Robbins Analysis of House Tax Bill Distribution
Omits Most Tax Cuts That Benefit Higher-income Taxpayers

by Iris J. Lav

A recent report by Gary and Aldona Robbins of the Texas-based Institute for Policy Innovation claims that over 75 percent of the individual tax cuts in the House tax bill would go to taxpayers with less than $75,000 in adjusted gross income. Taxpayers with $200,000 or more in income, according to the Robbins report, would receive only 1.2 percent of the individual income tax cuts.

To reach these conclusions, the Robbins report uses a timeframe and a calculation that results in the omission of most tax cuts that benefit higher-income taxpayers. The benefits of the capital gains and estate tax cuts, the new Individual Retirement Account, and the corporate tax breaks that by 2007 make up half of the cost of the House tax bill are not distributed, either because a provision is explicitly omitted from the Robbins analysis or because the provision has no cost in the timeframe the Robbins report considered. Counting primarily provisions such as the child tax credit and some of the education initiatives that provide a substantial proportion of their benefits to middle-income taxpayers, the Robbins analysis not surprisingly concludes that middle-income taxpayers would benefit the most.

The Robbins report distorts the distribution of benefits that will result from the House tax bill for the following reasons:

• The report shows the distributional effects for the House bill only for the single year 2002. The individual income tax provisions in the tax bill that will primarily benefit upper-income taxpayers — the capital gains and IRA provisions, including the IRA-like education investment savings accounts — have no net cost in 2002. According to the revenue tables prepared by the Joint Committee on Taxation, these provisions together raise $400 million in 2002.
  
  A recently released report by the Congressional Research Service notes how the time period considered in an analysis can affect and distort distributional analysis of the tax bills. The CRS report notes: "The time period is crucial in measuring the distribution because so many of the tax benefits are pushed into the future....Virtually none of the revenue cost of capital gains indexing appear in the budget horizon....The benefits of backloaded IRAs are also delayed into the future...."⁽¹⁾

• The capital gains tax provisions raise revenues in 2002, but this does not mean that higher-income taxpayers would be worse off or would be subject to a tax increase. Under the House bill's capital gains indexing provision, investors could elect to pay capital gains taxes in 2002 they otherwise would pay in subsequent years in return for the ability to use in future years the additional capital gains reduction that indexing provides. Investors would choose to follow this course only if they concluded they would make more money and secure even larger tax cuts over time by doing so. But in the year 2002, the higher taxes that investors appear to pay mask the benefits of other tax reductions, making the net tax cut these individuals would get appear to be very small. By looking solely at 2002, the Robbins report is able to claim that families with income over $200,000 receive only 1.2 percent of the overall tax break.
  
  In commenting on the distributional methodology employed by the Joint Committee on Taxation — which like the Robbins analysis considers the taxes on the additional assets investors would elect to sell in 2002 as tax increases — the Congressional Research Service study notes that this methodology can lead to "peculiar results." CRS states: "Clearly, high income individuals who have capital gains [would] have benefitted from the capital gains rate cut; yet in the distributional analysis of the JCT, the tax cut is shown as a burden."⁽²⁾

• The Robbins report distributes only selected tax cuts. The notes to the Robbins distribution table say their model distributes the child credits, education incentives, capital gains and individual AMT. Individual Retirement Account provisions are not listed.
  
  The analysis also omits the distributional effects of corporate and estate tax cuts, the benefits of which also would accrue to higher-income taxpayers. The new CRS study notes that the Treasury Department distributional analysis distributes the corporate tax in proportion to ownership of capital income in general, consistent with the economic literature which indicates the corporate tax burden is spread to all capital income.⁽³⁾ The vast majority of capital is held by high-income individuals. Similarly, the proposed estate tax cuts would benefit the heirs of the wealthiest two percent of people who die; all other estates are exempt from this tax.

If the analysis had looked at the single year of 2007 instead of 2002, the revenue loss from the capital gains and IRA provisions would be far from nonexistent. These provisions cost more than $19 billion in 2007, according to the Joint Tax Committee revenue tables.

Most of the benefits of this $19 billion in capital gains and IRA tax cuts in 2007 would accrue to the very high-income taxpayers the Robbins report claims derive little benefit from the tax bill. A recent CBO study found that 75 percent of all capital gains income in any year is received by families with incomes exceeding $100,000 and more than three-fifths of all capital gains income is received by families with incomes exceeding $200,000. The taxpayers with the bulk of the capital gains income will be those who benefit most from the generous capital gains tax reductions included in the House bill.⁽⁴⁾

The benefits of IRA expansions also are skewed toward higher-income taxpayers. A Joint Tax Committee analysis conducted several years ago of the distributional consequences of a 1990 proposal to expand IRA eligibility in a manner similar to the provisions of the House and Senate bills found that 95 percent of the benefits from such a provision would accrue to the top 20 percent of households. The richest 4.5 percent of taxpayers would collect nearly one-third of the new tax benefits. This analysis was cited in a 1991 House Budget Committee Republican Staff Report that refuted the claim that middle-income Americans would be the principal beneficiaries of an expansion of IRAs.⁽⁵⁾

If the Robbins analysis had been extended to corporate tax cuts and estate tax reductions, the benefit to higher-income taxpayers would have been still more marked. In 2007, the capital gains, IRA, estate, and corporate tax cuts together reach an annual cost of nearly $27 billion. These tax reductions make up half of the gross tax cut in that year.

Moreover, most of the tax cuts primarily benefiting higher-income taxpayers are growing rapidly in 2007 and would continue to grow in cost — and to increase as a proportion of the total tax bill — in years beyond 2007. If the analysis had moved beyond 2007 to consider the fully effective tax provisions, an ever greater proportion would be seen going to higher-income taxpayer.

The Treasury Department analysis, which looks at the provisions when they would be fully effective and considers all of the major tax cut provisions other than the estate tax reduction, produces very different findings than the Robbins report. The Treasury analysis, using a methodology that is highly regarded by most economists and was also used by the Treasury Departments under Presidents Reagan and Bush, finds that nearly two-fifths of the benefits of the House tax bill would accrue to the one percent of families with the highest incomes. This is nearly 1½ times the benefit the Treasury finds would be shared by the bottom 60 percent of the population.

In its analysis, the Congressional Research Service supports the Treasury analysis. Using measures "more consistent with conventional economic analysis," the Treasury estimates indicate that "by any distributional measure, the tax cuts favor higher income individuals in the House and Senate bills, with the effects more pronounced in the House bill."⁽⁶⁾

End Notes

1. Jane G. Gravelle, Distributional Effects of the Proposed Tax Cut, Congressional Research Service, July 2, 1997, p. 3. Gravelle is CRS' leading expert on these aspects of federal tax policy and is recognized nationally for her tax analysis work.

2. CRS, p. 4.

3. CRS, p. 3. The Joint Committee on Taxation historically has distributed the benefits of corporate tax cuts across owners of corporate capital. In analyzing the tax bills currently under consideration, however, the JCT has omitted corporate tax changes from its analysis.

4. Congressional Budget Office, Perspectives on the Ownership of Capital Assets and the Realization of Capital Gains, May 1997.

5. House Committee on the Budget, Republican Staff Report, November 22, 1991.

6. CRS, p. 6.