View Research by Author - Matthew Hall

Citation URL: http://www.urban.org/MatthewHall

This report examines the economic and distributional effects of changes made to retirement tax incentives by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). We augment the Tax Policy Center microsimulation tax model with information about saving from the Survey of Consumer Finances. Based on that model, we estimate that although EGTRRA provided some additional tax benefits for middle-income households, the benefits were skewed in favor of those with high incomes, and there were no benefits for those with low incomes. Better targeted policy options exist. We also estimate that when the effect on the deficit is considered, the policies are likely to reduce national saving by as much as 1 percent of GDP.

The individual alternative minimum tax (AMT) was intended to guarantee that high income people paid at least some tax, but it is poorly designed. Absent a change in law, close to 30 million taxpayers will become subject to the AMT by 2010. This data update presents new data for the tables in our July 2003 Tax Notes article and expands on the reform options presented in the Spring 2003 Journal of Economic Perspectives article. We also briefly explain the tables.

This paper incorporates retirement saving incentives into the Tax Policy Center microsimulation model and analyzes the distributional effects of current tax preferences for saving. As a share of income, tax-preferred saving incentives provide the largest benefits to households with income between $75,000 and $500,000, roughly the 80th to 99th percentile of the income distribution. In 2004, the top 20 percent of tax filing units by income will receive 70 percent of the tax benefits from new contributions to defined contribution plans and almost 60 percent of IRA tax benefits.

The President's Budget, released on February 2, 2004, admits that there is a problem with the AMT, but proposes only a small and temporary fix—extending through 2005 an existing temporary fix that currently expires at the end of 2004. This not only fails to resolve the problem, it also substantially reduces the apparent budgetary cost of the President's main proposals to make the 2001 and 2003 tax cuts permanent (because taxpayers on the AMT will get less benefits from the rate reductions).

Expiring tax provisions (or "sunsets") have long been a feature of the tax code, but they have traditionally involved minor provisions. The 2001 tax cut departed dramatically from this pattern: All of its provisions sunset by the end of 2010 and many expire sooner. The 2002 and 2003 tax cuts continued the aggressive use of sunsets to hold down official budget costs. In the 2004 State of the Union address, President Bush once more called for making the tax cuts permanent. This note provides information on the effects of doing so. [© Brookings Institution]

Although the IRS's National Taxpayer Advocate reported in January 2004 that the alternative minimum tax was the most serious problem faced by taxpayers, President Bush's 2004 State of the Union address did not mention the AMT. The AMT problem has been a consequence of bipartisan neglect, so the President is not alone in that regard. But the tax cuts that he has championed threaten to double the number of AMT taxpayers after some small temporary fixes expire in 2005, and the President advocates making those tax cuts permanent, which will significantly increase the number of families subject to the AMT over the long term. This piece examines issues and options for AMT reform and interactions between the AMT and the President's tax cuts. [© Brookings Institution]

The effects of income tax changes on the economy and the distribution of after-tax income depend in part on the population that does not file a tax return or that does file a return but owes little or no net income tax liability. These types of tax units featured prominently in the debate over the 2003 tax legislation. The Tax Policy Center (TPC) model contains information on both tax filers and nonfiling tax units. This article describes the household composition of nonfilers and filers with modest tax liability for 2003.

The 2001 tax act created a "saver's credit" that provides saving incentives for households with moderate income. The saver's credit provides a matching tax credit for contributions made to IRAs and 401(k) plans. The eligible contributions are limited to $2,000. Joint filers with income of $30,000 or less, and single filers with income of $15,000 or less, are eligible for a maximum 50 percent tax credit. (A 50 percent tax credit is the equivalent of a 100 percent match on an after-tax basis.)

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 back-loaded many of its provisions. For example, EGTRRA reduces the top income tax rate from 38.6 percent currently to 37.6 percent in 2004 and 35 percent in 2006. The future income tax cuts scheduled under EGTRRA have different distributional implications from those in place as of 2003.

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