Month: August 2000

August 31, 2000 12:51 PM | Permalink |

Click here to see this analysis in PDF format.

---

Democratic presidential candidate Al Gore has proposed a collection of targeted tax breaks that he says will cost a total of $500 billion over the next decade. The proposals include:

• Increasing the standard deduction for married couples to double the single level.
• Boosting the earned-income tax credit for two-earner couples and families with three or more children.
• A 25 percent refundable tax credit for people lacking access to employer-based health insurance who purchase coverage in the individual market.
• Big increases in tax credits for dependent care expenses, including making it refundable for families that don’t owe income taxes, increasing the percentage credits to up to 50% from the current 20%, offering an extra credit for infants (up to $250), even if there are no day care expenses, and expanding the credit to children up to age 16 (from 12 now).
• A tax credit of up to $3,000 for long-term care expenses.
• Expanding the current $2,000 college tax credit to $2,800 and making it available at somewhat higher income levels.
• Major new tax breaks for savings accounts for retirement, college and first time home purchases. Under Gore’s plan, the government would match an individual’s contribution to such an account by up to 370 percent, depending on income level. When fully phased in (in 2009), the maximum annual addition to an account would be $2,000 for individuals and $4,000 for couples.
  • For individuals making less than $15,000, a personal contribution of $425 would be matched by a refundable tax credit and deduction to bring the total to $2,000.
  • For individuals making between $15,000 and $30,000, an $850 contribution would be supplemented by $1,150 in tax breaks to get $2,000 into an account.
  • And for individuals making between $30,000 and $50,000, it would take an individual contribution of $1,080 plus tax breaks of $920 to reach the $2,000 maximum.
  • For couples, the income levels (as well as the $2,000 annual account limit) would be doubled.
• Tax credits for energy efficient products (to both individual and businesses).
• Tax breaks for companies that engage in research.
• Tax breaks for smaller companies that purchase health insurance for their employees.
• An increase in the estate tax exemption to $5 million for couples (half that for singles).

Due to data constraints and other problems, we have not yet been able to do a distributional analysis of the Gore proposals. Because most of the proposals are limited to taxpayers below certain income levels, however, it seems clear that the bulk of the proposed tax breaks would go to middle- and lower-income taxpayers.

The following table shows the maximum income cutoffs for the Gore proposals, where applicable.

Income limits for Gore tax cuts
Personal items	Singles	Couples	Notes
Earned-income tax credit changes	35,600	37,000
Health insurance personal credits	Mostly lower end		Only for those without employer paid insurance
Dependent care credit rates	60,000	60,000	(not counting indexing, increase in age limit and infant credit, which are not capped)
Retirement Savings Plus	50,000	100,000
Married standard deduction	na	100,000	94% under $100K, 80% under $75K
Education credits	60,000	120,000	Phase outs end
Long-term care credit	75,000	110,000	Phase outs start
Long-term care credit	135,000	170,000	Phase outs end (generally)
Tax credits for buying efficient products	no upper limit
Estate tax cuts	no upper limit		All in top few percent
Business items
Business health insurance credits	Limited to businesses below a certain size
R&E tax credit	No limit (almost all large corporations)
Energy-efficiency business credits	No limit

Proposed Changes to the Earned-Income Tax Credit:

Current Law 2000 levels	3+ kids	Everyone
	(like 2+)	2+ kids	1 kid	no kids
Max base	$ 9,720	$ 9,720	$ 6,920	$ 4,610
Rate	40%	40%	34%	7.65%
Max credit	3,888	3,888	2,353	353
PO rate	21.06%	21.06%	15.98%	7.65%
PO start	12,690	12,690	12,690	5,770
PO end	31,149	31,149	27,413	10,380
Proposed 2000 levels	All but 2-earner couples				2-earner couples
	3+ kids	2 kids	1 kid	no kids	3+ kids	2 kids	1 kid	no kids
Max base	$ 9,720	$ 9,720	$ 6,920	$ 4,610	$ 9,720	$ 9,720	$ 6,920	$ 4,610
Rate	45%	40%	34%	7.65%	45%	40%	34%	7.65%
Max credit	4,374	3,888	2,353	353	4,374	3,888	2,353	353
PO rate	19.06%	19.06%	15.98%	7.65%	19.06%	19.06%	15.98%	7.65%
PO start	12,690	12,690	12,690	5,770	14,140	14,140	14,140	7,220
PO end	35,636	33,086	27,413	10,380	37,086	34,536	28,863	11,830
Changes
Max base	—	—	—	—	—	—	—	—
Rate	+5%	—	—	—	+5%	—	—	—
Max credit	+486	—	—	—	+486	—	—	—
PO rate	–2%	–2%	—	—	–2%	–2%	—	—
PO start	—	—	—	—	+1,450	+1,450	+1,450	+1,450
PO end	+4,486	+1,937	—	—	+5,936	+3,387	+1,450	+1,450
Benefits start at income of	$ 1	$ 12,690	na	na	$ 1	$ 12,690	$ 12,690	na
End at	$ 35,636	$ 33,086	na	na	$ 37,086	$ 34,536	$ 28,863	na

