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Distribution of the 2001 - 2006 Tax CutsNovember 2, 2006 The tables referenced in this document have been updated. Click here for the updated tables. The following tables show Tax Policy Center estimates of the combined effect of the major tax changes that have been enacted since 2001. For each table, we compare the amount of tax that is owed under current law with the amount that would have been paid if the law had stayed the same as it was in 2000. The estimates are computed both for dollar income classes (e.g., $40,000 to $50,000) and for percentiles of the income distribution (e.g., middle quintile, which includes households in the middle 20 percent of the income distribution). Estimates are shown for current year, 2006, tax liabilities (which will be reported on tax returns filed in 2007) and projected for tax year 2010. Since several provisions enacted since 2001 do not take full effect until 2010 (for example, the estate tax is repealed in that year only), the 2010 estimates show the effect of the fully phased in tax laws. (October 31, 2006) - T06-0251 - Combined Effect of the 2001-06 Tax Cuts, Distribution of Federal Tax Change by Cash Income Percentile, 2006
There are various ways to interpret these tables. One meaningful measure is the percentage change in after-tax income (column 4), which shows how large the tax cuts are as a share of income. For example, in 2006, the tax cuts raise after-tax income by 0.3 percent for the poorest 20 percent of tax units and by 4.0 percent for the highest-income 20 percent (table T06-0251). The next column, labeled "share of total federal tax change," shows how the total tax cut is distributed by income class. The middle 20 percent received 9.5 percent of the tax cuts while the top 20 percent received almost 70 percent. The average tax cuts show a similar pattern (see column 6), but supporters of the tax cuts point out that high-income people also pay a disproportionate share of the taxes. The tax cuts are a larger share of taxes paid for middle-income people than for high-income people. (See column 7.) Tax Cuts with FinancingThe previous four tables are in some sense misleading because they don't indicate how the tax cuts will be paid for. Although it is impossible to predict how the deficits created by the tax cuts will be closed, we simulate three possible scenarios, shown in the following 12 tables. In one scenario, everyone shares the burden equally through a lump-sum assessment. This might correspond to a situation in which the deficits are closed through across-the-board cuts in government programs, including entitlements such as Social Security and Medicare, whose benefits are widely distributed. In a second scenario, the deficits are closed by tax increases (or spending cuts) whose incidence is proportional to income. In the third, the tax cuts are offset by tax increases that are proportional to income tax liability (e.g., through an income tax surcharge). Including the effects of financing changes the picture dramatically. The average tax change is, by design, now zero, which means that some income groups gain and others lose. In 2006, for example, more than three-quarters of households would be net losers if the tax cuts were financed by a lump-sum assessment (Table T06-0255). Only those in the top income quintile would, on average, benefit. More than 72 percent of households would, on net, be worse off if the cuts were financed by other tax increases (or spending cuts) that are proportional to income (Table T06-0257). Those in the middle of the income distribution would see their after-tax income fall by an average of 0.5 percent whereas the top one percent of income earners would see an increase of 1.3 percent. Finally, if the tax cuts are offset by increases that are proportional to income tax liability, households in the top and bottom income quintiles would, on average, be net losers whereas those in the 20th to 80th percentiles would tend to benefit (Table T06-0259). Overall, 43 percent of tax units would be net winners; 36 percent would be net losers. Those in the middle of the income distribution would see a 1 percent increase in after-tax income; the top one percent of earners would see their after-tax incomes fall by 1.6 percent. 2006(November 2, 2006) - T06-0255 - Combined Effect of the 2001-06 Tax Cuts with Lump Sum Financing, Distribution of Federal Tax Change by Cash Income Percentile, 2006
2010(November 2, 2006) - T06-0261 - Combined Effect of the 2001-06 Tax Cuts with Lump Sum Financing, Distribution of Federal Tax Change by Cash Income Percentile, 2010
Other ResourcesThe following article contains more information about the impact of financing the tax cuts enacted in May 2006. The following note elaborates on the various measures contained in our distribution tables and explains why the percentage change in after-tax income is particularly informative. Income classes in this article refer to percentiles of the cash income distribution. The dollar values for the percentile breaks can be found here. |
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