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The Bush Tax Cuts: If we ignore how the cuts are paid for, who benefits from them?

If the 2001 and 2003 tax cuts were made permanent and the number of taxpayers subject to the alternative minimum tax were held at levels that would have prevailed under pre-2001 law, about 73 percent of tax-filing units would receive a direct tax cut in 2010; that share rises with income, from only 16 percent of units in the bottom income quintile to more than 99 percent in the top quintile. This, however, is not a complete picture of the ultimate impact of the tax cuts, because it does not take into account the tax increases or spending cuts that will eventually be needed to pay for the tax cuts. That accounting is presented in another entry.

  • The percentage change in after-tax income, TPC’s preferred measure for comparing the benefits of tax cuts across income groups, rises under this scenario as income rises, from an increase of 0.3 percent in after-tax income in the bottom quintile (see table) to a rise of 4.3 percent in the top quintile. It rises even further within the top quintile, with a 6.4 percent increase for the top 1 percent and a 7.5 percent increase for the top 0.1 percent (not shown). Thus the tax cuts would be regressive, raising after-tax income by a greater percentage for high-income households than for all others.
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  • Several other commonly used measures of the distributional effects also suggest that the benefits of making the tax cuts permanent would be tilted toward high-income households in general and toward households in the top 1 percent of the income distribution in particular. The average effective tax rate would fall more for the top 1 percent than for any other group. Their share of the tax cut (73.1 percent) would exceed their share of tax burdens in the absence of the tax cut (71.7 percent); as a result, their share of total federal taxes paid would decline. And the tax cut in absolute dollars is clearly far larger for high-income than for low-income groups.
  • At least two other measures sometimes cited, if taken at face value, suggest that the tax cuts would actually help other households more than high-income households. First, the reduction in federal tax liability that households in the top 1 percent would receive (11.1 percent), although slightly larger than the average reduction (11.0 percent), would be smaller than the reduction for households in the second-lowest income quintile (18.2 percent). Second, households in the top 1 percent would actually pay a greater share of the income tax (but not of total federal tax) after the tax cuts than before. Some have used this finding to conclude that the tax cut is progressive.
 
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