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.
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By Len Burman :: June 30th, 2015
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