2011. It cut payroll taxes by two percentage points, adding $112 billion to workers' spendable income. It extended a college tuition tax credit. It also included $58 billion in industry-specific tax cuts.
Obama’s deal revived the inheritance tax that had been eliminated in 2010, but had been set to return to higher level. It applied a 35% tax rate to estates worth over $5 million for individuals.
Obama also signed legislation cutting taxes in 2009 and 2013. In 2009, $288 billion were cut as part of the American Recovery and Reinvestment Act. In 2013, Obama approved the permanent extension of the Bush tax cuts for those below a certain income level as part of the fiscal cliff package.
2009 Economic Stimulus Package
In February 2009, Congress approved Obama’s economic stimulus package. It restored confidence and ended the Great Recession in July 2009. It cut $288 billion in taxes. It reduced that year's income taxes for individuals by $400 each and $800 for families. Instead of stimulus checks, workers received a lower withholding in their paychecks. It wasn't publicized very well, so many people didn't even notice the increase.
ARRA also reduced income taxes by the amount equal to the sales tax on a new car purchase. It provided tax cuts for investments in renewable energy and other small business tax cuts.
The Congressional Budget Office estimated ARRA would save between 900,000 and 2.3 million jobs. In addition to tax cuts, it spent $224 billion on entitlement programs, education and health care. It also spent $271 billion for job creation using federal contracts, grants, and loans.
2010: Extension of Bush Tax Cuts
The Bush administration cut taxes in 2001 and 2003. The Economic Growth and Tax Relief Reconciliation Act cut income taxes. Most of those benefits accrued either to families with children or high-income earners. The Jobs and Growth Tax Relief Reconciliation Act cut corporate taxes and accelerated the income tax phase-in. Congress passed the Bush tax cuts to fight the 2001 recession.
In 2010, the House gained more than 60 Republicans. That created a majority who elected a new House Majority Leader, John Boehner. Republicans won additional seats in the Senate, but not the majority. They wanted to reduce the deficit, keep the Bush tax cuts for everyone, and eliminate Obamacare. The change meant Obama had to negotiate with the lame duck Congress. That enabled the Obama tax cuts to pass before the end of 2010.
2013: Fiscal Cliff Tax Cut
The fiscal cliff refers to the disaster that would have occurred if Obama and Congress hadn't agreed on a plan to prevent it. Without the deal, a combination of five tax increases and two spending cuts would have occurred on January 1, 2013. The CBO estimated it would have removed $607 billion from the economy in the first nine months of 2013. The economy would have contracted 1.3%, throwing the country back into recession.
Instead, the American Taxpayer Relief Act extended the Bush tax cuts for those with incomes below a threshold. This threshold was $400,000 for individuals and $450,000 for married couples. Incomes at and above the threshold were taxed at the Clinton-era 39.6% tax rate.
Do Tax Cuts Create Jobs?
Dollar for dollar, tax cuts are not the best way to create jobs. If Congress insists on tax cuts, then the best kind are payroll tax cuts. They create 13 new jobs for every $1 million. If these employers only get the cuts when they create new jobs, it boosts job creation to 18 jobs per $1 million.
Extended Unemployment Benefits Are Best Way to Boost Economy
If Congress wants to get the best bang for the buck, it should extend unemployment benefits instead of cutting taxes. The CBO study found that unemployment benefits created 19 jobs for every $1 million spent.
In addition to creating jobs, every dollar spent on unemployment benefits stimulates $1.73 in economic demand. This is according to an Economy.com study. The unemployed spend every dollar they receive on essentials, such as food, clothing, and housing.
How Tax Cuts Add to the Debt
At $26.6 trillion, the U.S. debt is the largest in the world. How did it get so large? Even before the economic crisis, the debt grew 50% between 2000 and 2007, ballooning from $6 trillion to $9 trillion. The $700 billion bailout helped the debt grow to $10.5 trillion by December 2008.
Why Do We Pay Taxes?
Why do we pay taxes? Blame Congress. It's the only federal branch that Constitution granted "the power to lay and collect taxes." Of course, it does so to pay for government services. The largest of these are Social Security, Medicare, and our nation's defense.
Obama Tax Cuts Compared to Trump Tax Cuts
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It cut individual income tax rates, doubled the standard deduction, and eliminated personal exemptions.
Trump's tax plan lowered the top individual tax rate to 37%. It cut the corporate tax rate to 21%.
The Act increases the deficit by $1 to $2 trillion over the next 10 years according to the Joint Committee on Taxation. It will increase growth by 0.7% annually, thus reducing some of the revenue loss from the $1.5 trillion in tax cuts.
The Trump tax cut occurred while the economy was solidly in the expansion phase of the business cycle. The 2010 Obama cuts occurred only two years after the financial crisis. Congress was concerned that ending the cuts would throw the economy back into recession. Both cuts increased the deficit and debt.
Frequently Asked Questions (FAQs)
How much is the Obamacare tax?
The Affordable Care Act ("Obamacare") included many small adjustments to the tax code to pay for itself. For example, the ACA limited tax deductions for health insurance executive compensation, imposed annual fees on the health insurance sector tied to premium growth rates, and added a 10% tax on indoor tanning services. There was once a tax on uninsured individuals to incentivize coverage, but it was reduced to 0%.
What tax rate did President Obama pay when he was in office?
In their 2015 tax return (the last they filed from the White House), President Barack Obama and First Lady Michelle Obama reported a combined adjusted gross income of about $430,000. They paid a little more than $81,000 in total taxes that year. Their effective federal tax rate was 18.7%.