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Tax Revenue and Distributional Effects of Lowering 10% Bracket to Zero for 2008

By: Gerald Prante, Patrick Fleenor

The 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. Foundation has estimated what the revenue impact of an income tax rebate of the 10% rate would be in 2008. Media reports suggest this may be one component of President Bush’s plan to stimulate the economy. Taxpayers would receive a rebate check, likely based on their 2006 tax returns. The 10% rate would be set to zero when taxpayers file returns for tax year 2008. The summary of our results:

  • Under a baseline assumption of no AMT patch (current law), reducing the 10% rate to zero would cost approximately $58 billion for calendar year 2008 (static score).
  • Under a baseline assumption of an AMT patch, reducing the 10% rate to zero would cost approximately $96 billion for calendar year 2008.
  • Reducing the 10% rate to zero would push about 11 million more returns into AMT for 2008 (under current law) and raises the price of an AMT patch for 2008 from $55 billion to $93 billion.
  • Approximately 29.6% of tax returns (representing 41.2 million of the nation’s projected 139 million tax returns in 2008) are scheduled to pay nothing in federal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es in 2008 and would therefore receive no savings by a mere reduction in the 10% rate.
  • Currently, 41.2 million returns pay nothing in federal individual income taxes in 2008, and reducing the 10% rate to zero for 2008 would increase this number to 62.9 million.
  • Due to the non-payers and because high-income individuals are more likely to be married, 21.2 percent of the tax savings from the reduction will go to those tax returns earning over $100,000, despite the fact that they make up only 13.8 percent of tax returns. (Assumes AMT patch baseline). However, ignoring the non-paying taxpayers, this reduction would make the tax code more progressive, because those making $60,000 receive greater savings as a percentage of their incomes as compared to those making $1 million.

Click here to read the full analysis. Click here for more Tax Foundation discussion of the stimulus proposals.