"Maxim Shvedov
Analyst in Public Finance
May 5, 2010
Congressional
Research Service
7-5700
www.crs.gov
R41111
Summary
This report discusses some of the broad individual income
tax cuts effective for most of the last decade that are set to expire at the
end of 2010. These tax cuts were first enacted under the Economic Growth and
Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27) and later extended
by other acts. The report traces the legislative history of the tax cuts, shows
their time line, and provides a general overview of their economic implications
and revenue effects.
Congress faces the issue of whether to let the tax cuts
expire or extend them, and if so, how. The tax cuts were first enacted under
reconciliation rules. As a result, all of the provisions were scheduled to
sunset (revert to prior-law levels) at the end of 2010 or earlier. Subsequent
legislation did not extend major provisions past 2010.
President George W. Bush advanced the idea of
across-the-board tax cuts as one of the cornerstones of his economic policy
since his first presidential campaign. In 2001, EGTRRA reduced marginal income
tax rates, provided marriage tax penalty relief, temporary relief from the
alternative minimum tax (AMT), and increased the child tax credit. JGTRRA
accelerated the implementation of certain tax reductions that were being
phased-in under the 2001 act. The 2003 act also reduced the tax rate on
dividends and long-term capital gains income, effective through 2008.
The Job Creation and the Working Family Tax Relief Act of
2004 (P.L. 108-311), the Tax Increase Prevention and Reconciliation Act of 2005
(P.L. 109-222), Tax Increase Prevention Act of 2007 (P.L. 110-166), the
Emergency Economic Stabilization Act of 2008 (P.L. 110-343), and American
Recovery and Reinvestment Act of 2009 (P.L. 111-5) extended various provisions
first enacted under EGTRRA and JGTRRA through 2010. As a result, after 2003,
the tax system essentially maintained the constant level of tax relief first
established by EGTRRA and JGTRRA.
Proponents of the tax cuts believe that they encourage
work, saving, and investing; help families raise children; address inequalities
affecting married taxpayers; and provide other benefits. At the same time,
expected budget surpluses played a big role in justifying the desirability and
feasibility of the tax cuts in 2001. In reality, however, the budget was in deficit
throughout the decade. Critics of the tax cuts question the fiscal responsibility
of the tax cuts. In addition, critics point out that the benefits of tax cuts
disproportionately accrue to higher-income taxpayers.
In recent years some legislative initiatives propose
extending the tax cuts with some restrictions. For example, President Obama's
budgets in FY2010 and FY2011 proposed extending the tax cuts only for taxpayers
with income below $ 200,000 or $ 250,000, depending on filing status. The
FY2011 budget resolution (S.Con.Res. 60) accommodates permanent extension of
many of the tax cuts generally in the same vein as the President's proposal,
although some believe that it might not accommodate the extension of the tax
relief for dividends.
This report will be updated to reflect legislative
activity.
Contents
Tax Legislation: 2001 Through 2009
President's Budget and Other Recent Initiatives Related
to Extension of the Tax Cuts Past 2010
Extending the Cuts Past 2010: Key Considerations
Tables
Table 1. Estimated Revenue Impact Associated with
Extending
EGTRRA and JGTRRA and Reforming the AMT
Table 2. Estimated Revenue Effects of Extending Certain
Major Expiring Tax Provisions of 2001 Through 2008 Acts
Table 3. Effective Individual Income Tax Rates for All
Households,
by Comprehensive Household Income Quintile, 2000-2006
Appendixes
Appendix. Phase-in and Expiration Schedule of Select Tax
Cut Provisions
Under EGTRRA, JGTRRA, and Subsequent Acts, 2001-2011
Contacts
Author
Contact Information Acknowledgments
The tax cuts enacted in 2001 and 2003 were one of the
cornerstones of the economic policy of President George W. Bush's
Administration and continue to play a significant role in defining the economic
policy of President Obama. The cuts were first enacted at the time of projected
budget surpluses after one of the longest economic expansions in recent
history. Even then, their size, scope, and distribution raised considerable
controversy. As the cuts are scheduled to expire under current law at the end
of 2010, policymakers face the issue of their possible extension, modification,
or expiration. These deliberations take place in a much changed environment of
significant current and projected budget deficits and a severe and prolonged
economic recession.
Tax Legislation: 2001 Through 2009
The Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) provided individual income tax relief
to a very large share of the population, reflecting President Bush's emphasis
on tax cuts. The act's provisions were scheduled to phase in over several years
at an estimated total cost of approximately $ 1.35 trillion over the
FY2001-FY2011 period. n1 EGTRRA reduced
marginal income tax rates, created a new 10% income tax bracket, provided
marriage-tax penalty relief, increased the child tax credit, increased the
alternative minimum tax (AMT) exemption, and changed other elements of the tax
system.
