January 10, 2003
The Bush Tax Cut: Distributional Issues

Ah. We are told that the Bush tax cut means that every year "ninety-two million Americans will keep an average of $1,083 more of their own money." But this is not what the average family will receive: think $265 instead. (On the other hand, it is worth $90,000 a year to the average family making more than one million a year.)


Spinsanity - Taxing the public's trust: The Bush administration is stretching the truth again to sell its latest tax cut: On Tuesday, President Bush announced a package of tax cuts that... will cost... approximately $925 billion counting increased interest costs.... [T]he administration is once again using a number of misleading arguments to rally support for its proposals. Perhaps the most deceptive talking point is that, as Bush put it in a speech announcing the proposal on Tuesday, "Ninety-two million Americans will keep an average of $1,083 more of their own money"... implying that most families will see their taxes cut by $1,083 in 2003. This number... is not representative of what middle-income families could expect to receive.... $265...


Posted by DeLong at January 10, 2003 02:57 PM | Trackback

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It seems like the Bush administration is willing spend some political capital on this one (otherwise it doesn't look like a very smart strategy from an electoral perspective). Is it a failed attempt at refidifining reality and the headlines? Do they really believe in their rhetorics about economic stimulus? Did they simply hope it would jump start the stock market in any lasting way? Or are they investing on future campain contributors? In any case, the Democrats should be thankful, this has a lot of traction and it's understandable and concrete to the public.

Posted by: Jean-Philippe Stijns on January 10, 2003 03:58 PM

I think this chart is pretty hard to interpret without any information on how many people are in each income group.

Posted by: ed johnson on January 10, 2003 05:43 PM

There you go, Ed. Courtesy of Sohrab Ismail-Beigi, Department of Physics (!), UC Berkeley. Source: U.S. Census Bureau.

Posted by: Jean-Philippe Stijns on January 10, 2003 06:04 PM

"Both claims ['under this plan, a family of four with an income of $40,000 will receive a 96 percent reduction in federal income taxes' and 'A typical family of four with two earners making a combined $39,000 in income would receive a total of $1,100 in tax relief under the President's plan'] are misleading in that they carefully select a household which would benefit disproportionately for its income level. As noted above, according to calculations by CTJ, the middle 20 percent of earners, who make an average of $36,600 per year, would receive an average benefit of just $289. The White House's theoretical family does better than this by virtue of having two children, allowing it to take advantage of the additional child tax credit. It also benefits from the accelarated marriage penalty phaseout."

So how is Bush's example not a "typical" family of four? Most households described as a "family of four" feature at least two children, and (hopefully) a significant fraction of them also feature a married couple. I don't see anything misleading in a statement that explicitly describes what would happen to a "family of four".

Not that I'm crazy about continuing the practice of singling out people for differential tax treatment based on their personal decisions to get married, have children, buy houses, etc. And I do wish there was a FICA cut as well, which would not only increase peoples' current wealth, but would also make it easier to justify benefit cuts later when demographic difficulties hit.

But any progress in the direction of lower taxes is a good thing.

Posted by: Kenneth Uildriks on January 10, 2003 07:21 PM

Kenneth Uildriks wrote, But any progress in the direction of lower taxes is a good thing.

Does that mean you're in favor of cutting funds slated for the military rathole?

Posted by: Stephen J Fromm on January 10, 2003 09:29 PM

Kenneth Uildriks wrote,

"But any progress in the direction of lower taxes is a good thing."

Doesn't this view, and the general conservative opinion that taxes should always be cut, imply that there simply should be no government, since the only acceptable level of taxation is zero?

Posted by: Bernard Yomtov on January 11, 2003 09:12 AM

And in direct response to Kenneth it is not the 'typical family of four' part that is dihonest, it is the choosing to highlight 'a typical family of four' which seriously misrepresents the average effect of the tax cut.

Posted by: theCoach on January 11, 2003 09:50 AM

Remember folks - There is a "hidden" capital gains tax reduction in the proposed bill. Virtual dividends by company can be used internally but credited to shareholders and taken as a deduction from capital gains taxes on sale of the stock.

Happy are those who hold lots of stock in taxable accounts. Perhaps the rest will not be so happy when they realize how little this now affects them or when they realize the future affects on the budget if tricky trickle downs do not really trickle. Who needs social security when we have tax free stock dividends? Not tax free in retirement accounts, you say? Who needs medicare when we can line up in the path of Senator Bill Frist for summary surgery?

Posted by: on January 11, 2003 10:10 AM

I suggest that henceforth the Bush 'stimulus' plan be referred to as "Leona's Law",
as its the next step on the road to making Ms. Helmsley's famous comment ('Only little people pay taxes') the law of the land.

