WASHINGTON, D.C., June 17, 2002 — The largest tax cut in 20 years, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), favors families with children over those without children, especially among lower-income taxpayers, and high-income people over those with moderate and low incomes, concludes new research from the nonpartisan Urban-Brookings Tax Policy Center.
"The 2001 tax cut has been roundly criticized because so much of the benefit goes to the rich, but the bill also did much to help low- and middle-income families. Most notably, it increased the child tax credit and made it refundable-that is, available to families with incomes too low to owe income tax," observe Urban Institute senior fellow Len Burman and research associates Elaine Maag and Jeff Rohaly in "The Effect of the 2001 Tax Cut on Low- and Middle-Income Families and Children."
EGTRRA also simplified the earned income tax credit and increased it for some married couples. It boosted the maximum child care tax credit, created a new 10 percent tax bracket, and raised the standard deduction for married couples, all of which will substantially benefit middle-income families.
Because the child provisions phase in slowly, low- and moderate-income taxpayers with children benefit most at the end of EGTRRA's authorization. In 2010, families with incomes between $10,000 and $30,000 will receive an average tax cut more than two and a half times larger than that received by taxpayers without children ($945 versus $352). For taxpayers in the $30,000 to $50,000 range with children, their cut will also be two and a half times that received by their childless counterparts.
Taxpayers with children save more than those without at almost every income level. The exception is upper-middle-income families, whose benefits are curtailed or eliminated by the alternative minimum tax. Not surprisingly, the largest tax cuts by far accrue to those with incomes over $200,000.
Although individuals with children represent only about one-third of the tax-filing population, they receive nearly half of the benefits in most of the years analyzed. For example, by 2010, taxpayers with children will constitute 34.2 percent of those filing returns, but they will garner 48.3 percent of the tax cut. By 2010, the 2.7 percent of all taxpayers with earnings above $200,000 will obtain 36.8 percent of the total tax cut. The 19.4 percent with less than $10,000 in income will receive 0.6 percent of the savings. If the estate tax cut were included, the very wealthy would be favored even more.
When looking at the percentage increase in after-tax income, the poorest individuals receive 2010's smallest benefit-0.51 percent-while the wealthiest taxpayers receive the largest benefit: 3.31 percent. Among taxpayers with incomes between $10,000 and $200,000, the tax cut appears progressive, with the percentage change in after-tax income substantially larger for those with lower incomes.
All of the provisions of the $1.35 trillion legislation expire in 2011. "Given the strains on the budget arising from the recession and the aftermath of the September terrorist attacks, every provision in EGTRRA could find its way to the chopping block," Burman, Maag, and Rohaly caution.
The researchers take the legislation to task for the slow phase-in of its provisions and for the fact that inflation erodes much of their value. They urge policymakers to revisit "the unnecessary complexity lower-income families must face when they prepare their taxes," especially the complicated refundable child tax credit. To make the tax system more progressive, they suggest Congress integrate the various child-related tax benefits into a simple child-assistance tax credit and eliminate personal exemptions for adults in favor of a higher standard deduction.
Data used in the Tax Policy Center's microsimulation tax model come from the 1996 public-use file produced by the Statistics of Income Division of the Internal Revenue Service. The data set contains about 112,000 detailed records based on 1996 federal tax returns.
"The Effect of the 2001 Tax Cut on Low- and Middle-Income Families and Children" discussion paper is available on the Tax Policy Center Web site. The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, clarifies the nation's tax policy choices by providing timely and accessible facts, analyses and commentary to policymakers, journalists, citizens and researchers. Its research focuses on fair, simple, and efficient taxation, the long-term implications of tax policy choices, social policy in the tax code, and state tax issues.
The Urban Institute is a nonprofit, nonpartisan policy research and education organization that examines the social, economic, and governance problems facing the nation.
