Bush Tax Cuts Erased Income Tax Burden for 7.8 Million Families

 
 
August 17, 2004

Fiscal Fact No. 14

A wave of political “tax fairness” rhetoric in recent months has swept aside reasonable assessments of the Bush tax cuts. Tax cut critics have argued that the cuts have only helped the wealthiest Americans. However, 7.8 million low and middle-income families had their entire income tax liabilities erased by the cuts.

The two provisions most responsible for removing these families from the tax rolls were the new 10 percent tax bracket and the doubling of the value of the child tax credit from $500 to $1,000.

Using the Tax Foundation’s Individual Tax Model and Matched IRS/Census Database, Foundation economists were able to compile a demographic profile of the 7.8 million families knocked off the tax roles because of the Bush tax cuts. Their results show that these families are overwhelmingly modest-income, married couples with children who work full-time and are younger than age 45. When all of the dependents of these households are counted, roughly 25.5 million Americans were taken off the tax rolls by the Bush tax cuts.

How the Bush Cuts Erase Tax Liabilities
Table 1 below illustrates the impact of the 2001 and 2003 Bush tax cuts on the income tax liability owed by a hypothetical family of four earning $40,000 per year (for simplicity figures are unadjusted for inflation). Under 2000 tax law, the couple would owe $2,158. But under 2004 tax law, they owe nothing—illustrating the large impact of the Bush extension of the child credit on reducing the tax liability of families with children to zero.

Table 1
Example of Erased Tax Liabilities from
the Bush Tax Cuts

Married Couple with Two Children

Tax Liability Under 2000 Tax Law

Tax Liability Under 2004 Tax Law

Adjusted Gross Income in 2004

$40,000

$40,000

Minus Standard Deduction

-$7,350

-$9,700

Minus Personal Exemption

-$11,600

-$12,400

Taxable Income

$21,050

$17,900

Gross Taxes Owed

$3,158

$1,970

Minus Child Credit

-$1,000

-$2,000

Taxes Owed

$2,158

$0

     

Source: Tax Foundation

Income
As Table 2 shows, more than 90 percent of the 7.8 million families knocked off the tax rolls by the Bush tax cuts earn less than $50,000 per year. Another 9.3 percent of these families earn between $50,000 and $100,000, while just 0.06 percent earn more than $100,000.

Table 2
90 Percent of Families Removed from Tax Rolls Earn Less than $50,000

Adjusted Gross Income

Percent of 7.8 Million Families in Each Income Group

$0 - $19,999

23.5%

$20,000 - $24,999

16.7%

$25,000 - $29,999

10.7%

$30,000 - $39,999

26.0%

$40,000 - $49,999

13.8%

$50,000 - $74,999

8.1%

$75,000 - $99,999

1.1%

$100,000 and Above

0.06%

Source: Tax Foundation Individual Tax Model

Age
The evidence of the child credit’s effectiveness at reducing family tax burdens is that the Americans knocked off the rolls by the tax cuts are overwhelmingly young and in the prime years for raising families with children. As Table 3 shows, nearly 38 percent of these families are younger than age 35, while nearly 75 percent are under age 45. Another 17 percent of these families are between the ages of 45 and 55, while the remaining 8.5 percent are above the age of 55.

Table 3
Zero-payers are Overwhelmingly Young Families

Age of Taxpayer

Percent of 7.8 Million Families in Each Income Group

24 and Under

12.0%

25 - 34

25.9%

35 - 44

36.5%

45 - 54

17.0%

55 and Older

8.5%

Source: Tax Foundation Individual Tax Model

Marital Status
Table 4 displays the breakdown of tax filing status for these families. Nearly 62 percent are married couples (filing jointly or separately), while just 13 percent are singles. Interestingly, more than 25 percent of these families are headed by a single parent filing as a “head of household.” Looking below the numbers, our model estimates that women are the major breadwinner in roughly 44 percent of these 7.8 million zero-paying families. Considering these figures, it would make sense that the majority of the families headed by a single parent are in fact single mothers with children.

Table 4
Majority of Families Removed from Tax Rolls Are Married Couples and Mothers with Children

Filing Status

Percent of 7.8 Million in Each Filing Status

Single

13.0%

Married Filing Jointly or Separately

61.6%

Head of household

25.4%

Widow(er) with dependent child (surviving spouse)

0.1%

Source: Tax Foundation Individual Tax Model

Work and Occupational Status
The families knocked off the tax rolls by the Bush tax cuts are overwhelmingly composed of full-time workers. Indeed, nearly 79 percent of these Americans had worked full-time during the past year, while less than 12 percent worked part-time.

While these workers are found across all sectors of the economy, we found them to be concentrated in manufacturing, construction and retail. Table 5 lists some of the major industries these workers are employed in.

Table 5
Zero-Paying Workers are Concentrated in Manufacturing, Construction and Retail

Industry

Percentage of 7.8 Million Families Working in Each Industry

Construction manufacturing

7.6%

Manufacturing-durable goods

9.4%

Manufacturing-nondurable goods

6.2%

Transportation

4.9%

Wholesale trade

3.8%

Retail trade

12.8%

Finance, insurance and real estate

4.7%

Business and repair

5.7%

Medical, except hospital

4.3%

Educational

5.5%

Public administration

4.2%

Source: Tax Foundation Individual Tax Model

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