All of the changes in EGTRRA were temporary, expiring
after 2010 or earlier. Congress included the sunset in EGTRRA to avoid a Byrd
rule (Section 313 of the 1974 Congressional Budget Act, as amended)
violation in the Senate. The Byrd rule prohibits "extraneous matter"
in reconciliation legislation. n2 Under
the rule, extraneous matter includes, among other things, language that would
cause an increase in the budget deficit (or reduce budget surpluses) in a fiscal
year beyond those covered by the reconciliation legislation. As a result of the
Byrd rule, EGTRRA contained language providing for the expiration of all of its
provisions at the end of calendar year 2010 -- the end of the reconciliation
budget window.
In 2003, Congress passed the Jobs and Growth Tax
Relief Reconciliation Act (JGTRRA; P.L. 108-27). JGTRRA accelerated the
implementation of many of the provisions that were being phased in under
EGTRRA, including marriage-tax penalty relief, expansion of the 10% tax
bracket, and increases in the child tax credit to $ 1,000 per qualifying child.
The 2003 act also included another temporary increase in the AMT exemption (a
so-called "AMT patch"). n3
These JGTRRA changes were scheduled to be in effect for only two years, 2003
and 2004.
In addition to acceleration of the existing provisions,
JGTRRA contained a major new provision lowering the maximum tax rate on
qualified dividend income and long-term capital-gains income to 15% (5% for
taxpayers in the 10% and 15% marginal income tax brackets, dropping to 0% for
these taxpayers in 2008). As originally enacted, these changes were effective
through January 1, 2009. The estimated cost of all JGTRRA's tax reduction
provisions was $ 329.7 billion over the FY2003-FY2013 period. n4
In 2004, Congress passed the Working Families Tax
Relief Act of 2004 (WFTRA; P.L. 108-311). Among other things, WFTRA
extended several tax provisions that were set to expire at the end of 2004
under JGTRRA. The estimated cost of these extensions was $ 131.4 billion over
the FY2005-FY2014 time period. n5
WFTRA extended the accelerated marriage-penalty tax
relief provisions (the standard deduction and 15% tax bracket for joint returns
set at twice the level as those for single returns) through 2008. In 2009 and
2010, this level of tax relief would be maintained due to the full phase-in of
the corresponding provisions of EGTRRA. The 2004 act also extended the increase
in the 10% income tax bracket through 2010.
WFTRA maintained the child tax credit at $ 1,000 through
2009 (for 2010, the EGTRRA provisions apply and the child tax credit will
remain at $ 1,000). In addition, WFTRA accelerated, to 2004, the increase in
the refundability of the child tax credit. For 2004 through 2010, the child tax
credit is refundable up to 15% of a taxpayer's earned income in excess of the
applicable threshold. WFTRA extended for one year the increase in the basic
exemption for the alternative minimum tax (AMT) to $ 58,000 for joint returns
and $ 40,250 for unmarried taxpayers.
The Tax Increase Prevention and
Reconciliation Act of 2005 (TIPRA; P.L. 109-222), passed by Congress and signed by the
President in May 2006, extended the dividend and capital gains tax reductions
through 2010. These reductions were enacted in 2003 and originally scheduled to
expire in 2008. The estimated cost of these extensions was $ 50.8 billion over
the FY2006-FY2015 period. n6
For the rest of the period, legislative activity
extending the EGTRRA and JGTRRA tax cuts concentrated largely on extending the
AMT relief. For 2006, TIPRA retroactively increased the basic AMT exemption to
$ 62,550 for joint returns and to $ 42,500 for unmarried taxpayers. The
combined cost of this and other AMT provisions of the act was $ 33.9
billion. n7
In 2007, the AMT exemption reverted to its pre-EGTRRA-law
levels, but the Tax Increase Prevention Act of 2007 (TIPA; P.L. 110-166),
enacted in December 2007, extended the AMT tax relief retroactively for one
year at a cost of $ 50.6 billion. n8
TIPA set the 2007 AMT exemption levels at $ 66,250 for joint returns and $
44,350 for single returns, and it included other AMT-related relief.
The Emergency Economic Stabilization
Act of 2008 (EESA;
P.L. 110-343) extended the AMT relief and expanded refundability of the child
tax credit for 2008. EESA increased the AMT exemption amounts to $ 46,200 for
individuals and $ 69,950 for joint returns. The estimated cost of this
provision was $ 61.8 billion over 10 years.
n9
In addition, EESA reduced the earned income threshold
used in calculating the refundable portion of the child tax credit to $ 8,500
from $ 12,050 for 2008. The estimated cost of the proposal was $ 3.1 billion
over 10 years. n10 The change led to an
increase in the amount and availability of the refundable child credit for
lower-income households.
The American Recovery and Reinvestment
Act of 2009 (ARRA;
P.L. 111-5) provided the AMT relief for 2009, expanded refundability of the
child tax credit in 2009 and 2010, and increased earned income tax credit
(EITC) phase-out income for married couples.
n11 These three provisions, estimated to cost $ 89.3 billion, were just
a small portion of the act. n12 The act
contained many other tax relief measures, most notably the new Making Work Pay
tax credit, as well as numerous non-tax provisions.
