Revised May 12, 2006
RECONCILIATION TAX CUTS WOULD AVERAGE $43,000 FOR HOUSEHOLDS WITH INCOME OVER $1 MILLION, BUT ONLY $20 FOR MIDDLE-INCOME HOUSEHOLDS
By Joel Friedman
The final agreement on the $70 billion tax-cut
reconciliation package offers virtually no benefits to low- and moderate-income
households, but showers high-income households with very large tax cuts.
The Urban Institute-Brookings Institution Tax
Policy Center has examined the major provisions that are in the package,
including a two-year extension of capital gains and dividend tax cuts, a
one-year extension of relief from the Alternative Minimum Tax, and a proposal to
lift the income limits that apply to converting retirement funds to Roth IRAs.
Estimates by the Tax Policy Center show that:
87 percent of the benefits of the reconciliation conference agreement would
flow to the 14 percent of households with incomes above $100,000, and 55
percent of the benefits would go to the 3 percent with incomes above
$200,000. Households earning more than $1 million a year, which represent
only 0.2 percent of all households, would receive 22 percent of the benefits
of these tax cuts.
Distribution of Major Reconciliation Tax Cuts
(Assuming They Are Fully In Effect in 2006)
Middle 20 percent
Top 1 percent
Over $1 million
Urban-Brookings Tax Policy Center
contrast, the three-quarters of households with incomes below $75,000 would
receive just 5 percent of the benefits. The 60 percent of households with
incomes below $50,000 would receive less than 2 percent of all benefits. In
total, 68 percent of all households would receive no benefits
whatsoever from the tax-cut package.
at in dollar terms, the differential treatment of various income groups is
even more striking. The average tax cut for the 20 percent of households in
the middle of the income spectrum would be just $20. But the average tax
cut for those in the top one percent of the income spectrum would be $14,100.
For those with incomes above $1 million, the average tax cut would be
The reconciliation agreement
provides such large tax breaks to the highest income households largely because
of the capital gains and dividend tax cuts, which the Administration and
Congressional leaders pushed hard to include in the bill. Nearly half (45
percent) of the benefit of extending these tax cuts would go to households with
incomes of more than $1 million, according to Tax Policy Center estimates.
Supporters of these tax cuts like to claim that the benefits of these tax cuts
are widespread, but they typically fail to acknowledge that, for less well-off
households, the tax cut only amounts to a few dollars, reflecting the modest
amount of taxable assets these taxpayers hold.
The benefits from
lifting the income limits that apply to converting traditional IRAs to Roth IRAs
are also sharply skewed to high-income households.
Only households with income above $100,000 are prohibited from making such
conversions under current law, so lifting that limit would benefit only those
households. Households with lower incomes would receive no benefit from this
tax cut, as they are able to make such conversions now. Tax Policy Center
estimates show that about three-quarters of the benefits of the Roth IRA
proposal would flow to households with incomes above $200,000, and nearly 35
percent of the benefits would go to households with incomes of over $1 million.
The legislation’s AMT
relief would also flow primarily to households with incomes above $100,000.
However, unlike the benefits of the investment tax cuts and the Roth IRA
proposal, the majority of which go to households with incomes above $500,000,
the benefits of AMT relief are concentrated on those households with incomes
between $100,000 and $500,000, according to the Tax Policy Center. These
households would receive about 80 percent of AMT relief. Those with higher
incomes are less affected by the AMT, so receive fewer benefits from AMT relief.
 The various provisions that are expected to be in the final
reconciliation bill will be in effect during different years. To estimate the
distributional effects of the bill as a whole, the Tax Policy Center employed
the simplifying assumption that all of the provisions would be in effect in
2006. Our distributional estimates have been updated to reflect the Tax Policy
Center’s most recent distributional figures.
 The Tax Policy Center estimates of the average tax cuts for the
different quintiles are as follows: bottom quintile is $0; second quintile is
$7; middle quintile is $20; fourth quintile is $117; and the top quintile is
$2,119. See Tax Policy Center Tables T06-0085 and T06-0086 at
 For more detail, see Joel Friedman and Katharine Richards, “Capital
Gains And Dividend Tax Cuts: Data Make Clear That High-Income Households Benefit
The Most,” Center on Budget and Policy Priorities, January 30, 2006.
 This proposal is included in the package as a way to “offset” a portion
of the cost of the capital gains and dividend tax cuts after 2010. This is a
gimmick of that uses timing shifts to make it appear as though one tax cut that
loses revenue is offsetting the cost of another tax cut that loses revenue. For
a discussion of the gimmick, see Joel Friedman and Aviva Aron-Dine, “Tax
Reconciliation Agreement Distorted By Obsession With Capital Gains And Dividend
Tax Cuts,” Center on Budget and Policy Priorities, May 11, 2006.