Fiscal Fact No. 9
The creation of the 10 percent tax bracket in 2001 assured a 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. cut to every American who pays income taxes. Of all the changes made to tax rates, brackets, deductions and credits during this presidential term, none has been as large in dollar terms or has benefited as many taxpayers as the new 10 percent rate. Its size and importance can be measured two ways: How big a fraction of the total tax cut is it? And how many taxpayers benefit?
The two big tax cuts in 2001 and 2003 together are estimated to have created approximately $1.6 trillion in tax savings over a ten-year period. Of that total, the 10 percent rate accounts for well over a quarter of the savings, or $421 billion. Also, it benefits far more taxpayers than any other provision, with 70 million tax returns showing a saving each year, the vast majority of whom are low- and middle-income people. And even the 70 million figure understates the breadth of the benefits because those are tax returns. Behind those 70 million returns are far more people approximately 149 million.
Before 2001, the first dollar of taxable income for every taxpayer was taxed at 15 percent. When the new rate was made law, it applied the new 10 percent rate to the first $6,000 of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. for singles, and to the first $12,000 for couples. Above those amounts, the 15 percent rate applied. After several years, in 2008, the 10 percent bracket was scheduled to stretch up to $7,000 for singles and $14,000 for couples.
In 2003, lawmakers thought better of the long delay and accelerated the scheduled increase in the bracket ceiling so that the $7,000 and $14,000 thresholds went into effect right away, in 2003. For 2004, those amounts are adjusted for inflation to approximately $7,150 and $14,300. However, this more generous approach to the 10 percent bracket was only a two-year, temporary measure that expires after 2004.
Unless Congress acts, these thresholds will revert to their 2001 levels at the end of this year: $6,000 and $12,000. That would mean higher taxes on 70 million tax returns, representing 149 million individuals. For most couples, the tax hike from 2004 to 2005 would be $115, and for most singles, it will be $67.50 (see Table 1). The reason the average tax hike is a larger dollar amount in the higher income ranges is that a much greater percentage of the tax returns in those brackets are filed by married couples.
Using the Tax Foundation’s Individual Tax Model and Matched IRS/Census Database, Foundation economists were able to build a basic demographic profile of the Americans who currently benefit from the 10 percent bracket. Most earn between $20,000 and $75,000, are married, and are between the ages of 25 and 54.
Table 2 below shows that the benefits of the higher 10 percent bracket levels overwhelmingly flow to lower and middle-income earners. Some 87 percent of these taxpayers earn less than $100,000 per year.
What is their Age and Marital Profile?
Tables 3 and 4 show that most beneficiaries of the higher 10 percent bracket levels are between the ages of 25 and 54, and most are married.
| Table 1. How Much Would Lowering the Top of the Current 10 Percent Bracket Raise Taxes for People In Different Income Ranges? | |||
| Income Range | Average Current Income Tax Liability | Average Tax Increase | Percentage Increase in Tax Burden |
| $10,000 to $14,999 | $6 | $31 | 535% |
| $15,000 to $19,999 | $168 | $51 | 30% |
| $20,000 to $24,999 | $592 | $57 | 10% |
| $25,000 to $29,999 | $954 | $57 | 6% |
| $30,000 to $39,999 | $1,525 | $75 | 5% |
| $40,000 to $49,999 | $2,466 | $90 | 4% |
| $50,000 to $74,999 | $4,645 | $102 | 2% |
| $75,000 to $99,9999 | $8,274 | $108 | 1% |
| $100,000 to $199,999 | $17,585 | $109 | 1% |
| $200,000 to $499,999 | $58,572 | $108 | 0.20% |
| $500,000 to $999,999 | $179,423 | $109 | 0.10% |
| $1,000,000 and over | $775,571 | $108 | 0.01% |
| Source: Tax Foundation Individual Tax Model |
| Table 2. How Much Do the Beneficiaries of the Wider 10 Percent Bracket Earn? | |
| Income | Percentage of the 70 Million Beneficiaries Who Fall Into Each Income Bracket |
| $10,000 to $19,999 | 9% |
| $20,000 to $29,999 | 16% |
| $30,000 to $39,999 | 14% |
| $40,000 to $49,999 | 12% |
| $50,000 to $74,999 | 24% |
| $75,000 to $99,9999 | 11% |
| $100,000 to $199,999 | 10% |
| $200,000 to $499,999 | 2% |
| $500,000 to $999,999 | 0.50% |
| $1,000,000 and over | 0.30% |
| Source: Tax Foundation Individual Tax Model |
| Table 3. How Old Are the Beneficiaries of the Wider 10 Percent Bracket? | |
| Age Range | Percentage of the 70 Million Beneficiaries Who Fall Into Each Age Range |
| 18 to 24 | 7.28% |
| 25 to 34 | 20.16% |
| 35 to 44 | 24.00% |
| 45 to 54 | 24.44% |
| 55 to 64 | 12.54% |
| 65 to 74 | 7.03% |
| 75 and over | 4.32% |
| Source: Tax Foundation Individual Tax Model |
| Table 4. What Is the Marital Status of the Beneficiaries of the Wider 10 Percent Bracket? | |
| Marital Status | Percentage of the 70 Million Beneficiaries Who Are Married/Single |
| Single | 44% |
| Married | 56% |
| Source: Tax Foundation Individual Tax Model |