January 7, 2003

How the Bush Tax Cuts Affect Families with Children at Different Income Levels

Scott Hodge

Scott Hodge

Fiscal Fact No. 2

Today, President Bush outlined his economic growth plan which would accelerate all of the phased-in individual tax changes enacted in 2001. These include:

  • Raising the child tax credit from $600 to $1,000. For a family with two children (earning less than $110,000 per year), this provision alone will mean a tax cut of $800.
  • Reducing the marriage penalty by (1) setting the standard deduction at 2 times the single amount for married couples filing jointly (this increases the standard deduction from $7,950 to $9,500 for couples), and (2) setting the top 15% bracket threshold at 2 times the single amount for couples (this increases the top amount in the 15% bracket from $47,450 to $56,800).
  • Expanding the income threshold of the new 10% rate from $12,000 for couples to $14,000.
  • Accelerating all of the marginal rate cuts to January 1, 2003 (the new rates are: 10%, 15%, 25%, 28%, 33%, 35%).

These changes affect families in different ways at different income levels. For example, raising the child credit amount has the biggest impact on families earning below $110,000 per year – the phase out level – while the marginal rate cuts are more beneficial to families with higher incomes. The marriage penalty changes are most beneficial for families earning up to about $75,000 per year.

For the median family with two children, earning $67,000 per year, the Bush plan would mean a tax cut of $1,133 this year, erasing 22% of their current tax liability. A family earning $40,000 will see 96% of their tax liability erased, while a family earning $200,000 will see just 9% of their tax liability erased.

The calculations below assume a working couple with two children. We also assume the standard deduction for families earning $40,000 to $75,000. For families earning $100,000 and above, we assume itemized deductions worth 20% of AGI.

Families earning below $35,000 are not included because the tax cuts enacted in 2001 effectively eliminated their entire income tax liability.

 

Current Law

Bush Plan

    

Adjusted Gross Income

Taxable Income (After Deductions and Exemptions)

Tax Liability

Taxable Income (After Deductions and Exemptions)

Tax Liability

Tax Cut in Dollars

Tax Cut as a Percentage of Liability

$40,000

$19,850

$1,178

$18,300

$45

$1,133

96%

$50,000

$29,850

$2,678

$28,300

$1,545

$1,133

42%

$67,000

$46,850

$5,228

$45,300

$4,095

$1,133

22%

$75,000

$54,850

$7,316

$53,300

$5,295

$2,021

28%

$100,000

$67,800

$10,812

$67,800

$8,570

$2,242

21%

$150,000

$108,046

$22,878

$108,046

$20,632

$2,247

10%

$175,000

$128,796

$28,905

$128,796

$26,243

$2,662

9%

$200,000

$149,546

$35,130

$149,546

$32,053

$3,077

9%

Assumptions:
Wage and Salary income only for a working couple with two children.
Standard deduction for families earning $40,000 — $75,000.
For families earning $100,000+ assume itemized deductions worth 20% of AGI.

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About the Author

Scott Hodge

President Emeritus & Senior Policy Advisor

Scott Hodge is President Emeritus & Senior Policy Advisor and is recognized as one of the leading experts on tax policy and the federal budget. Read more.

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A 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.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

Itemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. 

A marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples.

Taxable 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.