On January 20, 2001, when George W. Bush took the oath of office as president, the period of divided government came to an end. In the November 2000 elections, Republicans maintained control of both houses of Congress, and the new Republican president, despite the irregularity of his own election, set out to establish control over the legislative agenda. President Bush had a definite top priority for his domestic program: using much of the budgetary surplus that had emerged from the 1990s to fund a large tax cut.

During the Bush administration, organized anti-tax movements moved to the center of national politics, and the growing inequality of economic power assumed greater force in shaping tax policy. A combination of capital-favoring and retro-liberal tax cuts followed in 2001. They were reminiscent of Reagan's cuts twenty years earlier. But the Bush administration did not reverse course as Reagan had in 1982, and Bush never attempted base-broadening reform as Reagan had in 1986. Also, the Bush cuts in discretionary domestic spending were larger, reinforcing the regressive effects of tax policy. Meanwhile, in financing major military efforts, the Bush administration eschewed tax increases. The resulting deficits were unprecedented in scope, shifting public finance to a heavy reliance on borrowing. The already weakened World War II tax regime finally gave way, replaced by what deserves to be called a retro-liberal regime.

George W. Bush and the 2001 Tax Cuts

In bidding for the presidency, George W. Bush consistently made tax cutting the centerpiece of his agenda for domestic policy. As governor of Texas, with his presidential campaign in mind, he resisted calls to increase spending on education and turned $2 billion of budget surplus into a tax cut. This record established him as the biggest tax cutter among the Republican candidates for president. In the Republican primaries, he invoked his Texas record to outflank Christie Todd Whitman, whose record of tax cutting as governor of New Jersey was not quite as impressive, and Steve Forbes, who continued to advocate replacing the progressive income tax with the poorly understood “flat tax.”