Most of the acts mentioned above also included provisions
that are not covered in this report. In some cases, these were tax provisions,
but they had a more limited scope, for example relating to retirement or educational
provisions of the tax code. In other instances, they were driven by unrelated
policy initiatives or the legislative environment. This report discusses these
bills only to the extent that they affect the tax cuts first enacted under the
EGTRRA or JGTRRA.
The phase-in and expiration schedules of the various tax
provisions enacted under the 2001 through 2009 tax acts are shown in the Appendix.
President's Budget and Other Recent
Initiatives Related to Extension of the Tax Cuts Past 2010
Even though the tax cuts were first enacted with a sunset
in 2010, their proponents originally pursued the goal of the permanent tax
cuts. Over the years, a number of bills extending the cuts were introduced, but
none were enacted. The likelihood of their extension varied over the years,
depending on economic situation, deficit projections, and political climate.
President Obama in his first two budget outlines proposed
extending the tax cuts for married taxpayers with adjusted gross income (AGI)
below $ 250,000 and non-married taxpayers with AGI below $ 200,000. These
income thresholds reflect President Obama's pledge not to increase taxes on
taxpayers below those income limits.
In practical terms, this proposal means that most of the
tax cut provisions would be extended. The only income tax provisions that would
expire include the reductions of the top two marginal tax rates, tax rates on
capital gains and dividends for upper-income taxpayers, and limitations on
personal exemptions and itemized deductions. Some of these and other provisions
(e.g., the 28% income tax bracket) would be modified to tailor their structure
to the target income group. The Administration also proposed to freeze the
estate tax relief at the 2009 level.
In both years, the President's budget uses a
"current policy" baseline, not the current law baseline, to estimate
revenue effects of the Administration's proposal. This baseline assumes
extension of the tax cuts and the AMT relief. Because of the change in the
baseline, the Administration's proposals appear as revenue-raisers. The Office
of Management and Budget (OMB) estimated that the expiration of the
upper-income tax provisions related to the elements of EGTTRA and JGTRRA would
raise more than $ 678 billion from FY2011 to FY2020. n13
When looking from the current-law, not the
current-policy, perspective, the Administration's proposal reduces federal
revenue, because it extends about three-quarters of the tax cuts by value. n14 According to the Congressional Budget
Office (CBO), the FY2011 proposal would extend the tax cuts at a projected cost
of $ 2.7 trillion in 2011-2020. n15 This
total might differ from the comparable OMB estimate.
On April 22, 2010, the Senate Budget Committee approved
the FY2011 budget resolution, which assumes extension of the middle-class tax
relief estimated to cost $ 780 billion over five years. The measure accommodates
the extension of the marginal tax rate reductions, marriage penalty relief, the
child tax credit, and other provisions limited to taxpayers with income below $
200,000 or $ 250,000, depending on the filing status. n16 The measure also accommodates extension
of capital gains tax cuts in a vein similar to the President's proposal, but it
is unclear whether the revenue targets specified in the bill would allow for
the dividend tax relief. n17 The measure
also provides for two years of the AMT and the estate tax relief, along with a
number of other provisions.
In the first session of the 111 Congress, both chambers
approved the budget resolution (S.Con.Res. 13) conference report in April 2009,
which accommodated revisions similar to the Administration's approach. The
measure accommodated permanent extension of many of the tax cuts for
middle-income taxpayers, including the extension of the 10% bracket, marriage
penalty relief, and the increased child tax credit. The bill also supported
patching the AMT for an additional three years without an offset. The agreement
supported the extension of other provisions as well. n18 The individual income tax provisions
affecting higher-income taxpayers would be allowed to expire after 2010. These
include reinstatement of the top two tax brackets, personal exemption phaseout,
and itemized deductions limitations. The estate tax relief was to be frozen at
the 2009 level.
The prior year's budget resolution (S.Con.Res. 70)
conference agreement, approved by both the House and Senate in early June 2008,
also supported individual income tax relief, including such items as the child
tax credit, marriage tax penalty relief, the 10% bracket, and a one-year
extension on AMT relief. n19
A budget resolution, which is enforced by various points
of order, may constrain the size of the tax provisions subsequently considered
in revenue measures, but it does not make any changes to the tax code by
itself. Revenue legislation, which does make such changes, generally is
considered by the House and Senate within the framework established by the
annual budget resolution. Assumptions underlying a budget resolution regarding
specific tax or spending programs are not binding on the committees of
legislative jurisdiction.
Extending the Cuts Past 2010: Key
Considerations
The views of policymakers on proposals to extend the tax
cuts will likely be shaped by several key factors. These include (1) the
general desirability of providing tax relief, (2) the cost of the cuts in view
of budgetary constraints, and (3) the distribution of the tax cuts' benefits
among different income groups of taxpayers.