Tom Strong

Posted by: Tom Strong on January 11, 2003 10:56 AM

I suggest that henceforth the Bush 'stimulus' plan be referred to as "Leona's Law",
as its the next step on the road to making Ms. Helmsley's famous comment ('Only little people pay taxes') the law of the land.

Tom Strong

Posted by: Tom Strong on January 11, 2003 10:58 AM

>>Who needs social security when we have tax free stock dividends?

Fine point, anonymous! What kind of hangover will America wake up to in about 7 years? But then again, if the goal IS to destroy Social Security (and all other social programs), the proposed tax cuts are EXACTLY what you need to do. I can read the 2010 headlines already "15% increase this year in poverty among the elderly, economists fear further increases along the decade. Bush says: 'If we had privatised Social Security, at least the top 1% of income earners would still have a decent pension!' Professor DeLong told us that economists knew for a long this this was coming. 'Somehow, we never get listened to, maybe my brothers and sisters economists don't speak loud enough, maybe not.'" :)

Posted by: Jean-Philippe Stijns on January 11, 2003 03:49 PM

Or is it about time all reasonable academic (and maybe even some professional) economits write a petition against these and further unstimulatory and hyper-regressive tax cuts? What would you think of this, Professor DeLong? Won't get Greg Mankiw to sign this, but I would guess quite a few wouldn't mind...

Posted by: Jean-Philippe Stijns on January 11, 2003 03:55 PM

"I do wish there was a FICA cut as well, which would not only increase peoples' current wealth, but would also make it easier to justify benefit cuts later when demographic difficulties hit."

Cripes, there goes Uildreks again. Why should we cut SocSec benefits BEYOND the degree forced upon us by those upcoming demographic difficulties? And exactly how is the populace going to benefit from "an increase in people's current wealth" if it's compensated for by a drop in their later wealth?

Posted by: Bruce Moomaw on January 11, 2003 07:06 PM

"Why should we cut SocSec benefits BEYOND the degree forced upon us by those upcoming demographic difficulties?"

Well, there are a lot of reasons to oppose the Social Security system but here's one for starters: the government takes maybe 4% (that is a guess, maybe it's close to 5%) of taxable income, uses it to pay older retirees, and forces the taxpayer to be beholden to a government system for retirement benefits. Think instead of allowing that taxpayer to invest the 4% as they see fit in their own personal account. (I do realize that, if SS were to be junked, 1) a safety-net system for retirees would have to be implemented; 2) a large number of disabled people would need a new source of disability payments.) Let's not idealize the SocSec system: it is inequitable and should be abolished as soon as possible.

Posted by: JT on January 13, 2003 08:11 AM

Frist boldly carried the original deception into outright fraudulent territory on Meet The Press yesterday:

"... you took the dividend exclusion out and all the other elements which I mentioned, which result in 92 million people receiving a $1,000 check this year ...

Posted by: RonK, Seattle on January 13, 2003 12:22 PM

Think instead of allowing that taxpayer to invest the 4% as they see fit in their own personal account.

.....except when you factor existing liabilities (one generation's SS benefits, basically) into the growth rate, privitization results in exactly the same results.

Posted by: Jason McCullough on January 13, 2003 04:24 PM

"Cripes, there goes Uildreks again. Why should we cut SocSec benefits BEYOND the degree forced upon us by those upcoming demographic difficulties?"

If we cut FICA collections AND Social Security benefits, the absolute magnitude of any deficits will be smaller, and can more easily be made up from other sources.

"And exactly how is the populace going to benefit from "an increase in people's current wealth" if it's compensated for by a drop in their later wealth?"

For one thing, the less fortunate folks who won't live long enough to get their hands on that later wealth will definitely benefit by getting their hands on it now. Second of all, the individual gets a much greater degree of control over what that later wealth is, depending on what he freely chooses to do with that current wealth.

"Well, there are a lot of reasons to oppose the Social Security system but here's one for starters: the government takes maybe 4% (that is a guess, maybe it's close to 5%) of taxable income, uses it to pay older retirees, and forces the taxpayer to be beholden to a government system for retirement benefits."

Counting the money that your employer pays to the government rather than to you, we're talking on the order of 15%. Definitely not chump change.

And it is not much consolation that I might get it back several decades from now - if I live that long.

Posted by: Kenneth Uildriks on January 15, 2003 10:07 AM

you guys have way too much time on your hands. Stupid left wingers why don't you all STOP WHINING. How about THAT.

Posted by: BOBO the hobo on June 2, 2003 06:52 PM

you guys have way too much time on your hands. Stupid left wingers why don't you all STOP WHINING. How about THAT.

Posted by: BOBO the hobo on June 2, 2003 06:52 PM
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