This paper evaluates the distributional effects of the 2001 and 2003 tax cuts, and is the second paper in a series on tax policy in the Bush Administration. We show that the tax cuts enacted to date increase the disparity in after-tax income; after-tax income rises by a larger percentage for high-income households than low-income households. Once the eventual financing of the tax cuts is taken into account, the distributional effects will likely be even more regressive. If the eventual policy adjustments needed to finance the tax cuts impose burdens that are 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; most families (i.e., with children) and most taxpayers with small business income will be worse off; and even if the tax cuts raise economic growth significantly, most households will end up worse off when the financing is included. We also address several criticisms of distributional analysis.
To reuse content from Urban Institute, visit copyright.com, search for the publications, choose from a list of licenses, and complete the transaction.