There has been much discussion about whether or not the recent tax cut (Jobs and Growth Tax Relief Reconciliation Act of 2003) is skewed toward one class of citizens or another. On this topic, the Treasury Department has released six examples of the benefits that various people will obtain from the tax cut. They have been cited by numerous people, including the President. The following table summarizes these six examples:
SIX EXAMPLES OF TAX RELIEF IN 2003 (in dollars)
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003
---------------------------------------------------------------------------
Tax
Total Taxable Before Child Final Amount Percent
Income Deduct Exempt Income Credit Credit Tax Change Change
---------------------------------------------------------------------------
1)MARRIED, 1 CHILD
Old 40000 7950 9150 22900 2835 600 2235
New 40000 9500 9150 21350 2503 1000 1503 -733 -32.77
2)MARRIED, 2 CHILDREN
Old 40000 7950 12200 19850 2378 1200 1178
New 40000 9500 12200 18300 2045 2000 45 -1133 -96.18
3)MARRIED, 2 CHILDREN
Old 60000 10800 12200 37000 4950 1200 3750
New 60000 10800 12200 37000 4850 2000 2850 -900 -24.00
4)MARRIED, 2 CHILDREN
Old 75000 13500 12200 49300 7017 1200 5817
New 75000 13500 12200 49300 6695 2000 4695 -1122 -19.29
---------------------------------------------------------------------------
Other Taxable Final Amount Percent
Dividends Income AGI Deduct Exempt Income Tax Change Change
---------------------------------------------------------------------------
5)MARRIED, AGE 65
Old 2000 23250 25250 9850 6100 9300 930
New 2000 23250 25250 11400 6100 7750 675 -255 -27.42
6)MARRIED, AGE 65
Old 4500 72500 77000 13860 6100 57040 9107
New 4500 72500 77000 13860 6100 57040 7430 -1677 -18.41
Source: Department of the Treasury, Office of Tax Analysis, online at
https://www.treasury.gov/press-center/press-releases/Documents/taxreliefin2003.pdf
It would appear from these examples that the tax cut is skewed toward those earning lower incomes. Examples 2 through 4 are identical except for their increasing incomes and the decreasing percentages of their tax reductions. The same is true with examples 5 and 6, with the lower income earning the higher percentage tax cut.
However, there is a serious flaw in judging the distribution of the tax cuts from the table above. Examples 2 through 4 all gain $800 dollars from the increase in the child tax credit. Now some may feel that the lower income couple should get a higher child credit because they need it more. Others may feel that the higher income couple should get a higher child credit because they will spend more on the child. Still, the general consensus and practice has long been that all couples should get the same child credit. Any set increase in this credit will obviously appear as a higher percentage cut in the taxes of the lower-income couple. For this reason, the credit should not be included in the calculation of tax cut percentage for the purpose of measuring the distribution of taxes, at least not if the distribution is being used to judge the fairness of the tax cut. The size of the child credit is a valid issue in measuring the distribution of taxes between those who get the credit and those who do not. But it is not a valid issue in judging the fairness between people of different incomes, all of whom qualify for the same credit.
To remove the child credit from the calculation, following are examples 2 through 4 with no children claimed:
EXAMPLES OF TAX RELIEF IN 2003 (in dollars)
---------------------------------------------------------------------------
Tax
Total Taxable Before Child Final Amount Percent
Income Deduct Exempt Income Credit Credit Tax Change Change
---------------------------------------------------------------------------
2)MARRIED, NO CHILDREN
Old 40000 7950 6100 25950 3293 0 3293
New 40000 9500 6100 24400 2960 0 2960 -333 -10.10
3)MARRIED, NO CHILDREN
Old 60000 10800 6100 43100 5865 0 5865
New 60000 10800 6100 43100 5765 0 5765 -100 -1.71
4)MARRIED, NO CHILDREN
Old 75000 13500 6100 55400 8664 0 8664
New 75000 13500 6100 55400 7610 0 7610 -1054 -12.17
This causes the child credit to be zero and the exemption to drop from $12,200 to $6,100. Now the largest percentage tax cut is going to the highest-income couple. In addition, the middle-income couple is getting an exceptionally small tax cut. The reason for this can best be explained by looking at the graphs and tables at http://www.econdataus.com/taxcut03.html.