Matching Rules for Gore Savings Plans:

Income			Govt Match	Max govt amount			Max total (x2 for mfj)			Ind. contributes (max)
	Couples	Others		thru 06	07-08	2009	thru 06	07-08	2009	thru 06	07-08	2009
Less than	30,000	15,000	300%	750	1,125	1,500	1,000	1,500	2,000	250	375	500
Up to	60,000	30,000	100%	500	750	1,000	1,000	1,500	2,000	500	750	1,000
Up to	100,000	50,000	33%	250	375	500	1,000	1,500	2,000	750	1,125	1,500
Counting deductibility of contribution
Less than	30,000	15,000	371%	788	1,181	1,575	1,000	1,500	2,000	213	319	425
Up to	60,000	30,000	135%	575	863	1,150	1,000	1,500	2,000	425	638	850
Up to	100,000	50,000	85%	460	690	920	1,000	1,500	2,000	540	810	1,080

Dependent Care Credit Changes:

• The credit would be refundable in 2003 and thereafter.
• The credit rates would be increased from the current maximum of 30%, to 40% in 2003 and to 50% in 2005 and thereafter.
• The maximum expenses eligible for the credit, now $2,400 for one child and $4,800 for two or more children would be indexed for inflation starting in 2002.
• The income levels for computing the credit percentages would be indexed starting in 2002.
• Parents of infants (under 1) could add $500 to their child care expenses, even if they do not incur daycare expenses.
• The maximum age for the credit would be increased from 12 to 16.

Want even more CTJ? Check us out on Twitter, Facebook, RSS, and Youtube!

August 31, 2000 12:49 PM | Permalink |

Click here to see this analysis in PDF format.

---

 

Note: CTJ has released more up-to-date data on the impact of the Bush plan. To see the most recent estimates, click here.

Overview

Republican presidential candidate George W. Bush has proposed a very large federal tax cut as the centerpiece of his campaign. The $1.9 trillion ten-year cost of the plan would use up more than all of the projected budget surpluses over the next ten years, excluding the surpluses in the Social Security and Medicare trust funds. Most of the proposed tax cuts would go to upper-income taxpayers, with 43 percent of the tax cuts targeted to the top one percent.

Description of the Plan

In early December of 1999, George W. Bush announced a plan for large-scale tax reductions. The plan was clarified and amended in May 2000. The principal components of the Bush plan are:

• A major reduction in personal income tax marginal rates (accounting for just under half the total Bush tax cut). Specifically:
  • The current 39.6% top rate would drop to 33%.
  • The current 36% rate would drop to 33%.
  • The current 31% rate would drop to 25%.
  • The current 28% rate would drop to 25%.
  • The current 15% tax bracket would be retained over most of its range.
  • A new 10% bottom bracket would apply over about a quarter of the range of the current 15% bracket.

    (The revised and clarified Bush tax plan does not adjust the current 26% and 28% tax rates for the Alternative Minimum Tax (AMT), which taxpayers must pay if it exceeds their regular tax due. As a result, a substantial portion of the income tax cuts his plan seems to promise to taxpayers currently in the 28% through 36% tax brackets would be obviated by the AMT.)

• The $500 per child tax credit would be doubled and extended to much higher-income families. Two-earner couples would get a special deduction of up to $3,000. Taxpayers who don’t itemize deductions could nevertheless deduct charitable contributions. And a few other personal tax breaks would be provided. (These changes account for a quarter of the total Bush tax cuts.)
• The rest of the Bush tax cuts reflects repeal of the federal wealth tax on very large estates (24% of the total tax cut) and tax breaks for corporations (2% of the total).

Distributional Effects

Most of the Bush tax cuts would go to taxpayers in the top end of the income scale:

• Three-fifths of the tax cuts would go to the best off 10 percent of all taxpayers.
• Some 43 percent of the tax cuts would go to the top one percent, those making more than $319,000 a year, with average incomes of $915,000 in 1999. The average tax cut for the top one percent would be $46,000 a year.

In contrast, the average Bush tax cut for the bottom 60 percent of taxpayers would be only $227 a year.

 

Effects of George W. Bush’s Revised Tax Plan (Annual effects at 1999 income levels)
Income Group	Income Range	Average Income	Average Tax Cut	% of Total Tax Cut
Lowest 20%	Less than $13,600	$ 8,600	$ –42	0.8%
Second 20%	$13,600–24,400	18,800	–187	3.5%
Middle 20%	$24,400–39,300	31,100	–453	8.4%
Fourth 20%	$39,300–64,900	50,700	–876	16.2%
Next 15%	$64,900–130,000	86,800	–1,447	20.1%
Next 4%	$130,000–319,000	183,000	–2,253	8.4%
Top 1%	$319,000 or more	915,000	–46,072	42.6%
ALL		$ 50,800	$ –1,070	100.0%
ADDENDUM
Bottom 60%	Less than $39,300	$ 19,500	$ –227	12.6%
Top 10%	$92,500 or more	218,000	–6,410	59.4%
Source: Institute on Taxation and Economic Policy Tax Model, May 2000.

