- The Washington Times - Monday, October 16, 2000

Al Gore has been getting a lot of mileage lately out of claiming that George W. Bush's tax plan would give “almost half” its total benefits to the top 1 percent of taxpayers. This is a damning charge, one that Bush has not done a particularly good job of refuting. Following is an effort to try and explain what the truth is.

First, it is important to know that determining what the distributional effects of any tax proposal are is more art than science. Since the 1960s, it has been possible to use computers and tax return data to figure out how tax changes may affect taxpayers. Only the Treasury Department and Congress' Joint Committee on Taxation (JCT) have access to actual tax returns, in order to protect privacy. But it is now possible for private organizations to get a statistical sample of returns to do their own analyses of the distributional effects of tax changes.

Distributional analyses generally are done based on large groupings of taxpayers by income, with estimates being made of the average impact of tax changes on all taxpayers in a group. The result is that the distinctions between taxpayers with the same income are almost entirely lost. For example, the tables usually lump married couples and single persons with the same income together, those with and without children, and those retired and living off investments with those having only wage income.

Furthermore, for reasons that have never been clear to me, the Treasury, JCT and most private groups invariably “adjust” the income data in their tables so that they bear no relationship to that which taxpayers report on their IRS returns. There, the basic measure of income for tax purposes is something called Adjusted Gross Income, which all taxpayers can find on line 33 of their latest tax return.

But the Treasury, JCT and other groups add many other items to AGI to get the measure of income used in their distribution tables. The JCT, for example, adds municipal bond interest, the value of employer-provided health benefits, the employer share of Social Security taxes and other forms of tax-exempt income to AGI in their distribution tables. The effect is to artificially inflate the income that people actually pay taxes on.

A 1987 Treasury study found that its measure of income tripled the percentage of taxpayers making more than $50,000 over what would be measured just by AGI, and reduced the number making $10,000 or less by 80 percent. It also increased the aggregate income of those with incomes over $50,000 by 40 percent over AGI. The net impact of all this is to make all tax cuts appear to be going more to the rich than they really are, because, in effect, everyone becomes a lot richer when they are credited with taxable income they don't have.

With this in mind, let us look at Gore's claim that the top 1 percent of taxpayers — those making over $319,000 — get almost half of all the benefits of Bush's tax cut. These numbers come from a liberal group called Citizens for Tax Justice (CTJ), which says that 42.6 percent of the Bush tax cut goes to the top 1 percent. Thus, Gore is already exaggerating when he says “almost half.”

The JCT says that the top 1 percent of taxpayers are those making above $296,828. But this number is probably 20 percent higher than the equivalent level of AGI, which is likely closer to $250,000. Thus, the CTJ figures are probably 25 percent higher than the comparable level of AGI because of various adjustments, thus making Bush's tax cut appear much more skewed toward the rich than is actually the case.

CTJ also says that Bush's proposal to phase-out the estate tax is a kind of income tax cut, when of course estate taxes are paid out of assets at death, not incomes during life. Moreover, CTJ assumes that the burden of the tax falls on the deceased rather than heirs. Since the former tend to be wealthier than the latter, the effect again is to make Bush's tax cut seem much more oriented toward the wealthy than it really is. Leaving out the estate tax and using the JCT's methodology, the top 1 percent of taxpayers get closer to 30 percent of the total tax cut, not the “almost half” that Gore claims.

There are many other problems as well with the data Gore relies upon. One is that the CTJ figures only show a dollar figure for tax cuts, without telling anyone how much tax people in each income group are paying presently. According to the JCT, those making more than $100,000 per year pay 52.5 percent of all federal taxes while earning just 40.6 percent of total income. It estimates that this group would get 51 percent of Bush's tax cut and pay 52.6 percent of all taxes after the tax cut. Those making between $30,000 and $100,000 make 47 percent of all income, pay 42.3 percent of all taxes and would get 44.1 percent of the Bush tax cut. They would pay 42.2 percent of all taxes after the tax cut.

The bottom line is that taxpayers would benefit from Bush's tax plan roughly in proportion to the taxes they pay, with those in the middle doing a little better than those at the top. This fact is borne out by the JCT data, which show the distribution of federal taxes being almost exactly the same before and after the Bush tax cut.

Shares of Total Income and Total Income Taxes by Percentile, 2000
Top 10 percent40.166.4
Top 5 percent29.354.0
Top 1 percent15.433.6
Source: Joint Committee on Taxation

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