TAX BURDEN

  • Even with the weak economy in 2002, tax receipts remain high as a share of the economy.
  • Total tax receipts in 2002 are estimated to be 19.4 percent of GDP. Since World War II, total tax receipts as a share of GDP were higher in only six years (1969, 1981, 1998, 1999, 2000, and 2001).
  • Individual income tax receipts are estimated to be 9.2 percent of GDP. Since World War II, individual income tax receipts as a share of GDP were the same or higher in only seven years (1969, 1981, 1982, 1998, 1999, 2000 and 2001).
  • Even with the tax cut and the current economic downturn, projected total tax receipts over the 2002-2011 period are higher as a share of GDP than over any previous ten-year period. Projected individual tax receipts are also higher as a share of GDP over the 2002-2011 period than over any previous ten-year period.

BENEFITS OF TAX RELIEF
Who benefits from the President\\\’s tax relief package enacted last summer? When the major individual income tax provisions are fully phased in:

  • 104 million individuals and families will receive an average tax cut of $1,040.
  • Nearly 43 million married couples will receive an average income tax cut of about $1,720.
  • Over 38 million filers with children will receive an average income tax cut of $1,460.
  • Over 10 million single mothers with children will be able to keep, on average, $770 more of their income.
  • About 13 million seniors will see their taxes reduced, on average, by $915.

In response to the economic slowdown, the President called on Congress to speed the phase in of the 25% tax rate. Accelerating that rate reduction would reduce taxes for about 34 million taxpayers in 2002. Taxes would be reduced for one-fourth of all tax filers and one-third of all income taxpayers. Over two-thirds of the taxpayers who would receive a tax reduction have AGIs under $100,000. 82% of the taxpayers who would receive a tax reduction would receive a marginal rate reduction.

The taxpayers that would benefit from the accelerated tax rate reductions pay over 80% of all individual income taxpayers.

DISTRIBUTION OF TAX RELIEF AND THE TAX BURDEN

As a result of enacting the President\\\’s tax relief plan last summer:

  • The share of income tax relief provided to families with incomes under $100,000 is larger than their share of income taxes paid before the tax cut was enacted.
  • The percentage reduction in income tax burdens is largest for the lowest income group (under $30,000).
  • The percentage reduction is smaller but above average for families with incomes between $30,000 and $100,000.
  • The percentage reductions are below average for families with incomes over $100,000.
  • Taxpayers with income of $100,000 and higher paid 70 cents of every dollar in federal individual income taxes paid before last summer\\\’s tax cut. After the tax cut is fully phased in, these taxpayers will end up paying a larger share – almost 74 cents of every dollar in individual income taxes paid. The share of individual income tax paid by taxpayers with incomes under $100,000 will decline from 30 cents to 26 cents of each dollar of individual income taxes paid.

A recent CBO study, "Effective Federal Tax Rates 1979-1997" released last September, showed:

  • The share of total federal taxes paid by the highest income quintile and the top 1 percent rose dramatically over the period.
  • The top quintile\\\’s share of total federal taxes paid rose from 57.1 percent in 1979 to 64.7 percent in 1997.
  • The top 1 percent\\\’s share of total federal taxes paid rose from 15.5 percent in 1979 to 23.0 percent in 1997.
  • The effective federal tax rate fell by over 30 percent for the lowest income quintile – from 8.1 percent in 1979 to 5.6 percent in 1997, while effective rates for the highest income quintile were virtually the same in 1997 as in 1979.
  • During the late 1990s, federal revenue grew faster than GDP, pushing up the share of GDP claimed by taxes from 18.1 percent in 1995 to 19.9 percent in 1998, a post-World War II high.
  • Two-thirds of that growth in revenues came from rising individual income tax receipts, which climbed from 7.8 percent of GDP to 9.0 percent.

IRS data show that the average income tax rate for the top 1 percent increased from 23.3 percent in 1989 to 27.5 percent in 1999. For the rest of the top 50% (excluding the top 1%) the average tax rate rose much less, from 12.8 percent to 13.2 percent.

SMALL BUSINESSES BENEFIT FROM TAX RELIEF

The tax cut will help small business: the 33 million business owners who are taxed on their business income at individual rates stand to benefit from the Bush tax cut.

These business owners will receive over 80 percent of the tax relief associated with the reductions in the top two rates, providing incentives for expanding their businesses and creating new jobs.

  • Small businesses (including small businesses taxed as corporations):
    Provide about 75 percent of the net new jobs
  • Represent more than 99 percent of all employers
  • Generate more than 50 percent of America\\\’s private sector output

MAKING THE TAX RELIEF PERMANENT

In the 2003 budget, President Bush proposed making the tax relief plan permanent. If we don\\\’t repeal the sunset, among the many tax increases that will occur in 2011 are the following:

  • The tax rate on low income families will jump 50% (from 10% to 15%)
  • The child credit will fall by 50%
  • Marriage penalties will be restored
  • Formerly tax-free withdrawals for certain education savings plans will become taxable
  • IRA contribution limits will shrink by more than 60%
  • The death tax will be restored

EFFECT ON INTEREST RATES

  • The government debt share of the overall debt market is shrinking rapidly. Interest rates are already at very low historical levels. Short-term interest rates are at their lowest level in four decades and longer-term Treasury security yields recently have been at low levels very rarely observed over the past four decades.

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  • Benefits from low interest rates are already being observed, and it is unlikely that significant additional benefits could be accrued from any possible hoped-for effect from abandoning stimulus or rescinding planned tax rate reductions. Examples of the benefits from low interest rates that we have already observed include the increase in auto sales with zero percent financing and the mortgage refinancings that promote improved household finances.

WHAT HAPPENED TO THE SURPLUS?

  • In 2002, the tax relief plan accounts for about $40 billion or 14% of the decline in the projected surplus relative to the projection in last April\\\’s budget. The economic downturn is responsible for 66% of the erosion in the surplus. Additional spending is accountable for the remaining 20 percent of the decline.

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  • Over the 2002-2011 period, the tax relief package and associated interest payments account for 41% of the change in the surplus over this period. The economic downturn and associated changes in interest payments are responsible for 44 percent of the decline in the surplus. Increased spending is responsible for the remaining 15% of the decline.