The graphs show the percentage of tax reductions due only to the changes in the tax rates and the limits of the tax brackets. The first graph and table show that, for single people, there is no reduction up to $6000. This is because the tax rate of the lowest bracket remains 10 percent. The reduction then jumps up to 6.7 percent at $7000. This is because the upper limit of the lowest bracket increased to $7000, cutting the tax on income between $6000 and $7000 by one third, from 15% to 10%. The reduction then drops down to 1.3 percent at $28,400. This is because the tax rate of the second bracket remains at 15 percent. The reduction then increases and flattens out at about 6 percent through $311,950. Above there, the reduction approaches 9.3 percent. This is because that is the percentage reduction of the upper rate from 38.6% to 35%.
The reductions for a head of household are similar except that there is no spike at the top of the first bracket. That's because there is no change in the upper limit of that bracket. Other than that, the reductions are just at a somewhat higher income level, due to the higher limits of the brackets.
The reduction for couples filing jointly is similar to singles except that there is a huge spike between $47,450 and $56,800. This is because the upper limit of the second bracket changed from the former to the latter number. This means that the tax on all income between $47,450 and $56,800 dropped by nearly a half, from 27% to 15%. In any case, this large spike is the reason for the discrepency between the couples earning $60,000 and $75,000. The former has a taxable income of $43,100, near the top of the old 15% bracket. The latter couple has a taxable income of $55,400, near the top of the new 15% bracket and benefitting from the change in the upper limit.
The reason for the increase in the upper limit of the second bracket was to make it double the $28,400 upper limit of the second brackets for singles. This was one of two measures intended to lessen the so-called marriage penalty. The other measure was to increase the standard deduction for couples from $7950 to $9500, double the $4750 standard deduction for singles.
The marriage penalty reaches its maximum when both people work and earn identical salaries. In that case, they pay more taxes than they would if they filed separately, splitting their deductions between them. However, there can also be a marriage benefit if one person earns more than their spouse. In this case, the higher-wage earner may pay a lower marginal rate on some of their income than they would otherwise.
If the marriage penalty is truly seen as an injustice being suffered by one segment of the population then, like the child credit, it should be excluded from any distribution study aimed at judging the fairness of the tax cuts. Correcting an injustice against one group does not warrant compensation for all other groups. It only warrants that all injustices against all groups be treated equally. In any case, the effect of the higher standard deduction for couples can be removed by assuming that they all itemize. Following are the changed numbers for example 2, assuming that they have $9500 in itemized deductions. As can be seen, this assumption causes the percent reduction to drop from 10.10% to 3.27%.
EXAMPLES OF TAX RELIEF IN 2003 (in dollars)
---------------------------------------------------------------------------
Tax
Total Taxable Before Child Final Amount Percent
Income Deduct Exempt Income Credit Credit Tax Change Change
---------------------------------------------------------------------------
2)MARRIED, NO CHILDREN, $9500 DEDUCTIONS
Old 40000 9500 6100 24400 3060 0 3060
New 40000 9500 6100 24400 2960 0 2960 -100 -3.27
The effect of the higher standard deduction can likewise be removed from example 5 by assuming that they have $11,400 in itemized deductions. As can be seen, that causes their percent reduction to drop from 27.42% to 12.90%, now giving them a smaller percentage reduction than the 18.41% reduction of the higher-income elderly couple.
---------------------------------------------------------------------------
Other Taxable Final Amount Percent
Dividends Income AGI Deduct Exempt Income Tax Change Change
---------------------------------------------------------------------------
5)MARRIED, AGE 65, $11400 DEDUCTIONS
Old 2000 23250 25250 11400 6100 7750 775
New 2000 23250 25250 11400 6100 7750 675 -100 -12.90
6)MARRIED, AGE 65
Old 4500 72500 77000 13860 6100 57040 9107
New 4500 72500 77000 13860 6100 57040 7430 -1677 -18.41
An easy way to remove the effect of both the child credit and the reduction in the marriage penalty is to look at childless single taxpayers. Following are examples 2 through 6 (examples 1 and 2 would be identical) with the filing status changed to single and no children claimed. Also, the non-dividend income of examples 5 and 6 have been made the same as example 4 so as to better measure the effect of dividends on the percent reduction.