Economic theory suggests that reducing the tax burden may
reduce economic distortions -- undesirable changes in behavior of economic
agents resulting from imposing a tax. This conclusion depends, however, on a
specific form of the tax relief measures. It is difficult to generalize
economic effects of the EGTRRA and JGTRRA tax cut provisions due to their
diverse nature. Some of the provisions, such as lower marginal tax rates, might
indeed have a beneficial effect on economic efficiency, but others may have
little practical effect on economic efficiency.
n20
Policymakers will likely weigh the benefits of tax
reduction measures against their budgetary costs and other consequences.
Ultimately, the conclusion would depend on many factors, such as specifics of
the provisions, the time horizon, or the financing method. In addition, tax
reductions might be attractive for political or other reasons unrelated to
economic performance. Counterbalancing the desire to provide continued tax
relief is the concern over the current and projected size of the federal budget
deficit. The revenue effects of extending or making permanent the tax
reductions would be substantial. Moreover, once the cost of fixing the AMT is
included, the budgetary costs associated with maintaining the current level of
tax relief increase considerably.
The cost of extending the tax cuts critically depends on
the future AMT policies. The alternative minimum tax is an income tax system
parallel to the regular income tax. In general, a taxpayer's individual income
tax liability is determined by the higher of the AMT or the regular tax
liability. In the past, the regular tax liability was often the higher of the
two, determining the individual tax liability for the vast majority of
taxpayers. If, however, the regular tax liability goes down because of the tax
cuts, but the AMT liability stays the same, the AMT might come to determine the
individual income tax for an increasing number of taxpayers. Thus, absent congressional
action, the AMT will "take back" some tax relief granted through the
regular income tax and reduce the relief cost to the government at the same
time. n21 Hence, Congress faces not only
the issue of whether or not to extend or make permanent the reductions in the
regular income tax, but also how to coordinate the changes between these two
parallel tax systems. n22
Modifying the AMT has been one of the most pressing
individual income tax issues facing Congress in recent years. CBO estimates
that "the number of taxpayers affected by the AMT will jump from 4 million
in calendar year 2009 to 27 million in 2010," unless Congress extends tax
relief past 2009. n23 Since 2001,
Congress several times modified the amounts of the AMT exemption, a parameter
used in calculating the AMT, to avoid the increase in the number of affected
taxpayers (so-called AMT patch). Each of these patches expired, however, after
one or two years, bringing back the currency of this issue.
Table 1 presents Congressional Budget Office
(CBO) estimates of the cost of extending the EGTRRA and JGTRRA tax reductions
and reforming the AMT. n24 In addition
to the direct costs of these policy options, the table also presents associated
debt service costs -- indirect costs, which would arise if these policies are
deficit financed (that is, if there are no offsetting tax increases or spending
reductions). Due to strong interactive effects between various tax provisions
and other assumptions, these numbers should be treated as order-of-magnitude
estimates.
As shown in Table 1, the estimated total cost of
extending the EGTRRA and JGTRRA tax cuts, reforming the AMT, and servicing
related debt would be $ 4.6 trillion over FY2011-FY2020. Another important
observation is a relative cost of the first and second halves of this period.
The total cost of the first five years, $ 1,663 billion, is 36% of the total
10-year cost, while the cost of the second five years, $ 2,913 billion (= $
4,576 billion - $ 1,663 billion), is 64% of the total. These shares imply that
the overall program cost grows with time, reflecting economic and personal
income growth.
A better understanding of the cost dynamics may be
helpful in assessing long-term revenue implications of extending the tax cuts.
Comparing the Table 1 data for FY2012, when most of the transitional
effects would become negligible, to FY2020 demonstrates that the projected cost
of the tax cuts grows quickly in real terms. The direct cost of the tax cuts
represents 1.82% of GDP in 2012, but 2.16% by 2020, an increase of
approximately 19%. The estimated total cost increases by 65%, from 1.87% of GDP
to 3.07%. Thus, it appears that if the tax cuts were extended, their cost would
likely grow rapidly over time both in real and nominal terms.
Table
1. Estimated Revenue Impact Associated with Extending EGTRRA
and JGTRRA and Refor
ming the AMT
(dollar amounts in billions of dollars)
2011 2012 2013
2014 2015 2016
2017
Extend EGTRRA and
-115 -216 -243
-257 -269 -277
-285
JGTRRA (excluding AMT-
related provisions)
Debt service
-1 -5 -14
-29 -43 -61
-78
Reform the AMT
-69 -31 -35
-39 -44 -50
-58
Debt service
-1 -2 -4
-6 -9 -12
-16
Interaction between the
-13 -43 -48
-53 -59 -64
-71
above provisions
Debt service 0 -1
-2 -5 -8
-12 -16
Total direct cost
-197 -290 -326
-349 -372 -391
-414
above, as a share of
-1.30% -1.82% -1.93% -1.96% -2.00%
-2.01% -2.05%
GDP
Total cost -199 -298
-346 -389 -432
-476 -524
above, as a share of
-1.32% -1.87% -2.05% -2.18% -2.32%
-2.45% -2.59%
GDP
Gross Domestic Product 15,116 15,969
16,918 17,816 18,622 19,425 20,231
[table continued]
Total, Total,
2018 2019 2020
2011-2015 2011-2020
Extend EGTRRA and
-293 -302 -311
-1,099 -2,567
JGTRRA (excluding AMT-
related provisions)
Debt service
-99 -121 -144 -91 -594
Reform the AMT
-66 -77 -88
-219 -558
Debt service
-20 -25 -31 -22 -125
Interaction between the
-78 -85 -93
-215 -606
above provisions
Debt service
-21 -27 -33 -17 -126
Total direct cost
-437 -464 -492
-1,533 -3,731
above, as a share of
-2.08% -2.12% -2.16%
GDP
Total cost
-577 -637 -700
-1,663 -4,576
above, as a share of
-2.74% -2.91% -3.07%
GDP
Gross Domestic Product 21,033 21,882
22,770
Source: Congressional Budget Office, The Budget and
Economic Outlook: Fiscal
Years 2010 to 2020, and CRS calculations.