The Cost of the Bush Tax Cuts

Based on official projections from the Congressional Budget Office and the Joint Committee on Taxation, the Bush tax cut plan would use up slightly more than all of the projected budget surpluses over its first ten years, not counting the surpluses in the Social Security and Medicare trust funds. Over the fiscal 2002-11 period, the Bush tax cuts would cost $1.9 trillion, while the projected surpluses are only $1.8 trillion.

In fact, the Bush tax cuts effects on the surpluses is even greater than that. As is well known, the official surplus projections are substantially overstated, because, among other things, they assume that federal appropriations keep up with inflation only, with no adjustment for population growth or real wage growth. If, for example, one assumes that appropriations will probably keep up with the economy, then the projected surpluses over the 2002-11 period (excluding Social Security & Medicare) fall from $1.8 trillion to only $770 billion. Thus, in all likelihood, the Bush tax cuts would use up far more than the likely surpluses over the next decade. That would require dipping heavily into the Social Security and/or Medicare trust funds to cover the cost of the tax cuts.

 

Revised G.W. Bush tax cuts estimates (interest at 5.5%) over ten years (FY 2002-11)
Fiscal Years, $-bill.	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011*	10 yrs
Tax cuts (JCT 02-10)	$ 21.1	$ 57.4	$ 88.9	$ 125.5	$ 167.1	$ 193.2	$ 210.0	$ 224.5	$ 232.9	$ 243.7	$ 1,564.3
Interest (5.5% rate)**	0.6	2.8	6.9	13.2	22.0	33.1	46.0	60.5	76.4	93.7	355.3
Total effect	$ 21.7	$ 60.2	$ 95.8	$ 138.7	$ 189.1	$ 226.3	$ 256.0	$ 285.0	$ 309.3	$ 337.4	$ 1,919.6
*Tenth year (FY 2011) is Citizens for Tax Justice estimate. **Based on latest CBO interest rate estimates. Source: Except as noted, figures are from Joint Committee on Taxation, “Estimated Revenue Effects of Various Provisions Described as the ‘George W. Bush Tax Reduction Proposal,’ ” May 3, 2000. ADDENDUM (8/2000): With more recent official revenue projections under current law, cost of Bush tax plan will be higher.
ADDENDUM:	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011*	10 yrs
Surpluses per CBO (July 2000), excluding Social Security & Medicare (A)	$ 70	$ 86	$ 103	$ 114	$ 132	$ 180	$ 223	$ 254	$ 301	$ 361	$ 1,824
Bush tax cut uses	31%	70%	93%	122%	143%	126%	115%	112%	103%	93%	105%
Surpluses if appropriations keep up with the economy	$ 56	$ 59	$ 60	$ 55	$ 49	$ 72	$ 91	$ 94	$ 107	$ 127	$ 769
Bush tax cut uses	39%	101%	160%	252%	384%	315%	281%	305%	290%	266%	250%

Addendum: Regarding Bush’s Claim That His Tax Plan Favors the Poor

According to the “Fact Sheet” accompanying George W. Bush’s Dec. 1, 1999 announcement of his tax plan, “The Bush tax cuts benefit all Americans, but reserve the greatest percentage reduction for the lowest income families.”

This statement is false. Bush’s proposed tax cuts do not benefit all Americans, and they do not provide the largest percentage reduction to lower-income people. In fact, more than a quarter of taxpayers would get nothing at all from the Bush plan. Moreover, as a share of current federal taxes, the Bush plan (as revised in May 2000) amounts to:

• a 5.5% reduction for the bottom 20%,
• an 7.3% reduction for those in the middle and
• a 13.6% tax cut for the best-off one percent.

In dollars, the Bush plan would cut total federal taxes for the lowest fifth from an average of $756 a year now to $714, a reduction of only $42 a year. Taxpayers in the middle of the income scale would see their average federal tax liability cut from $6,195 to $5,742, a reduction of $453. But those at the top would see their taxes cut by an average of more than $46,000 a year.

Over-spin: To assert that his tax plan favors those at lower income levels, Bush chose to misleadingly focus on only one federal tax, the personal income tax. But because the income tax is progressive, it imposes little or no burden on lower income taxpayers now. In fact, most of the federal taxes that lower- and middle-income people pay reflect Social Security payroll taxes and excise taxes, neither of which is affected by Bush’s plan.

Measuring the fairness or unfairness of any tax proposal by its percentage change in taxes for different income groups is almost always a misleading exercise because the current federal tax system is modestly progressive. Much more relevant measures are to look at proposed tax cuts for different income groups: (a) in average dollar terms, (b) as shares of the total tax cuts, and (c) as shares of income. By any of these measures, Bush’s plan is clearly targeted at the upper end of the income scale:

 

 

 

	Average Dollar Cut	Share of Total Cut	Tax Cut/Income
Lowest 20%	$ 42	0.8%	0.5%
Middle 20%	453	8.4%	1.5%
Top 1%	46,072	42.6%	5.0%

Want even more CTJ? Check us out on Twitter, Facebook, RSS, and Youtube!