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The Bush Tax Cuts: Who benefits when their cost and potential economic growth are accounted for?

Distributional analysis of the Bush tax cuts often assumes no effect on economic growth. If the tax cuts raised economic growth, could they have raised the incomes of low- and middle-income taxpayers enough to offset the losses they suffer after accounting for the cost of the tax cuts? TPC finds that the answer is no: even with a plausible increase in economic growth, about two-thirds of households would still be worse off. Even a substantial economic growth effect would not be sufficient to rescue most households from being worse off if the tax cuts were made permanent, once the financing of the tax cuts is taken into account.

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  • If one assumes that the tax cuts raised each component of pre-tax household income by 1 percent, the combination of the direct tax cut and the increase in income would raise after-tax income by 4.5 percent, if the financing of the cuts is ignored. That growth in after-tax income is skewed toward higher-income households, but all groups would obtain some direct benefit. When financing is included, however, the aggregate change in after-tax income falls to 1.1 percent. More important, however, for the distributional analysis is that, in this full accounting, most households would end up worse off, even with a 1 percent increase in pre-tax cash income, than they would have been without the tax cuts. How many would be worse off depends on how the burden of paying for the tax cuts is shared.
  • If all households contributed the same dollar amount to paying for the tax cuts (equal-dollar financing), more than two-thirds of households would be made worse off, including almost everyone in the bottom 40 percent of the income distribution, almost 90 percent of those in the middle quintile, and a majority of those in the fourth quintile. The bottom 60 percent of the income distribution would see a decline in after-tax income, even though the economy grew.
  • If instead the financing of the tax cuts were proportional to income, 60 percent of households would be made worse off. As a whole, the bottom 20 percent would see a decline in income, and the next 40 percent would see only a very small increase in average after-tax income. Households in the top quintile receive the vast majority of all benefits in this scenario.
 
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   Entry 3 of 4