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 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 $600 to $1,000. For a family with two children (earning less than $110,000 per year), this provision alone will mean 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 of $800.
- Reducing the marriage penaltyA 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. by (1) setting the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative. 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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