Fiscal Fact No. 14
A wave of political “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. 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 bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. and the doubling of the value of the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. 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 inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
). 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 |
||
|
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 |
|
|
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 |
|
|
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 |
|
|
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 |
|
|
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 |