How the 2001 and 2003 Tax Cuts Affect Hypothetical Families

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© TAX ANALYSTS. Reprinted with permission.

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How do the 2001 and 2003 tax cuts affect families and tax return filers? What are the tax consequences of having children or being middle-income? The following discussion addresses these questions for an array of families with varying income, number of children, and marital status, for tax year 2003.

The table below shows the combined amount of tax cut each hypothetical household received from the 2001 and 2003 tax cuts at different levels of adjusted gross income (AGI). The table also shows the estimated number of filers in the actual population for each type of hypothetical household.

Under the 2001 tax cut, the new 10 percent bracket was generally of largest benefit to low- and middle-income filers. Under the 2003 tax cut, the child credit expansion (up to an additional $400 per child) is the most important tax provision for families with children and earning less than $75,000, while rate reductions combined with the 15 percent bracket expansion dominate for families earning more than $100,000 and for single filers at all income levels. For millionaires, while reducing the taxes on capital gains and dividends lowers taxes thousands of dollars, lowering the top two tax rates (for example, 39.6 percent to 35 percent, and 36 percent to 33 percent) lowers taxes by tens of thousands of dollars.

While larger families with children benefit most from the expanded child credit, many such families who are middle-to-upper income find their net benefit limited because they are pushed onto the alternative minimum tax (AMT) (expressed in the table by an asterisk).

Families earning $10,000 and below do not benefit from the tax cuts as they tend not to owe any income taxes and the new "refundable" portion of the child credit is not available until income exceeds $10,500 in 2003. As to who pays taxes after the tax cuts, some families with low wages receive larger refunds (expressed in the table in bold italics), while filers at AGI levels of $500,000 and $1 million still tend to pay taxes exceeding $100,000 and $200,000.

The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, provides independent, timely, and accessible analysis of current and emerging tax policy issues for the public, journalists, policymakers, and academic researchers. For more tax facts, see http://www.taxpolicycenter.org/taxfacts.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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