EXAMPLES OF TAX RELIEF IN 2003 (in dollars)
---------------------------------------------------------------------------
Tax
Total Taxable Before Child Final Amount Percent
Income Deduct Exempt Income Credit Credit Tax Change Change
---------------------------------------------------------------------------
2)SINGLE, NO CHILDREN
Old 40000 4750 3050 32200 4986 0 4986
New 40000 4750 3050 32200 4860 0 4860 -126 -2.53
3)SINGLE, NO CHILDREN
Old 60000 4750 3050 52200 10386 0 10386
New 60000 4750 3050 52200 9860 0 9860 -526 -5.06
4)SINGLE, NO CHILDREN
Old 75000 4750 3050 67200 14436 0 14436
New 75000 4750 3050 67200 13610 0 13610 -826 -5.72
---------------------------------------------------------------------------
Other Taxable Final Amount Percent
Dividends Income AGI Deduct Exempt Income Tax Change Change
---------------------------------------------------------------------------
5)SINGLE, NO CHILDREN
Old 2000 75000 77000 4750 3050 69200 14976
New 2000 75000 77000 4750 3050 69200 13910 -1066 -7.12
6)SINGLE, NO CHILDREN
Old 4500 75000 79500 4750 3050 71700 15651
New 4500 75000 79500 4750 3050 71700 14285 -1366 -8.73
As can be seen, the distribution now appears skewed toward the higher-income taxpayers. This in verified by the first graph mentioned above in which the reduction increases for taxable incomes above $28,400. The dividends earned by examples 5 and 6 only increase this skewing.
The second graph at http://www.econdataus.com/taxcut03.html shows the percentage of tax reductions resulting from the rate reductions and changes in bracket limits for both the 2001 and 2003 tax cuts. The major change from the first graph is that the very lowest income-earners get the highest tax reduction of 33%. That is because this includes the original creation of the 10 percent bracket from the lower portion of the 15 percent bracket in the 2001 tax cut. The lowest percentage reductions can be seen to occur at the top of the old 15 percent bracket. Above this, the single and head of household reductions are in the 9 to 12 percent range through an income of $2 million. The married reductions spike up due to the change in the second bracket to reduce the marriage penalty. Other than that, it likewise stays in this range. The reductions for all taxpayers approach 13.14% at extremely high incomes as this is the reduction of the highest bracket, from 39.6 to 35 percent.
In conclusion, the 2001 and 2003 tax cuts are not generally skewed toward lower-income taxpayers as is suggested by the Treasury examples, at least not if the child tax credit and marriage penalty are properly excluded. Except for the those in the new 10 percent bracket, the percent reductions caused by the 2001 and 2003 rate reductions and changes in the tax brackets are flat or slightly skewed toward higher-income taxpayers. Looking at the 2003 tax cut alone, the percent reductions are, excepting the spikes caused by the change in the brackets, clearly skewed toward higher-income taxpayers.
Even if one chooses not to exclude the child credit and reduction in the marriage penalty from the distribution study, one has to address the fact that, for those who do not benefit from these changes, the distribution is very much different than it is for those who do benefit. As the prior modified examples show, the distribution for childless taxpayers is very much skewed toward those with higher incomes. This is especially the case for single taxpayers. This skewing is likely made much greater by the reduction in taxes on dividends and capital gains. However, since there is no precise link between the level of income and the level of dividends and capital gains, this would best be studied via a distribution table.
The Treasury Department did release a distribution table showing the changes in income taxes paid and the distribution of the tax burden due to the 2003 cuts. It is online at https://www.treasury.gov/press-center/press-releases/Documents/js4092.pdf. Unfortunately, it distinquishes taxpayers only by income level and makes no attempt to separate those groups who may or may not benefit from other major provisions of the tax cut. It is therefore, like the examples, highly misleading. The Treasury Department would do well to create and release a table that at least looks at the distribution for single and married couples with and without children. At the very least, they should release the data on which their distribution table is based so that others can analyze it more completely.