The prosperous already pay the lion's share of Federal taxes in America. The top half in income pay something like 96 per cent of all levies, as I recall. The affluent and semi-affluent are carrying this country. If there are fair ways of reducing the burden on the middle class American I'm for them, but it's also wrong to penalize, and criminalize, success in a country built on capitalism.
OK, another urban myth bites the dust:
Altogether, the bottom 40 percent of the population would receive just four percent of the tax cuts, about one-ninth what the richest one percent of the population would receive.
As conservative and liberal analysts alike have long recognized, the working families that face the highest marginal tax rates are those with incomes between about $13,000 and about $20,000. /// The Bush plan fails to reduce marginal tax rates at all for these working families.
///Some 82 percent of the benefits from the child credit proposal would accrue to the 40 percent of families with children with the highest incomes.(5) Only three percent of the benefits from this proposal would accrue to the bottom 40 percent of such families.
As a result, despite showering what is likely to be close to $2 trillion over 10 years in tax cuts — including tax cuts averaging approximately $40,000 each for the wealthiest one percent of Americans — the plan leaves out working-poor and near-poor families.
By contrast, the wealthiest one-percent of Americans would receive 43 percent of the total tax cuts, receiving an average tax cut of $46,000 each. The top five percent of filers would garner a little more than half of the tax cuts.
http://www.cbpp.org/2-5-01tax.htm
President Bush stated on February 2 at a Congressional Republican retreat that the current tax system is "unfair to people at the bottom end of the economic ladder" and that a critical part of his plan is to provide tax relief to help struggling low-income families make it into the middle class.
White House officials also have made statements in recent days portraying the tax cut as being most beneficial to lower-income working families because they would receive a 100 percent tax cut while those at high-income levels would have their taxes reduced by much smaller percentages.
These statements represent bold public relations strokes but generally are incomplete or misleading.
The tax package President Bush is expected to introduce ignores working-poor families; such families would receive no assistance under the proposal. The proposal provides no relief until a family's income surpasses 130 percent to 160 percent of the poverty line, depending upon family size and configuration. (Throughout, this analysis examines the Bush plan as proposed in the campaign and recently introduced by Senators Gramm and Miller.)
The plan does not reduce taxes for everyone who pays taxes. Many low-income working families that do not owe income tax pay significant payroll taxes, even when the effects of the Earned Income Tax Credit are considered; these families are not aided by the plan.
A single mother with two children who works full time and earns $22,000 would receive no tax cut whatsoever under the Bush plan. This may be the reason that after citing such a mother on February 2, the President retooled his example the next day.
The waitress earning $25,000 that President Bush mentioned in his February 3 radio address would get no tax cut or a tax cut of a few hundred dollars (depending on her child care costs). In contrast, her lawyer customer earning $250,000 would receive a tax cut of approximately $3,100 a year. (The lawyer's tax cut would be $8,400 if the Alternative Minimum Tax were eliminated, as some members of Congress are proposing to do.)
Altogether, the bottom 40 percent of the population would receive just four percent of the tax cuts, about one-ninth what the richest one percent of the population would receive.
The proposal does not reduce marginal rates at all on those working poor families that face the highest such rates of any families in the nation — working families with children that have incomes between about $13,000 and $20,000. The proposal also departs from a bipartisan Congressional consensus of the past two years by failing to include any marriage penalty relief for low-income working families, even though as a group such families face some of the largest such penalties of any families.
The Waitress and Her Customer at the Diner
The President pointed to a waitress with two children who earns $25,000 a year, portraying her as a partner in the tax cut with a highly-paid attorney making $250,000 a year who is the waitress' customer at a diner. This portrayal is questionable.
If the waitress is married and her family's income is $25,000, she would receive no tax cut under the Bush plan. Yet her family pays a substantial amount of federal taxes, including $3,825 in payroll taxes (including both the employee and employer share; most economists concur that the employer's share of the payroll tax is passed along to workers in the form of lower wages) and lesser amounts in gasoline and other excise taxes. The family's Earned Income Tax Credit of $1,500 would offset well under half of those taxes.(2)
If she is a single mother who pays at least $170 a month in child care costs so she can work and support her family — an amount that represents a rather modest expenditure for child care — she would receive no tax cut under the Bush plan despite having a significant net tax burden. If her child care costs are $100 a month, she would receive a small tax cut — less than $200 a year.(3)
By contrast, the attorney with a $250,000 income would receive a tax reduction of approximately $3,100 per year, assuming the current law Alternative Minimum Tax. If, however, the AMT were eliminated, her tax cut would equal an estimated $8,400.(4)
The average tax cut for those in the top one percent of the population would be about $40,000. (This figures includes the average effect on this group of repealing the estate tax, the benefits of which are heavily oriented among the top one percent of population.)
The Extent of Assistance to Low-income Working Families
The bottom 40 percent of the population would receive only four percent of the plan's tax cuts. This is about one-ninth the share of the tax cuts that would go to the wealthiest one percent of Americans.
//A married family with two children that earns $26,000 this year would have its income tax eliminated. But such a family owes only $20 in taxes. The elimination of 100 percent of its income tax liability would not be of much benefit to it.