In 2008, CBO conducted an analysis of the long-term
effects of extending the tax cuts, confirming that it would represent a major
long-term budgetary commitment. n25 CBO
conducted the 75-year horizon analysis in terms of the fiscal gap -- "the
immediate and permanent change in spending or revenues that would reduce the
government's projected debt in 2082 to its current level as a share of
GDP." n26 Under the "extended-baseline"
scenario, which closely adheres to current law and thus assumes expiration of
the tax cuts in 2010, the fiscal gap would be 1.7% of GDP. CBO's analysis
indicates that extending the individual income tax portion of the EGTRRA and
JGTRRA tax cuts without extending the AMT relief would result in a 0.7%
additional fiscal gap. The AMT relief would increase the fiscal gap to 3.1%.
Finally, adding the extension of the estate and gift tax reductions would add
0.7% more, resulting in a 3.8% fiscal gap.
Some proponents of extending the tax cuts argue that
incremental economic activity, generated by lowering taxes and not accounted
for in the above estimates, would offset a large share of the cost of the cuts.
While some positive revenue feedback effect is likely, evidence shows that its
magnitude is considerably smaller than the direct cost of the tax cuts. n27 For example, in 2006 the Treasury modeled
the effects of indefinite extension of the tax cuts and found that under the most
favorable set of plausible assumptions, the incremental increase in the GDP
growth rate may reach 1.1%. n28 The
incremental revenues generated by this additional income would be about 0.2% of
the GDP, offsetting roughly 10% of the direct cost. Other scenarios would
result in even more modest effects. In addition, economic theory suggests that
revenue feedback effects depend on the design of the measures, method of
financing, and other factors.
Partially extending the cuts might represent a compromise
that would continue to provide some tax relief, while keeping costs lower. The
President's budget proposal follows this approach. The Administration aims to
preserve the benefits of the tax cuts for married taxpayers with AGIs below $
250,000 and other taxpayers with AGIs below $ 200,000. These thresholds would
extend the tax cuts for a large majority of taxpayers. At the same time the
Administration proposes to let expire those cuts that would primarily affect
the taxpayers with AGIs above these thresholds.
An alternative approach might involve extending some of
the provisions, but not others. Table 2 reproduces CBO estimates of
extending the tax reductions by individual provision. n29 The estimates provide the general
magnitude of the cost and relative size of extending each provision. However,
because of the interaction between the provisions, extending all of the tax
provisions would produce a greater revenue loss than the revenue loss indicated
by summing up the revenue costs of all the individual provisions.
Table 2.
Estimated Revenue Effects of Extending Certain Major
Expiring Tax Provisions of 2001
Through 2008 Acts
(dollar amounts in billions of dollars)
Tax Provision
Expiration 2008 2009
2010 2011 2012
2013 2014
Increased AMT
exemption amount
2007/a/ -5.4 -72.7
-70.0 -64.1 -36.3
-42.0 -48.9
Personal credits
under the AMT
2007/b/ -0.1 -0.4
-0.5 -0.5 -0.2
-0.2 -0.3
Child credit at
2010 n.a. n.a.
n.a. -7.1 -35.4
-35.6 -36.0
$ 1,000
Earned income credit
2010 n.a. n.a.
n.a. 0.1 -4.0
-4.0 -4.0
modification
Estate and gift tax
2010 n.a. -1.4
-2.3 -30.5 -69.4
-77.0 -84.2
changes
Expanded 10% bracket
2010 n.a. n.a.
n.a. -31.4 -44.9 -44.7
-44.1
Income tax rates of
2010 n.a. n.a.
n.a. -44.3 -65.7 -68.2
-71.0
25%-35%
Itemized deduction
2010 n.a. n.a.
n.a. -7.2 -14.9
-15.9 -16.9
and personal
exemption phaseout
Joint filers' 15%
2010 n.a. n.a.
n.a. -5.6 -7.9
-7.4 -6.9
bracket and standard
deduction
Other provisions of
2010 n.a. n.a.
n.a. -0.3 -1.3
-1.3 -1.4
EGTRRA
Reduced tax rates on
2010 n.a. n.a.
