Fiscal Fact No. 117
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 Tax Foundation estimates assume all tax returns would benefit from the lower rate, including high-income returns and dependents. This may not ultimately be what comes out of Congress as some have speculated that the rebates would not apply to higher income individuals. Specifically, some media reports suggest that congressional Democrats are seeking a more modest tax rebate that would be capped at $110,000 for joint filers ($85,000 for singles), while other stimuli would be provided via direct spending programs. The Tax Foundation plans to provide fiscal and distributional estimates of other proposals as more information becomes available.
Because any reduction in ordinary marginal income 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. s will send more people into AMT, we analyze the proposed reduction under two baseline scenarios: Table 1 below shows the distributional effect (by a tax return’s AGI group) under a baseline of current law (no AMT patch for 2008) and Table 2 shows the distributional effect assuming an AMT patch for 2008.
Summary of 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. This does not include an additional 15-20 million “tax units” that do not file an income tax return.
- 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.
Table 1: Impact of Reducing 10% Tax Rate to Zero for 2008 (assuming no AMT patch)
|
Income Group (AGI) |
% of Returns with Positive Income Tax After Credits |
Average Income Tax After Credits |
Average Savings Per All Tax Returns |
Total Tax Savings for Income Group |
||
|
Before Cut |
After Cut |
Before Cut |
After Cut |
|||
|
All Tax Returns |
70.5% |
55.5% |
$8,345 |
$7,926 |
$419 |
$58,246 |
|
$1 – $4,999 |
2.9% |
0.0% |
$6 |
$1 |
$5 |
$46 |
|
$5,000 – $9,999 |
30.2% |
0.0% |
$44 |
$1 |
$43 |
$486 |
|
$10,000 – $14,999 |
49.3% |
1.9% |
$190 |
$4 |
$186 |
$1,963 |
|
$15,000 – $19,999 |
54.8% |
27.1% |
$415 |
$71 |
$344 |
$3,386 |
|
$20,000 – $24,999 |
62.2% |
41.2% |
$734 |
$313 |
$422 |
$4,057 |
|
$25,000 – $29,999 |
69.7% |
45.2% |
$1,112 |
$598 |
$514 |
$4,547 |
|
$30,000 – $39,999 |
78.2% |
59.9% |
$1,850 |
$1,173 |
$678 |
$9,893 |
|
$40,000 – $49,999 |
85.6% |
73.3% |
$2,845 |
$2,037 |
$808 |
$8,875 |
|
$50,000 – $74,999 |
94.3% |
88.5% |
$4,832 |
$3,979 |
$852 |
$17,106 |
|
$75,000 – $99,999 |
98.6% |
97.9% |
$8,250 |
$7,823 |
$427 |
$5,552 |
|
$100,000 – $199,999 |
99.8% |
99.7% |
$18,725 |
$18,623 |
$102 |
$1,482 |
|
$200,000 – $499,999 |
99.8% |
99.8% |
$59,914 |
$59,880 |
$33 |
$122 |
|
$500,000 – $999,999 |
99.8% |
99.8% |
$161,570 |
$161,031 |
$539 |
$341 |
|
$1 million and over |
99.7% |
99.7% |
$745,599 |
$744,568 |
$1,032 |
$390 |
Source: Tax Foundation Microsimulation Tax Calculator
Table 2: Impact of Reducing 10% Tax Rate to Zero for 2008 (assuming AMT patch)
|
Income Group (AGI) |
% of Returns with Positive Income Tax After Credits |
Average Income Tax After Credits |
Average Savings Per All Tax Returns |
Total Tax Savings for Income Group |
||
|
Before Cut |
After Cut |
Before Cut |
After Cut |
|||
|
All Tax Returns |
70.4% |
54.8% |
$7,949 |
$7,257 |
$692 |
$96,209 |
|
$1 – $4,999 |
2.9% |
0.0% |
$6 |
$1 |
$5 |
$46 |
|
$5,000 – $9,999 |
30.2% |
0.0% |
$44 |
$0 |
$43 |
$487 |
|
$10,000 – $14,999 |
49.3% |
1.8% |
$189 |
$3 |
$186 |
$1,963 |
|
$15,000 – $19,999 |
54.8% |
27.1% |
$415 |
$71 |
$344 |
$3,386 |
|
$20,000 – $24,999 |
62.2% |
41.2% |
$734 |
$312 |
$422 |
$4,058 |
|
$25,000 – $29,999 |
69.6% |
45.1% |
$1,111 |
$596 |
$514 |
$4,552 |
|
$30,000 – $39,999 |
78.2% |
59.7% |
$1,846 |
$1,157 |
$689 |
$10,056 |
|
$40,000 – $49,999 |
85.2% |
71.8% |
$2,822 |
$1,968 |
$855 |
$9,393 |
|
$50,000 – $74,999 |
93.9% |
85.6% |
$4,727 |
$3,578 |
$1,149 |
$23,059 |
|
$75,000 – $99,999 |
98.2% |
95.8% |
$7,630 |
$6,243 |
$1,387 |
$18,030 |
|
$100,000 – $199,999 |
99.7% |
99.5% |
$16,667 |
$15,330 |
$1,337 |
$19,409 |
|
$200,000 – $499,999 |
99.8% |
99.8% |
$55,858 |
$55,573 |
$285 |
$1,038 |
|
$500,000 – $999,999 |
99.8% |
99.8% |
$161,568 |
$161,028 |
$540 |
$342 |
|
$1 million and over |
99.7% |
99.7% |
$745,621 |
$744,589 |
$1,032 |
$390 |
Source: Tax Foundation Microsimulation Tax Calculator
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