June 21, 1999
Bill To Raise Income Ceiling On 15 Percent Tax Bracket Would
Primarily Benefit Higher-Income Families, Not The Middle Class
by Iris J. Lav
The "Middle Class Tax Relief Act of 1999" (S. 274), introduced by Senators Paul Coverdell (R-GA), Robert G. Torricelli (D-NJ), and John McCain (R-AZ), would reduce federal income taxes by increasing the amount of a taxpayer's income that is taxed at the 15 percent tax rate rather than the 28 percent rate. The legislation would accomplish this by raising the income levels at which the 15 percent tax bracket ends and the 28 percent bracket begins.
Contrary to what the bill's name implies, however, this measure does not provide much middle-income tax relief. In fact, most middle-income families would fail to benefit at all from this change. By contrast, most high-income families would benefit substantially.
- More than three-quarters of all taxpayers 76 percent would receive no benefit under the proposal. Of the approximately 127 million taxpayers in the country (including both families and individuals), 31 million would receive a tax cut under this plan, while 96 million would not.
These 96 million taxpayers would not receive any tax reduction because raising the amount of income taxed at the 15 percent rate provides no benefit to those for whom all income already is taxed at no higher than a 15 percent rate. For example, two-parent families of four with adjusted gross incomes up to $61,250 do not have any income taxed at the 28 percent rate and would receive no benefit under this plan.
- While most middle-class families would be left out, high-income tax filers would benefit handsomely. A portion of their income currently taxed at the 28 percent rate would be taxed at a 15 percent rate instead.
Taxpayers with No Tax Cut Under the Coverdell-Torricelli-McCain
"Middle Class Tax Relief Act"
(S. 274, fully phased in at 1999 levels)
Number of Tax Units (000)
No Tax Cut
No Tax Cut
Soure: Institute on Taxation & Economic Policy Model, June 1999
Indeed, only seven percent of tax filers with income below $50,000 and just 14 percent of those below $75,000 would receive any tax reduction. But 93 percent of those with incomes over $100,000 would benefit. Moreover, some of the upper-middle-income families that would benefit would receive only a partial tax cut, while most high-income families who benefitted would receive the maximum tax cut the proposal can provide, $1,300 a year.
- Overall, nearly two-thirds of the total tax cut benefits would go to the 15 percent of taxpayers with the highest incomes (those with incomes exceeding $75,000). By comparison, only 11 percent of the tax cut would go to the 70 percent of taxpayers with incomes below $50,000.
The 15 Percent Bracket
The "Middle Class Tax Relief Act" would increase the taxable income ceiling for the 15 percent tax bracket by $5,000 for single taxpayers and head of household filers and by $10,000 for married couples. In other words, an additional $5,000 or $10,000 of income, depending on filing status, would be moved from the 28 percent tax bracket to the 15 percent bracket. The increase would be phased in over five years.
Minimum Income At Which Taxpayers Benefit From
"Middle Class Tax Relief Act"
Head of Household
1999 Maximum taxable income for 15% rate
Minimum gross income needed to benefit at all from the proposal
Proposed increase in maximum taxable income for 15% rate (fully phased-in)
Minimum gross income needed to benefit fully from the proposal
As noted, raising the amount of income taxed at the 15 percent rate does not provide any tax benefit to tax filers for whom all income already falls within the 15 percent bracket under current law. Under current law, the 15 percent tax rate applies to taxable income below $43,050 for married couples, $34,550 for head of household filers, and $25,750 for single individuals. Taxable income, however, is not the same thing as adjusted gross income, and the actual income of many taxpayers who pay taxes at a maximum 15 percent rate is substantially higher than these "taxable income" ceilings.
In determining taxable income, taxpayers subtract from their gross income the personal exemptions they are allowed for each member of the family as well as their standard deduction (or itemized deductions if greater). For a married couple family of four, taxable income of $43,050 corresponds to gross income of $61,250. (Gross income of $61,250 minus the $7,200 standard deduction for married filers and four personal exemptions that total $11,000 yields taxable income of $43,050; see Table 2.) Thus, married families of four with income below $61,250 already have all of their income in the 15 percent bracket and would receive no tax cut under this proposal.
Furthermore, to receive the full benefit of the proposed increase in the income ceiling on the 15 percent bracket, married taxpayers would need to have at least $10,000 of taxable income that falls in the 28 percent tax bracket under current law. As Table 2 shows, a married taxpayer with two children would need income exceeding $71,250 in 1999 to receive the full benefit of the tax cut. For taxpayers with incomes above this level, the proposed increase would result in a tax reduction of $1,300 each. (For these taxpayers, $10,000 of income would be taxed at a rate 13 percentage points lower than the rate at which it is taxed under current law i.e., this income would be taxed at the 15 percent rate rather than the 28 percent rate.)
It is misleading to call this proposal a middle-class tax cut. Only 22 percent of taxpayers with incomes in the $30,000 to $50,000 range which is squarely in the middle of the income distribution and part of most people's definition of the middle class would receive any tax cut; the other 78 percent of taxpayers in this income range would not benefit. This stands in sharp contrast to the very high proportions of high-income filers who would gain.
Those families with incomes just large enough to benefit fully from the proposed change that is, those with incomes modestly above $71,250 for married couples may be described as being in the upper part of the middle class. Even these upper-middle-income families have income well above the median. The median income level for all households in 1997 was $37,000, and the median income for married couple families was $51,681.