Distribution of the 2001-2006 Tax Cuts: Updated Projections, July 2008

DISTRIBUTION OF THE 2001–2006 TAX CUTS: UPDATED PROJECTIONS , JULY 2008 Greg Leiserson and Jeffrey Rohaly July 2008 Urban-Brookings Tax Policy Center The Urban Institute 2100 M Street, NW, Washington, DC 20037 The Brookings Institution 1775 Massachusetts Avenue, N.W. Washington, DC 20036 Acknowledgments Funding for the general operations of the Tax Policy Center is provided by a generous consortium of donors, including the Annie E. Casey Foundation, Brodie Price Fund at the Jewish Community Foundation of San Diego, Charles Stewart Mott Foundation, Ford Foundation, George Gund Foundation, John D. and Catherine T. MacArthur Foundation, Rockefeller Foundation, Sandler Foundation, Stoneman Family Foundation, and private donors. CONTENTS 1. The 2001–2006 Tax Cuts 24912141618202. Distributional Effects in 2010 3. Distributional Effects in 2008 4. Financing the Tax Cuts 5. Conclusions Appendix A: Description of TPC Microsimulation Model Appendix B: Measuring the Distribution of Tax Changes References DISTRIBUTION OF THE 2001–2006 TAX CUTS Since 2001, Congress has passed a major tax bill almost every year. Most have reduced taxes significantly and, since they were not accompanied by spending cuts, the resulting deficits have increased the national debt. The largest revenue loss—$1.35 trillion over ten years—came from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced revenues by another $350 billion (again over the subsequent decade). Subsequent legislation cut taxes further: $146 billion in 2004 (WFTRA), $142 billion in 2006 (TIPRA and PPA), $51 billion in 2007 (TIPA), and $125 billion in 2008 (ESA).1 The tax cuts total almost $2.2 trillion over ten years, and that total may be vastly understated if some or all of the cuts are extended beyond their scheduled expiration date of 2010.2 In addition, the cuts exacerbated the growing problem of the alternative minimum tax (AMT). Barring legislative action, more than 33 million taxpayers will fall prey to the AMT in 2010. It is highly unlikely that Congress will allow this to happen but simply extending the AMT “patch” through the end of 2010 would add another $207 billion to the cost of the tax cuts. As Congress and the new President consider whether to extend some or all of the tax cuts, they should take into account the distribution of the tax cuts and how that distribution would change if the cuts were combined with measures to finance the resulting budget deficits. Although the long-term distributional effects of the 2001-06 tax cuts will depend on how they are ultimately paid for, the immediate benefits are skewed in favor of high-income taxpayers. In 2010, when the cuts are fully phased in, households in the middle fifth of the income distribution will receive an average tax reduction equal to 2.6 percent of after-tax income.3 Households in the top quintile—the 20 percent of the population with the highest incomes—will receive an average tax cut that is more than twice as large: 5.4 percent of income. Those in the bottom quintile will get an average cut equal to just 0.7 percent of income. Taxpayers at the very top of the income scale benefit the most. Those in the top one percent will receive a 7.3 percent average increase in after-tax income in 2010; those in the top one-tenth of one percent—the richest 1 in 1,000 taxpayers—will see their after-tax incomes rise an average of 8.2 percent. Leiserson is a research associate at the Urban Institute and the Urban-Brookings Tax Policy Center (TPC). Rohaly is a senior research methodologist at the Urban Institute and the director of tax modeling for the TPC. Views expressed are those of the authors alone and do not necessarily reflect the views of the Urban Institute, its trustees, or its funders. We thank Bob Williams for helpful comments and suggestions. 1 WFTRA is the Working Families Tax Relief Act of 2004; TIPRA is the Tax Increase Prevention Reconciliation Act of 2005; PPA is the Pension Protection Act of 2006; TIPA is the Tax Increase Prevention Act of 2007; and ESA is the Economic Stimulus Act of 2008. Although we will refer to these collectively as the “2001-06 tax cuts”, where appropriate, our distributional estimates also include the temporary measures in TIPA and ESA that affect revenues in 2007 and 2008 only. Revenue estimates for the bills come from the Joint Committee on Taxation and represent the cost through the end of the ten-year budget window in effect at the time of each law’s enactment. 2 For analyses of the cost of making the tax cuts permanent, see CBO (2008) and Auerbach, Furman, and Gale (2008). The latter show that the revenue cost of making the tax cuts