Across-the-Board Tax Cuts: Economic Issues (CRS Report for Congress)
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| Release Date |
Sept. 24, 2001 |
| Report Number |
RL30779 |
| Report Type |
Report |
| Authors |
Jane G. Gravelle and Steven Maguire, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
Across-the-board income tax cuts were an important feature of H.R. 1836 , the
comprehensive tax cut of 2001. Distributional issues have been central to the analysis of
across-the-board tax cuts (although issues of growth and simplification are also of concern). Some
plans have been described as primarily benefitting the middle class; some plans, or even the same
plans, have been criticized as unduly favoring high income taxpayers.
The distributional measure used to characterize a tax cut affects how the cut is perceived.
Absolute measures include tax cut per return and the distribution of the revenue cost: these measures
show most tax cuts to favor high income individuals because income (and income tax liability) is
concentrated in higher income classes.
A variety of relative distributional measures are used, but the measure that indicates the change
in income inequality is percentage change in disposable income. Using this measure, recent
proposed tax cuts have had very different effects on inequality. A 10% cut in tax rates, for example,
increases income inequality, causing disposable income in the top 20% of the population to rise by
around 5%, while causing disposable income in the bottom 80% to rise by less than 1%. (Note that
outside of a refundable credit, however, the bottom fifth of the distribution would have a very small
tax cut from any tax change because tax liability is typically zero in that income category.). A one
percentage point cut in rates still increases income in higher brackets by slightly more, but has a
much smaller effect on increasing income inequality. To make a tax cut neutral or decrease
inequality would require (using rate cuts) a larger percentage point cut in the lower brackets. An
expansion of bracket widths would have no effect on the 70% of taxpayers who fall in the lowest
brackets; an increase in the standard deduction, however, would benefit these taxpayers. (These
findings would be affected by the Alternative Minimum Tax (AMT) and capital gains tax rates.)
The 2001 tax cut, when permanently in place, would reduce the progressivity of the tax system
and increase income inequality by this relative measures.
Tax cuts favoring higher income individuals are more likely to reduce marginal tax rates, which
can have benefits for growth and efficiency. Cutting only individual tax rates can worsen distortions
(such as those between corporate and non-corporate investments) or undermine desirable subsidies.
There are concerns about using tax cuts for counter-cyclical purposes because of ; however, tax cuts
used in this fashion are most effective if they can be reflected in withholding and if they provide
benefits to lower and moderate income individuals (rather than high income individuals).
Tax cuts in general do not have important implications for simplification, although they do
reduce the incentive to shelter income. They can complicate the tax law by increasing the number
of taxpayers subject to the AMT, however. Tax cuts could also be focused on changes that provide
simplification (e.g. eliminating phase