If the Administration's goal is to reduce marginal tax rates on the low-income working families that face the highest rates in the nation — a worthy goal — the plan falls far short.
As conservative and liberal analysts alike have long recognized, the working families that face the highest marginal tax rates are those with incomes between about $13,000 and about $20,000. For each additional dollar these families earn, they lose up to 21 cents in the Earned Income Tax Credit, 7.65 cents in payroll taxes (15.3 cents if the employer's share of the payroll tax is counted), 24 cents to 36 cents in food stamp benefits, and additional amounts if they receive housing assistance or a child care subsidy on a sliding fee scale or are subject to state income taxes. No other Americans in any income bracket have as large a share of each additional dollar they earn "taxed away." The Bush plan fails to reduce marginal tax rates at all for these working families.
Ways to reduce marginal tax rates for such families are available, well known, and not especially expensive: raising the income level at which the Earned Income Tax Credit begins to phase down as earnings rise, and/or reducing the rate at which the EITC phases down. Bipartisan legislation introduced last year by Senators Rockefeller, Jeffords, and Breaux follows such a course, as do proposals made by Rep. Ben Cardin and the Clinton Administration. The Bush Administration has apparently chosen not to follow such a course and to leave marginal tax rates on these families at very high levels.
The likely Bush plan also departs from a bipartisan consensus formed in Congress over the past two years to reduce marriage tax penalties for low-wage working families, not just for middle- and upper-income families. Analysts generally concur that some of the most serious marriage penalties in the tax code are those that can face low-income working individuals as a result of the way the phase-out of the EITC is designed. Every major tax bill from both parties in the last year and a half — including major tax bills that Congress passed and President Clinton vetoed in 1999 and 2000 — has contained EITC reforms to provide marriage penalty relief for low-income working families. (Clinton vetoed the bills for other reasons; his budget, too, proposed EITC marriage penalty relief.) The Bush plan contains no such marriage penalty relief.
The Child Credit and the 10 Percent Bracket
The Administration is touting its proposals to create a new 10 percent bracket and to double the child credit as proposals designed in substantial part to benefit lower-income working families and help them enter the middle class. In fact, only a modest share of the tax-cut benefits from these proposals would go to low- or moderate-income families; much larger shares would go to high-income families. Approximately one-third of all children in the United States would fail to benefit from either proposal.
Consider the proposal to raise the child credit from $500 per child to $1,000. Under the Bush plan, this proposal would cut taxes for families with children that have incomes up to $200,000. Those who would benefit most are filers with incomes in the $110,000 to $200,000 range; they would receive the largest tax cuts under this proposal because the Bush plan not only would double the child credit but also would raise the income level above which the child credit phases out from $110,000 to $200,000, extending the credit for the first time to those in this income category. For many of these relatively affluent taxpayers, the child credit thus would rise from zero to $1,000 per child. For millions of children in low- and moderate-income working families, by contrast, the child credit would remain at zero or at its current level of $500 per child or rise to less than $1,000 per child (because their families would have insufficient income tax liability against which to apply the increase in the child credit).
As a consequence, when the increase in the child credit is fully in effect:
Some 82 percent of the benefits from the child credit proposal would accrue to the 40 percent of families with children with the highest incomes.(5) Only three percent of the benefits from this proposal would accrue to the bottom 40 percent of such families.
The top 20 percent of families would receive 46 percent of the tax-cut benefits from this proposal, a larger share than any fifth of the population would receive.
Several of these issues are discussed in more detail below.
The Income Levels at Which Families Would Begin to Receive Tax Cuts
The Bush plan would have no effect on working families that owe no federal income tax before the Earned Income Tax Credit is applied.(6) Many of these families pay significant amounts of federal taxes, but they make tax payments through the payroll tax (and to a much smaller degree, through excise and other taxes) rather than through the income tax.
The framers of the Bush plan could have reduced the high marginal tax rates and substantial marriage penalties that many such working families face by improving the EITC. Alternatively, the plan could have expanded the dependent and child care tax credit and made it available to the working poor, who currently are denied access to this credit because it is not refundable. The plan takes neither step. As a result, despite showering what is likely to be close to $2 trillion over 10 years in tax cuts — including tax cuts averaging approximately $40,000 each for the wealthiest one percent of Americans — the plan leaves out working-poor and near-poor families.
As Table 1 shows, the income level at which the tax cut would begin to take effect is about 140 percent to 160 percent of the poverty line for families with two children that incur no child care costs and do not itemize deductions. For families with child care costs and families that itemize, the income levels below which the Bush plan has no effect are higher. (See Table 2.) The income levels shown in these tables are the levels at which families begin to owe income tax before the EITC is applied and thus the levels at which the Bush tax cuts would begin to have an effect. Families with incomes slightly above these levels would receive small tax cuts.
The Portion of the Tax Cut that Would Go to Lower-income Families
To gain some perspective on the degree to which low- and moderate-income families are major beneficiaries of the Bush tax proposal, one can look at how the plan's tax cuts are apportioned among different income groups. Such an examination shows the plan to be heavily tilted away from low- and moderate-income families and toward wealthy individuals.
