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History lesson: Why the Bush tax cuts were enacted

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Chip Somodevilla — Getty Images

We’ve noted this history before, but many people have forgotten it. Given that the dispute over whether to extend all of the Bush tax cuts has now led the nation to the edge of the “fiscal cliff,” let’s take a trip back in time to recall why the Bush tax cuts were enacted in the first place. (The Fact Checker covered passage of the Bush tax cuts as an economic policy reporter for The Washington Post.)

Oddly, a key reason the tax cut became reality was because of a fear the United States soon would have zero debt.

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With federal revenue soaring in 2000, generating budget surpluses, there was pent-up desire for a tax cut, especially among Republicans.

George W. Bush had just been elected on a pledge to cut taxes, but his plan did not get much traction among Democrats until then-Federal Reserve chairman Alan Greenspan warned Congress of a dangerous new specter — that the government would pay down the national debt, and there would be no place to park excess funds.

“At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government,” he declared.

Yep, you read that right. The perceived danger was — believe it or not — that there would be no national debt left.

Greenspan, however, offered caveats and warnings that were largely ignored by Congress. In fact, he said that any tax cuts should have triggers that would halt them “if specified targets for the budget surplus and federal debt were not satisfied.”

In other words, the tax cuts would have been terminated or reduced, depending on the nation’s economic circumstances — precisely the tactic Republicans said was a non-starter in the 2011 debt-ceiling debate.

“We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake,” Greenspan said, back when the federal debt was $5.7 trillion. (It is $16.3 trillion today.)

The tax cut that emerged a few months later was a classic congressional compromise — a hodgepodge of rate cuts and special-interest tax provisions that actually was much larger than officially scored. It is frequently reported that the tax cut reduced revenues by  $1.35 trillion over 10 years, but that’s not accurate.

Moderate Democrats, in fact, thought they had won a large victory when they forced through a budget resolution that cut the tax cut from $1.6 trillion to $1.35 trillion. Thus, because the Senate at the time was split 50-50, with Vice President Richard Cheney casting the deciding vote, the tax cut would have to fit within the terms of the congressional budget resolution in order to avoid a filibuster.

But then Republicans cleverly terminated the tax bill after just nine years, meaning they could fit what in effect was a $1.6 trillion tax cut within a 10-year box. (The tax cut would have terminated after 10 years because of arcane Senate budget rules, but this way, Bush was able to have his cake and eat it too.)

Few people understood at the time the significance of this shift — and even fewer today remember what happened.

Ironically, no one was really happy with the resulting tax package — especially conservatives.

“Conservatives view Bush's legislation not as an important economic or philosophical statement that shows what Republicans stand for, the way President Ronald Reagan’s tax cut did two decades ago,” we wrote in The Washington Post at the time. “Instead, the Bush tax cut is generally considered a political document, filled with gimmicks and trade-offs that drain it of any real impact.”

As Stephen Moore, president of the Club for Growth, a tax cut advocacy group, put it: “It provides almost zero help for the economy over the next two years and modest help over the next decade.”

Yet almost 13 years later, the Bush tax cut has become sacrosanct. The Club for Growth on Wednesday warned Republicans not to vote for House Speaker John Boehner’s “Plan B” proposal to raise taxes only on people making more than $1 million a year.

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