Budget Agreements Tax Cuts Far More Similar
to Congressional Bills than to Presidents Plan
The following analysis examines a report by Citizens for Tax Justice on the distributional effects of the tax cuts under the budget agreement reached this week by the President and Congressional leaders. The CTJ report is a comprehensive examination of the distributional impact of the tax changes when these changes are fully in effect.
The CTJ distributional analysis is the only such analysis available at this time. While most Center analyses of the tax proposals this year have relied on Treasury Department distribution tables, the Treasury has not prepared such tables for this final tax agreement. If Treasury does release distributional tables in the near future, the Center will analyze that information as well. The text box below discusses the differences between the CTJ and the Treasury Department methodologies.
Comparing CTJ and Treasury Methodologies
The CTJ tables consistently show a larger proportion of the tax cuts going to high-income households than the Treasury tables do. The difference between the tables is largely due to the scope of tax cuts analyzed. CTJ includes the effects of the estate tax reductions and excise tax increases, while Treasury does not. The inclusion of estate tax reductions in the CTJ analysis increases the proportion of the tax cuts the top 20 percent and top one percent of households would secure, since only the largest two percent of estates are subject to taxation under current law. The inclusion of excise tax increases reduces the share of the net tax reduction going to middle- and lower-income groups and thereby further raises the proportion going to high-income groups.
Thus, for example, it is not correct to compare the CTJ finding that 78 percent of the benefits from the tax agreement ultimately would go to the highest-income 20 percent of households with earlier Treasury data on the proportion of benefits under the House and Senate bills going to the top fifth. The Treasury data showed that the House and Senate bills each would provide approximately two-thirds of their benefits to the highest-income 20 percent of households. The CTJ data, on the other hand, show more than 80 percent of the tax cuts would go to the highest-income 20 percent under the House and Senate bills.
The appropriate comparison, using the CTJ analysis for each plan, finds that the tax agreement reached by the President and Congressional leaders would provide 78 percent of it benefits to the top 20 percent down only modestly from the 83 percent of benefits that would go to the top 20 percent under the House bill or 84 percent under the Senate bill.
This analysis compares the CTJ findings on the distribution of benefits under the House and Senate bills, the June 30 Clinton proposal, and the budget agreement. The President had criticized the Congressional tax cut proposals on the grounds that their benefits were skewed too much toward upper-income households. His own proposal was much more targeted towards middle-income Americans. The distribution of the budget agreement's tax cuts, however, share much more in common with the Congressional proposals than his own. (See Figure 1.)
The CTJ report finds that the wealthiest one percent of the population would receive nearly as large a share of the tax cut benefits from the budget agreement as from the Senate bill. In addition, the size of the average tax cut for the top one percent of the population would be slightly larger under the final package than under the Senate bill. Both the proportion of the tax cuts received by the top one percent and the size of the cuts they receive are dramatically larger under the budget agreement than under the President's proposal. According to the CTJ findings:
The proportion of the tax cuts that would be received by the top fifth of households under the budget agreement also is quite large and much closer to the House and Senate bills than to the President's proposal. The top 20 percent of households ultimately would garner 78 percent of the tax cut benefits from the budget agreement, according to CTJ. This group ultimately would have received 47 percent of the tax cut benefits from the Clinton plan, 84 percent from the Senate plan, and 83 percent from the House plan.
The proportion of the tax cuts received by the middle fifth of households would be larger under the budget agreement than under the House and Senate bills. The proportion, however, would still be modest and be much lower than under the President's proposal.
A brief examination of some of the provisions included in the budget agreement helps explain why its tax cuts remain tilted towards the top. The capital gains tax cut in the budget agreement is smaller than in the House bill but is ultimately larger than the capital gains tax cut in the Senate bill. The budget agreement does not include the House provision that would index capital gains taxes, but it does include a provision that lowers the top capital gains tax rate to 18 percent on assets held for at least five years (this provision would begin to apply to assets sold in 2006).(2) Neither of these provisions was in the Senate bill.
In another example, the budget agreement's estate tax reductions are somewhat smaller than those in the Senate bill but are significantly larger than those in the House bill. By the year 2007, the estate tax reductions in the budget agreement will result in a revenue loss of $8.9 billion according to the Joint Committee on Taxation. This exceeds the $5.6 billion in estate tax cuts in 2007 under the House bill by nearly 60 percent. The estate tax cuts in 2007 under the Senate bill would have totaled $9.8 billion.
Effect on Moderate-Income Families
As compared to the House and Senate bills, the budget agreement provides more assistance to moderate-income and middle-income families, largely because it follows the President's plan and increases the assistance these families receive under the child credit. Excise tax increases from the cigarette and airline taxes, however, nearly offset the child tax credit and other tax benefits for moderate-income households (the fifth of households with the second-to-lowest amount of income). As the table below indicates, the net tax reduction for moderate-income households averages only $1 per household.
Four Contrasting Tax Plans
House GOP Plan
|Senate GOP Plan||Clinton June Plan||Agreement|
|Ave. Tax Change||% of Tot. Tax Cut||Ave. Tax Change||% of Tot. Tax Cut||Ave. Tax Change||% of Tot. Tax Cut||Ave. Tax Change||% of Tot. Tax Cut|
|Lowest 20%||$ +12||tax hike||$ +53||tax hike||$ +46||tax hike||$ +40||tax hike|
|Second 20%||+6||tax hike||+59||tax hike||-4||0.4%||-1||0.1%|
|All||$ -632||100.0%||$ -464||100.0%||$ -201||100.0%||$ -498||100.0%|
|Source: Citizens for Tax Justice, July 31, 1997|
If the effect of excise tax hikes is excluded, moderate-income households would have their taxes reduced by $75 on average. These households include both families with children, childless couples, and single individuals. The average tax reduction for moderate-income families with children would be larger than $75.
Excluding excise taxes also increases the share of the tax cuts going to moderate-income households, but only modestly. Under the budget agreement the fifth of households with the second-to-lowest incomes would receive 0.1 percent of the tax cut benefits when excise taxes are included, and 2.5 percent when excise taxes are not counted.
Similarly, the proportion of the tax cuts received by high-income households decreases modestly if excise taxes are excluded. The top fifth of households are estimated to receive 78 percent of the tax cut benefits when excise taxes are counted, and 71 percent when excise taxes are not counted.
1. The average size of the tax cut for middle-income households of $148 under the budget agreement is smaller than the $178 average tax cut under the Clinton proposal. But this is not the primary reason why the proportion of tax cut benefits received by the middle fifth of the population is much lower under the budget agreement than under the President's proposal. The tax cuts for upper-income households are much larger under the budget agreement than under the Clinton proposal; it is primarily this difference that leads to the substantial discrepancy in the proportion of the tax cuts going to the middle fifth of households.
2. In one respect, the budget agreement cuts the capital gains tax less than under the Senate bill because it lowers the top capital gains tax rate to 20 percent on assets held for at least 18 months; the Senate bill lowered the top capital gains tax rate to 20 percent on assets held for at least 12 months. The additional revenue lost due to the top rate of 18 percent on assets held for more than five years, however, ultimately appears to outweigh the gain in revenue relative to the Senate bill due to the application of the 20 percent top rate to assets held for at least 18 months instead of to assets held for at least 12 months.