-2.3 -12.3 2.2
-14.7 -14.6
capital gains
Reduced tax rates on
2010 n.a. 0.3
0.8 -5.4 -22.3
-26.2 -27.8
dividends
Interaction from
n.a. 0.0 0.0
0.0 -15.2 -52.0
-56.6 -60.5
extending all
provisions
together/b/
[table continued]
2009- 2009-
Tax Provision
Expiration 2015 2016
2017 2018 2013
2018
Increased AMT
2007/a/ -56.7 -64.9
-73.5 -83.7 -285.2
-612.8
exemption amount
Personal credits
2007/b/ -0.4 -0.5
-0.6 -0.7 -1.9
-4.3
under the AMT
Child credit at
2010 -36.4 -36.7
-36.9 -37.0 -78.1
-260.9
$ 1,000
Earned income credit
2010 -4.0 -4.1
-4.2 -4.2 -7.9
-28.3
modification
Estate and gift tax
2010 -90.7 -97.4 -104.9 -112.0 -180.6
-669.8
changes
Expanded 10% bracket
2010 -43.4 -43
-42.6 -42.1 -121
-336.2
Income tax rates of
2010 -74.5 -78.3
-82.4 -86.6 -178.2
-571.0
25%-35%
Itemized deduction
2010 -18.0 -19.2
-20.4 -21.8 -38.0
-134.2
and personal
exemption phaseout
Joint filers' 15%
2010 -6.5 -6.3
-6.0 -5.7 -20.9
-52.3
bracket and standard
deduction
Other provisions of
2010 -1.4 -1.5
-1.4 -1.5 -2.9
-10.2
EGTRRA
Reduced tax rates on
2010 -14.7 -14.8
-15.1 -15.4 -27.1
-101.5
capital gains
Reduced tax rates on
2010 -29.7 -31.2
-32.8 -34.4 -52.8
-208.8
dividends
Interaction from
n.a. -63.8 -66.5
-68.5 -69.8 -123.8
-453.0
extending all
provisions
together/b/
Source: Congressional Budget Office, The Budget and Economic
Outlook: Fiscal
Years 2008 to 2018.
Note: The estimates in this table do not incorporate the
effects of the
Emergency Economic Stabilization Act of 2008 and the
American Recovery and
Reinvestment Act of 2009.
/b/ Table 2.
Another option is to provide tax relief through a
different set of policies, more loosely or not at all related to the EGTRRA and
JGTRRA tax cuts. n30 Such an approach
may generate a simpler tax system and achieve other goals. At the same time,
any tax relief conceptually unrelated to EGTRRA and JGTRRA would likely
generate winners and losers across the income spectrum, which may be seen as a
violation of a requirement to hold harmless taxpayers with income below $
200,000 or $ 250,000, set forward by the President.
One of the key considerations in deciding how to extend
the tax cuts might be the distributional effects of the enacted measures. Table
3 presents CBO data on the effective individual income tax rates in
2000-2006. n31 By 2005 most of the tax
reductions were phased in, thus the analysis may serve as a reasonably close
approximation to the effects of the fully phased-in tax cuts. The tax cuts were
the key, although not the only, factor determining the distribution of the tax
burden over the time span shown.
Examination of Table 3 shows that the effective
tax rate for all taxpayers fell by 2.7 percentage points, from 11.8% to 9.1%.
However, the gains are distributed unevenly among taxpayers belonging to
different quintiles -- groups of one-fifth of all households, arranged by
income. Whereas the lowest quintile received a 2.0 percentage point cut, the
top quintile's cut was 3.4 percentage points. None of the bottom four quintiles
received a cut exceeding 2.3 percentage points, but the taxpayers in the top 1%
received a reduction of 5.2 percentage points. Expanding the analysis to
include the reductions in the estate tax would likely exacerbate the
difference.
Table 3.
Effective Individual IncomeTax Rates for All Households,
by Comprehensive Household Income
Quintile, 2000-2006
(percentage
points)
Lowest Second
Middle Fourth Highest
All Top Top
Top
Year Quintile
Quintile Quintile Quintile Quintile Quintiles 10% 5%
1%
2000 -4.6 1.5
5.0 8.1 17.5
11.8 19.7 21.6
24.2
2001 -5.6 0.3
3.9 7.1 16.3
10.3 18.7 20.8
24.1
2002 -6.0 -0.2
3.6 6.7 15.5
9.7 17.9 20.0
23.7
2003 -6.0 -1.1
2.8 5.9 13.7
8.4 15.8 17.7
20.4
2004 -6.2 -0.9
3.0 5.9 13.9
8.7 15.9 17.6
19.7
2005 -6.5 -1.0
3.0 6.0 14.1
9.0 16.0 17.6
19.4
2006 -6.6 -0.8
3.0 6.0 14.1
9.1 16.0 17.5
19.0
Change -2.0 -2.3
-2.0 -2.1 -3.4
-2.7 -3.7 -4.1
-5.2
from
2000
to 2006
Source: Congressional Budget Office, Historical Effective
Federal Tax Rates:
1979 to 2006, and CRS calculations.
