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Tuesday, March 11, 2008

The Bush Tax Cuts Did Not Make Taxes More Progressive

In case you hear otherwise (and you will):

Have the 2001 and 2003 Tax Cuts Made the Tax Code More Progressive?, by Aviva Aron-Dine, CBPP: Summary Supporters of extending the 2001 and 2003 tax cuts claim that these tax cuts’ benefits have been broadly and fairly distributed. Some argue that the tax cuts have actually made the tax system more progressive, pointing to Congressional Budget Office (CBO) data showing that the share of total federal income taxes paid by the top 1 percent of households rose modestly after the tax cuts were enacted.

The claim that the tax cuts are fairly distributed and have made the tax code more progressive does not withstand scrutiny. Whether measured in dollar terms or as a share of household income, the tax cuts going to high-income households are much larger than those going to all other households.

When fully in effect, the tax cuts will boost after-tax income by more than 7 percent among households with incomes of more than $1 million, but just 2 percent among middle-income families... A progressive tax cut, like a progressive tax system, is one that reduces inequality. But, as these data show, the tax cuts enacted in 2001 and 2003 are widening the gap in after-tax incomes, which was historically large even before the tax cuts were enacted.

In 2010, when the tax cuts are fully in effect, the average household earning more than $1 million a year will receive $158,000 in tax cuts, according to the Tax Policy Center; the average middle-income household will receive $810.

The same CBO data cited by the tax cuts’ supporters show that the top 1 percent of households pay almost 5 percent less of their income in federal personal income taxes than they did in 2000, before the tax cuts. No other group got a tax cut nearly as large.

The CBO finding cited by the tax cuts’ supporters does not change these facts. High-income households now pay a modestly larger share of federal income taxes not because the tax cuts are somehow tilted against them — to the contrary, the tax cuts are tilted decisively in their favor — but instead because (1) their incomes have risen much faster than other households,’ and (2) the tax cuts have significantly shrunk the total revenue “pie.”

The Tax Cuts Widened Income Gaps

A progressive tax code is one that makes the distribution of after-tax income more equal than the distribution of pre-tax income.  (This definition is accepted by analysts across the political spectrum.)  Hence, one tax code is “more progressive” than another if it has a larger effect in reducing income inequality. For the 2001 and 2003 tax cuts to have made the tax code more progressive, after-tax incomes would have to be less unequal today than if the tax cuts had not occurred.  In fact, the tax cuts have made the distribution of after-tax income more unequal.

Taxcuts

There's been quite a bit of denial about this from the crowd that believes that tax cuts for the wealthy are the answer to every problem. They want to believe - or want you to believe - that tax cuts pay for themselves and, at the same time, make taxes more progressive. Here's the entire report. [On changes in the distribution of income, see the graphs and discussion in this post from Lane Kenworthy.]

    Posted by on Tuesday, March 11, 2008 at 01:53 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (34)

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