Distributional Effects of the 2001 and 2003 Tax Cuts: How Do Financing and Behavioral Responses Matter?

Distributional analysis has long been a central element in discussions of tax policy. However, standard methods of estimating the distributional effects of tax changes omit two potentially important factors: the financing of the tax changes, and the implications of behavioral responses for economic growth, incomes, and well-being. In this paper we reexamine the distributional effects of the 2001 and 2003 tax cuts incorporating these two factors. Compared with the standard analysis, this "dynamic distributional analysis" shows that the benefits of these tax cuts were much smaller, on average, and much more skewed toward people with higher incomes.