Future Income Tax Cuts From the 2001 Tax Legislation

William G. Gale, Matthew Hall, Peter Orszag

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 back-loaded many of its provisions. For example, EGTRRA reduces the top income tax rate from 38.6 percent currently to 37.6 percent in 2004 and 35 percent in 2006.

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Held Harmless by Higher Income Tax Rates?

Held Harmless by Higher Income Tax Rates?Rachel M. Johnson, Eric Toder

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In 2010, 45 percent of tax returns will either remit no federal income tax or receive a net tax refund. But this figure overstates the share of taxpayers who would be unaffected by higher income tax rates. Raising all rates by 1 percent would hold only 34 percent of tax returns harmless; others would either pay higher taxes or receive smaller net rebates.

The proliferation of tax credits has raised the number of Americans who either remit no federal income tax or receive a net income tax refund. The most requested publication on the Tax Policy CenterWeb site reports that nearly half (47 percent) of all tax units face zero or negative tax liability for tax year 2009. The updated figure for tax year 2010, assuming the alternative minimum tax patch is extended, is 45 percent - primarily because some temporary tax provisions in the stimulus bill have expired. People pay no income tax for one of two reasons: either they have no taxable income (almost all the elderly with no tax liability) or they can claim enough credits to offset the taxes they would otherwise owe.

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Top Individual Income Tax Rates: How Does the U.S. Compare?

Jim Nunns

Discussions of the effect of taxes on international competitiveness usually focus on corporate income tax rates, but individual income tax rates may also affect a country’s (or state’s) ability to compete for workers.

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Distributional Effects of the Major Individual Income Tax Provisions of H.R. 3970

Distributional Effects of the Major Individual Income Tax Provisions of H.R. 3970Greg Leiserson, Jeff Rohaly

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On October 25, 2007, Ways and Means Committee Chairman Charles Rangel (D-NY) unveiled H.R. 3970, The Tax Reduction and Reform Act of 2007, sweeping tax reform legislation that would provide for a revenue-neutral repeal of the individual alternative minimum tax (AMT). This paper describes the proposal and provides distribution tables that analyze the impact of the major individual income tax provisions in the bill.

On October 25, 2007, Ways and Means Committee Chairman Charles Rangel (D, NY) unveiled sweeping tax reform legislation that would provide for a revenue-neutral repeal of the individual alternative minimum tax (AMT). The bill would also increase the standard deduction, expand the earned income tax credit (EITC) for childless individuals, and increase the availability of the refundable child tax credit. These changes are projected to reduce individual income tax revenues by about $882 billion over ten years.

The cost of these cuts would be largely offset by three provisions designed to raise about $867 billion over that same period: a surtax on high-income taxpayers; reinstating the limitation on itemized deductions and personal exemptions; and further limiting the deductibility of miscellaneous itemized deductions such as employee business expenses.

All of the above provisions would be effective beginning in 2008. For 2007, the bill extends, and indexes for inflation, the AMT relief that was in place for 2006. It also extends for one year certain expiring provisions such as the R&D credit, the deduction for state and local general sales taxes, and the above-the-line deduction for qualified tuition and related expenses.

Our distribution tables include the impact of all the broad-based individual income tax provisions of the bill described above. The legislation also makes several other more narrowly targeted individual income tax changes, including the taxation of carried interest as ordinary income. It also makes changes to corporate taxes including a reduction in the top corporate marginal tax rate from 35 percent to 30.5 percent, repeal of the domestic production activities deduction, and repeal of the last-in, first-out (LIFO) accounting method.

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By 2008, the AMT Will Cost More to Repeal Than the Regular Income Tax

William G. Gale, Leonard E. Burman, Jeff Rohaly

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

© TAX ANALYSTS. Reprinted with permission.

This report is available in its entirety in the Portable Document Format (PDF).

Taxpayers pay alternative minimum tax (AMT) if their AMT liability exceeds their regular income tax. Originally targeted at a few high-income households who paid no federal income tax, this class tax is about to become a mass tax. The projected expansion occurs because the AMT is not indexed for inflation and because last year's tax cut steadily pares regular income tax obligations without providing significant and sustained AMT relief. The increases are troubling because the AMT is notoriously complex and has dubious effects on equity and efficiency.

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Income Tax Statistics for Sample Families, 2003

Leonard E. Burman, Mohammed Adeel Saleem

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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We are often asked about how much income tax a family would pay in a given situation. Table 1 shows total taxes that would be owed as well as the average tax rate for single individuals and families at different income levels.1 Table 2 shows the statutory income tax rate (the tax bracket) and the effective marginal tax rate for the same families. The tables assume a very simplified scenario: The tax filers are nonelderly, not blind, and all children are potentially eligible for dependency exemptions, the earned income tax credit, and the child credit (subject to income limits); the filer claims no other credits; income is comprised of earnings, capital gains, and dividends, where the fraction of income in capital gains and dividends reflects the average for each income group; itemized deductions equal 19 percent of income and the taxpayer itemizes if itemized deductions exceed the standard deduction; the filer has no other deductions or income. (See notes to tables for detailed list of assumptions.)

Table 1 shows that income tax liability can be negative for many families with children because of the refundable earned income tax credit and the child tax credit. So-called "refundable tax credits" are paid out as refunds even if the tax filer has no income tax liability. Both of these credits are designed to reward work and assist families with children. Up to a point, families can get larger credits the more they earn. (There is also a small refundable earned income tax credit for single people, but it applies to lower income levels than are shown in the table.)

At higher income levels, income tax liability trends upward because tax rates are progressive with income. Average tax liability is always significantly lower than the top statutory tax bracket of 35 percent — even for taxpayers with $1 million of income. Their average tax rate is about 24 percent. For low- and moderate-income families, having children reduces average tax rates because of dependent exemptions, child tax credits (for all but the lowest-income families), and, for low-income families, the earned income tax credit. At income s above $110,000 ($75,000 for heads of household and singles), the child tax credit starts to phase out; it is phased out entirely at an income of $129,001 for a family with one child, $149,001 for a family with two children, and so on. In addition, personal exemptions are phased out for high-income families, and are not available at all for families subject to the alternative minimum tax. As a result, high-income families can owe the same tax with six children as they would with none.

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