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Have the Bush Tax Cuts Made the Federal Tax Code More or Less Progressive?

4 min readBy: Gerald Prante

Have the Bush taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts passed in 2001 and 2003 (and phased-in over so many years) made the federal tax code more or less progressive? It’s an interesting question, yet one that can actually be difficult to answer. This week, the left-of-center Center on Budget and Policy Priorities (CBPP) released a report showing that because after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. shares have risen for the top income groups as a result of the tax cuts (ceteris paribus under static scoring), the tax cuts have thereby made the tax system less progressive (or more regressive).

The analysis is correct to point out that this is a fairly reasonable (and accepted) way to measure changes in tax progressivity. But one of the problems with using this method is that almost any across-the-board tax cut is going to lower progressivity. For example, suppose government became more efficient all of a sudden due to some technological progress in bureaucracy. If government cut taxes in response across-the-board in a world where the current system was progressive, it would likely show that the tax system declined in progressivity as a result of the tax cut. This could be the case even if the redistribution element of the tax system actually grew (i.e. relative to a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. ). I’ll leave a math-heavy illustration for a future blog post, but if you’re curious, e-mail me.

Now granted the Bush tax cuts have largely been deficit financed with some possible cuts in government being caused by their imposition (see below). But this deficit financing brings up two other issues when discussing tax progressivity — lifetime progressivity and fiscal incidence. The true change in progressivity as a result of the Bush tax cuts would first have to take into account any foregone spending that has resulted from the tax cuts. In other words, using the terminology of many supporters of the tax cuts and lower government spending — have the tax cuts successfully served to “starve the beast” either today or in the future? If the answer is yes to cutting spending today and to some degree for the future, then the tax cuts are likely to be more regressive (ceteris paribus) than a mere look at the tax code because discretionary spending tends to disproprtionately flow to those in lower-income groups, especially as a percentage of their incomes.

But assume that Niskanen is right and starve the beast doesn’t work, thereby implying that the entire cost of the Bush tax cuts will be deficit financed. What does that mean for progressivity? Actually, it could mean that the tax cuts have not lowered progressivity as much as its opponents claim, depending on what incidence theory of deficits one believes. For example, if today’s generation cares nothing about its offspring and thereby seeks to raise taxes on future generations to finance tax cuts today, then the Bush tax cuts could actually increase lifetime progressivity given that future generations tend to be wealthier than previous generations due largely to continued technological progress. But you may say that such an analysis is inappropriate since it’s unfair for future generations to have to pay for tax cuts for today’s generation while today’s generation enjoys higher levels of government spending (assuming the government spending today doesn’t benefit the future generations). But such an argument is essentially just an endorsement of the benefit principle of taxation instead of ability to pay. In other words, one could extend such a benefit principle time-series argument to endorsing the benefit principle in any given period, thereby making the entire discussion of progressivity (and ability to pay) relatively moot. (That is unless one can justify tax progressivity on benefit principle grounds such as the rich benefiting from redistributive tax policies if there is some “public good”/free-rider problem at work.)

On the other hand, if one endorses the Ricardian equivalence view of deficit-financing (whereby current generations care about their future offspring), and assuming that the Bush tax cuts have not reduced government spending, then the Bush tax cuts may not have changed progressivity at all, assuming that the current tax cut recipients expect post-tax cut law to reflect pre-Bush tax cut law.

In summary, when one asks the question of whether the tax code has been made more or less progressive as a result of the Bush tax cuts, questions of the incidence of the ramifications of those tax cuts (i.e. deficits and/or government spending cuts) and the generational consequences should also be kept in mind.