The principal analysis of how filers at different income levels would fare under the Bush plan — and how the tax-cut benefits would be divided among different income categories — is an analysis by Citizens for Tax Justice, using the Institute for Taxation and Economic Policy (ITEP) model. This is a well-respected model developed in substantial part by former staff members of the Joint Committee on Taxation. CTJ tax distribution analyses, using the ITEP model, have been validated over the years by the fact that they generally yield results very similar to those produced by the highly respected career staff at the Treasury Department.
The CTJ analysis of the tax proposal that President Bush presented in the campaign finds the following results (these results reflect the tax cuts when fully in effect):
The bottom 40 percent of tax filers would receive four percent of the tax cuts. The average tax cut for this group would be $115.
The bottom 60 percent of filers would receive 13 percent of the tax cuts, receiving an average of $227 each. The bottom 80 percent of taxpayers would receive 29 percent of the tax cuts.
The 20 percent of filers exactly in the middle of the income spectrum would receive eight percent of the tax cuts and get an average tax reduction of $453.
By contrast, the wealthiest one-percent of Americans would receive 43 percent of the total tax cuts, receiving an average tax cut of $46,000 each. The top five percent of filers would garner a little more than half of the tax cuts.
During the campaign, the Bush campaign issued quite different numbers regarding the proportions of the tax cut that would go to different income categories. The campaign also cited figures from the Joint Tax Committee that were said to show that the proportion of the tax cut that would go to the top one percent of filers would be much smaller than the CTJ figures indicate. But neither the campaign's figures nor those from the Joint Tax Committee provide an accurate picture of the distribution of the proposed tax cuts. These figures exclude the effects of the proposal to repeal the estate tax, thereby substantially reducing the proportion of the tax cuts presented as going to those at the top of the income spectrum. To assess how the tax cuts would be apportioned among different income categories, one must examine all of the major elements of the tax-cut proposal — including estate tax repeal — not just some of those elements.
In the past, there has been some debate among analysts about the best methodology to use to determine what percentage of the estate tax is paid by people in different income categories and thus what percentage of the benefits from estate tax repeal would accrue to each income group. Under the ITEP model that CTJ uses, 91 percent of the estate tax is estimated to be paid by the top one percent of tax filers, and virtually all of the tax is estimated to be paid by the top five percent of filers. Such results should not be surprising. IRS data show that the estate tax is levied only in the case of two percent of deaths and that half of all estate taxes are paid on the estates of the wealthiest one of every 1,000 people who die.
The Treasury findings are broadly similar, although not identical, to the estimates in the ITEP model, which was constructed before the Treasury study became available. The Treasury study estimates that the top one percent of tax filers pay 64 percent of the estate tax (and thus would get 64 percent of the tax-cut benefits that would result from estate tax repeal), rather than paying 91 percent of the tax as the ITEP model estimates. The Treasury and ITEP figures on the proportion paid by the top five percent, however, are quite similar; the Treasury study estimates that the top five percent of filers pay 91 percent of the estate tax, as compared to 100 percent of the tax under the ITEP model. Under both sets of estimates, the top 20 percent of filers pay virtually all of the estate tax, and the tax does not affect the other 80 percent of the population.
///the top one percent of the population is estimated to receive 36 percent of the tax cuts under the Bush plan, rather than the 43 percent the CTJ analysis estimates (and to receive an average tax cut of $39,000 rather than $46,000). The top 20 percent of the population still is found to receive 71 percent of the tax cut, the same percentage as under the CTJ analysis. Similarly, the bottom 40 percent of the population still is found to receive four percent of the tax cut. The tax cut is found to be tilted heavily toward those with very high incomes and to provide only a modest percentage of its tax-cut benefits to the types of families that the White House appears to be touting as major beneficiaries.
Could Low-income Working Families be Adversely Affected?
If the magnitude of the Bush tax cut necessitates reductions in coming years in important programs for low- and moderate-income working families, such families could be adversely affected. This outcome must be regarded as a possibility. The cost of the tax cut exceeds $2 trillion over 10 years when one takes into account the increased interest payments on the debt the tax cut would engender and when the very reasonable assumption is made that the Alternative Minimum Tax will be reformed so it does not encroach heavily upon the middle class.(7) Yet the projected surpluses outside Social Security total only about $2 trillion when the Medicare portion of the surplus is set to the side and adjustments are made in the surplus estimate to reflect the cost of actions Congress is virtually certain to take, such as maintaining payments to farmers and extending the 20 tax credits that expire every couple of years and always are renewed.(8)
Furthermore, the CBO surplus estimates are only projections. Seventy percent of the projected non-Social Security surplus would occur in the second five years of the 10-year period, years for which budget projections are speculative and highly uncertain. The projected surpluses may not fully materialize. There consequently is risk that tax cuts of this magnitude could lead to budget reductions in future years. As the experience of the 1980s has shown, when such budget cuts are instituted, they are likely to have a disproportionate impact on programs for lower- and moderate-income families.
