Lion’s Share of Tax Cuts Will Go to Highest Earners

Monday, December 20, 2010 at 10:43 PM by

Most of the benefit from the tax provisions in the new tax deal signed by President Obama last week will go to the highest earners. The package extends the Bush tax cuts for all income levels for another two years, reduces the number of people affected by the estate tax, and extends the duration of several tax credits aimed at helping low- and moderate-income families.

The Tax Policy Center has done a distributional analysis of how the effects of the tax package will play out, and shows that the top 20 percent of earners – those earning more than $105,000 – will garner 57 percent of the benefit from the tax package. (The Tax Policy Center’s analysis focuses on changes in tax policy, such as the extension of the Bush tax cuts, expansion of the Earned Income Tax Credit, and the payroll tax holiday, and does not include other provisions such as the continuation of federal unemployment benefits.)

The bottom 80 of earners will receive the other 43 percent of the tax benefit from the package, as shown in the chart. The top one percent of earners – those earning more than $565,000 – will receive 19 percent of the total tax benefit, with an average cut of nearly $71,000. The Tax Policy Center has additional distributional information on their website.

High earners would have benefitted even from Obama’s initial proposal to extend the tax cuts only for the first $200,000 of income ($250,000 for couples). The Center on Budget and Policy Priorities (CBPP) explains why:

“The 2001 tax law’s reductions in the lower tax brackets benefit not only people whose incomes fall within the lower brackets but also those whose incomes exceed those brackets. In fact, high-income people actually receive much larger benefits in dollar terms from the so-called “middle-class tax cuts” than middle-class people do.”

The income tax is more like a staircase than an elevator, says CBPP. High earners pay higher income tax rates, but they don’t go directly to the top rate (or floor, in this analogy). Instead, they take the “stairs,” paying tax on the first increment of taxable income at one rate, then paying tax on the next increment at a different rate.

According to CBPP, if only the middle class tax cuts had been enacted, households with incomes above $200,000 would have averaged $6,300 in tax cuts, compared to $1,132 for household with incomes between $50,000 and $75,000.

The bottom line is that high earners accrue significant benefit from the so-called middle-class tax cuts. If Obama’s initial proposal had passed, top earners would have still gotten tax cuts on their first $200,000 (or $250,000) of income, and paid the pre-2001 rates on the remaining income.

Tamarine Cornelius

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