Depending on the policymaker's view, such a distribution
might or might not be desirable. At the same time, it is possible to make the
cuts more affordable and more evenly spread across taxpayers at all income
levels, because the budgetary cost of a single percentage point reduction in
taxes for the highest-income taxpayers is much higher than a single-point
reduction for the lower-income taxpayers.
n32 The proposal to limit the extension to taxpayers with income below $
200,000 or $ 250,000 is one possible implementation of this approach.
Appendix.
Phase-in and Expiration Schedule of Select Tax Cut
Provisions Under EGTRRA, J
GTRRA, and Subsequent Acts, 2001-2011 Link-to-image-2010102951 Link-to-image-2010102952
Source: CRS adaptation of Congressional
Budget Office and Joint Committee on Taxation tables and publications.
Note: EGTRRA -- Economic Growth and Tax
Relief Reconciliation Act of 2001 (P.L. 107-16, 2001, introduced as H.R. 1836);
JGTRRA -- Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27,
2003, introduced as H.R. 2); WFTRA -- Working Families Tax Relief Act of 2004
(P.L. 108-311, 2004, introduced as H.R. 1308); TIPRA -- Tax Increase Prevention
and Reconciliation Act of 2005 (P.L. 109-222, 2006, introduced as H.R. 4297);
TIPA -- Tax Increase Prevention Act of 2007 (P.L. 110-166, 2007, introduced as
H.R. 3996); EESA -- Emergency Economic Stabilization Act of 2008 (P.L. 110-343,
2008, introduced as H.R. 1424); ARRA -- American Recovery and Reinvestment Act
of 2009 (P.L. 111-5, 2009, introduced as H.R. 1).
Author Contact Information
Maxim Shvedov
Analyst in Public Finance
mshvedov@crs.loc.gov, 7-4639
Acknowledgments
This report includes significant contributions from Gregg
Esenwein, now retired from CRS.
FOOTNOTES:
n1
U.S. Congress, Joint Committee on Taxation
(JCT), Estimated Budget Effects Of The Conference Agreement For H.R. 1836,
JCX-51-01, May 26, 2001.
n2
For more information see CRS Report RL30862, The
Budget Reconciliation Process: The Senate's "Byrd Rule", by
Robert Keith. Other procedural aspects related to the budget process are
discussed in CRS Report 97-865, Points of Order in the Congressional Budget
Process, by James V. Saturno; and CRS Report RL32835, PAYGO Rules for
Budget Enforcement in the House and Senate, by Robert Keith and Bill Heniff
Jr.
n3
For more information, please see CRS Report
RL30149, The Alternative Minimum Tax for Individuals, by Steven Maguire.
n4
CRS calculation based on U.S. Congress, Joint
Committee on Taxation, Estimated Budget Effects Of The Conference Agreement
For H.R. 2, The "Jobs And Growth Tax Relief Reconciliation Act Of
2003," JCX-55-03, May 22, 2003.
n5
U.S. Congress, Joint Committee on Taxation, Estimated
Revenue Effects Of The Conference Agreement For H.R. 1308, The "Working
Families Tax Relief Act Of 2004," JCX-60-04, September 23, 2004.
n6
U.S. Congress, Joint Committee on Taxation, Estimated
Revenue Effects Of The Conference Agreement For The "Tax Increase
Prevention And Reconciliation Act Of 2005," JCX-18-06, May 9, 2006.
n7
Ibid., p. 2.
n8
U.S. Congress, Joint Committee on Taxation, Estimated
Revenue Effects of H.R. 4351, the "AMT Relief Act of 2007," Scheduled
for Consideration by the House of Representatives on December 12, 2007,
JCX-114-07, December 12, 2007.
n9
U.S. Congress, Senate Finance Committee, Detailed
Summary of Energy, Disaster Relief, AMT, and Other Tax Extender Provisions in
Emergency Economic Stabilization Act of 2008, October 1, 2008, as reported
by BNA, Inc., TaxCore -- Congressional Documents, Legislation, No. 191, October
2, 2008.
n10
U.S. Congress, Joint Committee on Taxation,
JCX-78-08, Estimated Budget Effects of the Tax Provisions Contained in an
Amendment in the Nature of a Substitute to H.R. 1424, Scheduled for Consideration
on the Senate Floor on October 1, 2008, October 1, 2008, p. 9.
n11
For details about changes affecting the EITC
please see CRS Report RS21352, The Earned Income Tax Credit (EITC): Changes
for 2009 and 2010, by Christine Scott. Changes to the child tax credit and
the AMT are discussed in CRS reports referenced above.
n12
U.S. Congress, Joint Committee on Taxation,
JCX-19-09, Estimated Budget Effects Of The Revenue Provisions Contained In
The Conference Agreement For H.R. 1, The "American Recovery And Reinvestment
Tax Act Of 2009," February 12, 2009, p. 1.
