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How the Clinton Surplus Led to the Bush Tax Cuts (Or, the Real Story You May Not be Hearing About the Fiscal Cliff)

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It is hard to avoid hearing about the "fiscal cliff" these days. Any news show, newspaper or online blog about politics seems to have it front and center. The "fiscal cliff" refers in part to the automatic return to the tax rates pre-2001 or ending of the so-called "Bush tax cuts." The Economic Growth and Tax Relief Reconciliation Act of 2001, or the "Bush Tax Cuts" as they are now commonly referred to, were to be phased in and they were meant to expire at the end of 10 years. These tax reductions were set to expire in 2011 if an extension was not passed by Congress. Congress voted to extend the tax cuts in 2010 but to relook at it again in 2012 after the election. But why were these tax cuts written in such a way that they were automatically set to expire in 10 years? No other tax laws that I know of were written in such a way to expire automatically. At least none that were so dramatic.

When I looked into this what I found was that these tax cuts came into being because of the "Clinton Surplus." When Bill Clinton left office he left a federal budget surplus. The budget office projected a surplus for years to come given the tax rates at that time. There was much debate about what to do with the surplus in the 2000 election including making Social Security more secure, a suggestion made by Al Gore. But when George Bush won the election in 2000, returning the surplus to the electorate was his wish.

In his first State of the Union Address on Jan. 27, 2001, the newly elected President George Bush put forth his argument on what to do with the surplus:

I hope you will join me in standing firmly on the side of the people. You see, the growing surplus exists because taxes are too high and government is charging more than it needs. The people of America have been overcharged and, on their behalf, I am here asking for a refund.

Clearly stated, the people were overcharged, the government has more money than it needs and they should get the money back. This put the ball in motion to make way for the Bush Tax Cuts, which were voted on in June 2001 with the idea that they would expire in 2011. Let me just state this again -- these were meant to expire, this was written into the piece of legislation. These were meant to be temporary because no one could see into the future to see if the tax cuts made sense 10 years hence.

In the New York Times on Dec. 29, 2000, Richard W. Stevenson looked at this issue of the projected budget surpluses:

Administration officials said they expected the surplus to total $4.996 trillion in the 10 years beginning with the start of the next fiscal year, on Oct. 1, 2001. That amounts to an increase of just over $800 billion from the administration's previous projection, of $4.193 trillion for the 10 years that started this October.

Although such long-range projections are subject to change with ups and downs in the economy and are not a tool of great precision, the new estimates give Mr. Bush more wiggle room in his efforts to convince Congress and the public that his tax cut proposal, valued at some $1.6 trillion over 10 years, is affordable.

Maybe I have missed this, but I just haven't heard this talked about in the current debates on the fiscal cliff. I am sure someone somewhere has talked about this, but really are we clear on why these cuts came into place to begin with? It is worth restating: Because we had or so the budget office thought, a budget surplus, tax rates were cut across the board by the Bush administration and the Republican Congress at the time. I think we can see what happened and many of us know this all too well, they spent money before they had it and then they didn't get it. Am I simplifying it? Probably. But am I that far off? I don't think so.

Should all the tax cuts be allowed to expire? Probably not. Should the tax cuts on those making over $250,000 expire? I really think so. Do we need to look at cutting our spending, too? Of course.

But my point in writing this is that these tax cuts were never meant to be something that continued unless we had a balanced budget or a surplus. They were put into effect because the budget office believed we had a projected surplus, which did not materialize for a variety of reasons -- 9/11 and the resulting wars are a big one. The Great Recession (or whatever we are calling it now) was another reason. Two major events that were unforeseen when these tax measures were voted on.

There are lots of things I would like to believe. Maybe this year will be the year that I do get that red BMW convertible with the bow on top in the driveway for Christmas. I can see myself now, driving down Sunset Boulevard with the top down getting lots of envious looks (well, maybe not in this city). But then when the first bill arrived in the mail and I saw how much I was going to have to pay for it and for how long, the reality would set in. Thanks but no thanks -- I only want gifts that I can afford if I am ultimately the one that has to pay for it. This is one gift we can't afford I'm afraid.