Why Cutting All Tax Rates Equally Produces Unequal Results

You might assume that cutting all income tax rates by the same percentage — as Governor Romney and others have proposed, and as key Senate Republicans endorsed last week as a key goal of tax reform — would benefit all taxpayers equally.  You’d be wrong.

As our brief new paper explains, across-the-board rate cuts disproportionately benefit higher-income people, raising their after-tax incomes by much larger percentages than less-affluent people (see graph).

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In dollar terms, too, the disparities are striking.  People making over $1 million a year would receive tax cuts averaging $92,000 apiece if we cut all rates by 20 percent below current levels, while middle-income people (those making $50,000-$75,000) would get around $900.

At a time when tax policy should be seeking to reduce deficits and push against rising income inequality, across-the-board tax cuts do the exact opposite.  Thus they are a particularly poor place to start when formulating tax reform or deficit reduction plans.