Who Benefits the Most from an Across-the-Board Cut in Individual Tax Rates?

By :: July 2nd, 2015

Just about every tax reform plan calls for cutting individual tax rates. But it turns out that a one percentage point across-the-board rate cut would benefit only about six out of 10 households. The biggest beneficiaries:  those with the highest incomes.

According to a new Tax Policy Center analysis, such a rate cut would add 0.5 percent to average after-tax income, or about $360. But households making less than $30,000-a-year in expanded cash income would receive almost no benefit at all, while those making $1 million or more would enjoy an average boost in after-tax income of 0.8 percent, or almost $17,000.

About 85 percent of middle-income households making between $50,000 and $75,000 would get a tax cut, but it would be fairly modest, averaging a bit less than $250, a 0.5 percent increase in their after-tax income.

Overall, the rate cut would add about $70-billion-a-year to the deficit (the Congressional Budget Office calculates the revenue effects of a one percentage point rate hike, but the story is roughly the same in either direction).

On average, top bracket taxpayers are the biggest winners. But not every high-income household would come out ahead. For instance, only half of those making $500,000 to $1 million in expanded cash income would get a tax cut. Why? Mostly because of the dreaded Alternative Minimum Tax.

About half of those taxpayers are already being hit by the AMT, which requires you to calculate taxes the regular way and using the alternative method (which eliminates many deductions) and pay whichever is higher.  With rare exceptions, lowering ordinary rates won’t help AMT taxpayers at all.

Other high-income taxpayers, especially those making $1 million or more, earn so much through investments that ordinary income rates matter relatively little. For them, cuts in capital gains and dividend taxes would be much more valuable.

At the other end of the food chain, many low income households receive no benefit from the rate cuts because they pay no federal income tax.  Almost no-one making less than $10,000 would benefit, and a bit more than one-third of those making $20,000 to $30,000 would see a tax cut. By contrast, nearly everyone making between $75,000 and $200,000 would get some tax cut.

Bottom line: While rate cuts have become a key piece of tax reform theology, they don’t help everyone. And those they do help are those who need it the least.

 


Puerto Rico: Not Your Father’s Debt Crisis – or Your Greek Uncle’s

By :: July 1st, 2015

In a remarkable statement, Governor Alejandro Garcia Padilla announced this week that Puerto Rico’s debts are “not payable.” Nobody was really surprised. The island can work its way out of this financial mess with a two-pronged strategy: An aggressive short-term effort to raise taxes, cut spending, and improve financial controls combined with a long-run plan […]

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MEGA tax credits: Will Michigan bust a deal, or will residents face the wheel?

By :: July 1st, 2015

In the classic post-apocalyptic film Mad Max: Beyond Thunderdome, those who back out of deals in Tina Turner’s Bartertown face a wheel of fortune to determine their punishment. Hero and road warrior Max busts his deal with her, spins the wheel, and seals his own fate. The huge, lucrative tax subsidies Michigan gave the Big […]

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The Uneasy Case for a Financial Transaction Tax

By :: June 30th, 2015

In recent years, there has been a resurgence of interest in an old idea—a financial transaction tax, or FTT. In a new paper, The Tax Policy Center has taken an in-depth look at the pros and cons of the levy. We’ve found that even a modest tax would raise a lot of money, and that […]

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One more step for equality, and two views on state EITCs

By :: June 29th, 2015

Congress is in recess. The Daily Deduction will return to its regular schedule on Monday, July 6. Wyden promises tax changes in the wake of the Supreme Court’s decision on same-sex marriage. Following the Obergefell v. Hodges decision, senior Senate Finance Committee Democrat Ron Wyden said Friday, “As lawmakers, we must now turn our attention […]

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Michigan, out of ideas, might ask poor to pick up transportation tab

By :: June 26th, 2015

Michigan desperately needs more money for transportation. Republican Gov. Rick Snyder called the state’s roads and bridges “rotten” in his State of the State speech. Snyder and the legislature passed a gas tax hike (Michigan’s rate is among the lowest in the country) late last year but needed voters to approve a ballot amendment (Proposal […]

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Combined Tax Rates and Creating a 21st Century Social Welfare Budget

By :: June 26th, 2015

In testimony yesterday before a joint hearing of two House subcommittees, I urged Congress to modernize the nation’s social welfare programs to focus on early childhood, quality teachers, more effective work subsidies, and improved neighborhoods. One way lawmakers can shift their gaze is by considering the effects of combined marginal tax rates that often rise steeply […]

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A Ruling, A Guide, and Progressive Taxation

By :: June 26th, 2015

The Affordable Care Act’s tax subsidies are legal in all 50 states. The US Supreme Court issued its ruling yesterday against the plaintiff in King v. Burwell, the case that questioned whether tax subsidies for low- and moderate-income ACA enrollees could be offered in states without their own health exchanges. The High Court decided that […]

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Everything You Should Know about Taxing Carbon

By :: June 25th, 2015

Climate change is hot. From the pope’s encyclical to the upcoming United Nations conference in Paris, leaders are debating how to slow and eventually stop the warming of our planet. We economists think we have an answer: put a price on carbon dioxide and the other gases driving climate change. When emissions are free, businesses, […]

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Paying Taxes: Choice and Consequence

By :: June 25th, 2015

Will some private schools lose their tax-exempt status? If religious schools that ban same-sex relationships want to continue to do so, they might have to start paying taxes. If the US Supreme Court rules this month that same-sex marriage is a constitutional right, the IRS could conclude that banning those relationships violates “fundamental national public […]

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