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:
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)
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.