n13
Office of Management and Budget, PRESIDENT'S
BUDGET o FY 2011 BUDGET, Analytical Perspectives, Receipts, web page, available
at http://www.whitehouse.gov/omb/budget/fy2011/assets/receipts.pdf, p. 188 (online
p. 32).
n14
CRS estimates based on the data reported in
Congressional Budget Office, A Preliminary Analysis of the President's
Budget Request for 2011, Letter to the Honorable Daniel K. Inouye, March 5,
2010 downloaded from http://cbo.gov/ ftpdocs/112xx/doc11231/03-05-apb.pdf, and The
Budget and Economic Outlook: Fiscal Years 2010 to 2020, Budget Projections
(Excel), supplemental data file, downloaded from
http://cbo.gov/ftpdocs/99xx/doc9957/selected_tables.xls.
n15
Congressional Budget Office, A Preliminary
Analysis of the President's Budget Request for 2011, Letter to the Honorable
Daniel K. Inouye, March 5, 2010 downloaded from
http://cbo.gov/ftpdocs/112xx/doc11231/03-05-apb.pdf.
n16
United States Senate, Budget Committee,
Majority Staff, "Summary, Chairman's Mark FY2011 Senate Budget
Resolution," press release, April 21, 2010.
n17
Brett Ferguson and Jonathan Nicholson,
"Lawmakers Ponder Senate Budget Resolution for Clues on Dividend Tax
Rates," Daily Tax Report, 81 DTR G-11, April 29, 2010.
n18
U.S. Congress, Conference Committees, 2009, Concurrent
Resolution on the Budget for Fiscal Year 2010, conference report to
accompany S.Con.Res. 13, Rept. 111-89, 111 Cong., 1 sess. (Washington: GPO,
2009), p. 71.
n19
U.S. Congress, Conference Committees, 2008, Concurrent
Resolution on the Budget for Fiscal Year 2009, conference report to
accompany S.Con.Res. 70, H.Rept. 110-659, 110 Cong., 2 sess. (Washington: GPO,
2008), pp. 73-75.
n20
For more information see CRS Report RL32502, What
Effects Did the 2001 to 2003 Tax Cuts Have on the Economy? by Marc Labonte.
n21
For more information on the "take
back" effect see CRS Report RS21817, The Alternative Minimum Tax (AMT):
Income Entry Points and "Take Back" Effects, by Steven Maguire.
n22
See CRS Report RS22909, The Alternative
Minimum Tax for Individuals: Legislative Activity in the 110 Congress, by
Steven Maguire and Jennifer Teefy.
n23
Congressional Budget Office, The Individual
Alternative Minimum Tax, January 15, 2010, p. 3.
n24
Congressional Budget Office, The Budget and
Economic Outlook: Fiscal Years 2010 to 2020, Budget Projections (Excel),
supplemental data file, downloaded from
http://cbo.gov/ftpdocs/99xx/doc9957/selected_tables.xls.
n25
Congressional Budget Office, The Long-Term
Budgetary Effects of Three Specified Policy Scenarios, Letter to the
Honorable John M. Spratt Jr., March 14, 2008.
n26
Ibid., p. 2.
n27
For more information on revenue feedback
effects and recent studies on the subject, see CRS Report RL33672, Revenue
Feedback from the 2001-2004 Tax Cuts, by Jane G. Gravelle.
n28
U.S. Department of the Treasury, Office of Tax
Analysis, A Dynamic Analysis of Permanent Extension of the President's Tax
Relief, July 25, 2006, downloaded from
http://www.treas.gov/press/releases/reports/treasurydynamicanalysisreporjjuly252006.pdf
n29
Congressional Budget Office, Updated
Estimates for Table 4-9, "Effects of Extending Tax Provisions Scheduled to
Expire Before 2018," in The Budget and Economic Outlook: Fiscal Years 2008
to 2018, January 2008, pp. 101-106, downloaded from
https://www.cbo.gov/ftpdocs/90xx/doc9040/ExpiringProvisions.pdf. Comparable CBO
estimates published since 2008 do not offer the same level of detail and,
therefore, are not reproduced here.
n30
A large number of possible alternatives are
listed in CBO, The Budget Options, Volume 2, August 2009, or earlier
issues of this report, as well as in other publications issued by various
government agencies and independent think tanks.
n31
Congressional Budget Office, Data on the Distribution
of Federal Taxes and Household Income, web page, Historical Effective Federal
Tax Rates and Income, by Income Category (1979-2006), Effective Tax Rates,
April 2009, data files, downloaded from
http://cbo.gov/publications/collections/taxdistribution.cfm.
n32
For more information see CRS Report RL32693, Distribution of the Tax Burden Across Individuals: An Overview, by Jane G. Gravelle and Maxim Shvedov."
See also CRS Examines 2001 and 2003 Tax Cuts, 2010 TNT 89-78, May 10, 2010.
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