AGI is income minus deductions (standard deduction, deductions for dependents, mortgage interest, etc.). The table shows that in percentage terms people earning under $50,000 per year enjoyed the largest percentage reduction in taxes: 48 percent, versus 10% for those earning $200-$500,000 per year and 15% for those earning $10 million and above.
The percentage change in tax burden, however, is not the best way of evaluating the distributional impact of the tax cuts. The reason is that the average tax burden of taxpayers with low incomes is small to begin with. Imagine a taxpayer who paid $2 in taxes before the cuts and now pays $1. He gets a 50 percent cut in taxes, but the impact on his well-being is very small. A better way of measuring the distributional effects of the tax cuts is to calculate the percentage change in incomes generated by the tax cuts. I don’t have figures on total incomes, but using the figures for AGI and the size of the average tax cut from the table above, we get the following:
I separate out the effects of the 2001-03 income tax cuts from the 2003 tax cuts that affected only investment income (dividends, capital gains). These figures show that – based on how they affected taxpayers’ total income – the 2001-03 income tax cuts were somewhat regressive. The tax cuts increased incomes of those earning under $50,000 per year by 2.2% of AGI versus 2.5% for those earning $100-$200,000, 2.5% for those earning $500,000-$1m, and 2.8% for those earning $1m-$10m. Taxpayers earning $200-$500,000 and $10m and above benefitted least for reasons that are unclear to me. In dollar terms, of course, the gains to the richest taxpayers far outweigh those of other groups. The 2003 tax cuts on investment income had a much more regressive impact. Contrary to the disingenuous claims of tax cut supporters that the majority of taxpayers would benefit from the cuts because most people own stock in one form or another, the tax cuts had a highly regressive effect. While people earning under $100,000 per year saw their incomes rise by an average of 0.1% of AGI as a result of the tax cuts, people earning over $10m saw their incomes rise by 1.9% of AGI. The combined effect of the two types of tax cuts is therefore fairly regressive: the percentage increase in income due to all of the Bush tax cuts rises uniformly with income, from a 2.2% bump for taxpayers with incomes under $50,000 to 3.9% for taxpayers with incomes over $1m.
The big issue here is this. Over the last three decades, changes in the economy that economists do not fully understand – but probably have something to do with changing demand for workers with different skills, increased trade with low-wage countries, the decline of unions, new technologies that allow “superstars” in various fields to reap disproportionate gains from growth, and a change in corporate culture – have caused the gap in incomes of the rich and poor to grow. The result is an income distribution today that looks very much like the distribution of income that prevailed before the Great Depression. I would think the proper role of government would be to use the tax code to push back against these trends in the interest of basic fairness and social cohesion. The Bush tax cuts, however, have magnified that trend fairly substantially. That’s disturbing.
Posts
0 comments:
Post a Comment