Tax Analysts Blog

TPC Study Shows Fiscal Cliff Deal Cut Taxes for Most

Posted on Jan 14, 2013
The fiscal cliff might be behind the United States, but the effects of the deal to avoid it will be felt for a long time. Unlike many other hasty tax compromises drafted on Capitol Hill, the provisions of the American Taxpayer Relief Act (ATRA) are mostly permanent. The income tax rates, the estate tax, and the alternative minimum tax patch are all here to stay. And, according to the Tax Policy Center's (TPC’s) preliminary study on distributional effects, the act essentially provided a big tax cut for almost everyone.

Using the Congressional Budget Office’s old baseline (which assumed that the Bush tax cuts would expire for everyone) and looking at the effects of the tax cut in 2018, the TPC says that the average taxpayer will receive a $2,335 tax cut under ATRA. That amounts to a 3.5 percent reduction. As incomes rise, of course, the amount of the benefit increases, despite the increase in tax rates on those earning more than $400,000. The taxpayers who got the largest cut were those earning between $200,000 and $500,000 – their tax cut amounted to 5.7 percent. Those earning between $100,000 and $200,000 received 30.8 percent of ATRA’s total tax cut, the most of any group. (By comparison, those earning under $50,000 received only about 8 percent of the tax cut.)

What about the very wealthy, who President Obama says should be paying more? They didn’t do that badly. Only 5.6 percent of those earning over $1 million will pay more taxes as a result of ATRA. The average tax increase for that group was $34,273. Overall, annual millionaires received a tax cut of about 1.7 percent, or around $38,000. Although the top two rates on millionaires might have gone up, the federal income tax system taxes each taxpayer’s income with a progressive rate structure. That means that millionaires still received the benefit of all the 2001 and 2003 cuts to the lower income brackets. And it averaged out to be a net tax benefit. It is very likely that the 5.6 percent of millionaires who took a tax hit under ATRA are extremely high earners.

The TPC’s study focuses only on how ATRA treated the income and estate taxes. It doesn’t look at the effect of the expiration of the payroll tax cut, which was essentially a 2 percent tax increase on everyone. The increase in payroll tax rates will mostly wipe out ATRA’s tax benefits for anyone earning less than $50,000 -- which only emphasizes why Congress should have more seriously considered extension of the payroll tax cut, perhaps giving the same amount of time to a tax benefit that helped every working American that it gave to hashing out income, estate, and AMT rates for very wealthy taxpayers.

While the TPC study revives some of the old criticism of the 2001 and 2003 tax cuts (that they provided a tax benefit to the rich and were expensive), that isn’t exactly a fair charge. The reality is that the federal income tax system is structured in a way that any tax cut will benefit the wealthy, at least somewhat. As mentioned above, any reduction in the tax rate on lower income brackets will cut taxes on that portion of everyone’s income that falls in that bracket. And ATRA maintains a progressive rate structure. Those earning over $1 million pay an effective tax rate of around 37.9 percent, while those earning between $40,000 and $50,000 pay only 14.5 percent. If any distributional criticism is to be leveled at ATRA, it should be concentrated on the expiration of the payroll tax cut or the entire federal income tax regime, not the specific provisions of the compromise.

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