· The tax cuts enacted to date increase the disparity in
after-tax income; most households would receive a
direct tax cut, but after-tax income would rise by a
larger percentage for high-income households than
for low-income households.
· Once the eventual financing of the tax cuts is taken
into account, the distributional effects will likely be
even more regressive. For example, if the eventual
financing is proportional to income, about 80 percent
of households, including a large majority of
households in every income quintile, will end up
worse off after the tax cuts plus financing than
before.
· Likewise, although advocates routinely describe the
tax cuts as pro-family and pro-small-business, we
show that most families (that is, with children) and
most taxpayers with small-business income will be
worse off once the financing is included.
· Even if the tax cuts raise economic growth by a
significant amount (relative to existing estimates of
the growth effects), most households will end up
worse off after the tax cuts, the growth effect, and the financing are considered than they would have
been if the tax cuts had not taken place.
· Incorporating the eventual financing of the tax cut
into the distributional analysis is a key innovation in
the analysis. It is consistent with the fact that the tax
cuts must be paid for eventually with either spending
cuts or other tax increases. It is consistent with
the differential (revenue-neutral) incidence analysis
that is the standard in academic treatments of tax
incidence. And it makes moot the distracting and
misleading debates about which of a variety of
distributional measures are most appropriate: In
analyses that ignore financing, the alternative measures
give different results, but when plausible
methods of financing are included, all of the measures
yield the same qualitative results.
Section II discusses alternative measures of the distribution
of tax changes. Section III provides estimates of
the distributional effects of the 2001 and 2003 tax cuts, if
they are made permanent, ignoring how the tax cuts will
be financed. Section IV discusses alternative methods of
financing the tax cuts and incorporates those methods in
the distributional analysis. Section V examines a variety
of criticisms of distributional analysis, our responses, and
a discussion of how those criticisms affect the results
presented here.
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