David R. Henderson  

Was the 2001 Tax Cut Regressive?

Hal Varian... Various...

In a post today, Paul Krugman approvingly cites Jonathan Chait's claim that the Bush tax cut of 2001 was regressive. Chait wrote:

When George W. Bush proposed a huge, regressive tax cut in 2001, Snowe, sitting at the heart of a decisive block of centrists, used her leverage to support the passage of a modestly smaller and less regressive version.

That's false. Here's what I wrote recently about the 2001 tax cut:
In fact, though, for all the Bush tax cuts (in 2001, 2002, and 2003) combined, the percentage reduction in taxes for upper-income households was less than the percentage reduction for lower-income households. The second-lowest quintile, for example, had its taxes cut by 17.6 percent whereas the highest quintile had its taxes cut by about 11 percent. I don't have data for the 2001 tax cut alone, which is what [Alexander] Field's claim is about. But because the 2002 and 2003 tax cuts were aimed disproportionately at high-income people, it follows that the 2001 cut alone had to have been even more tilted to lower-income people than the above percentages suggest.

I explained further:
Why do so many people, including Field, think differently about this important issue? My guess is that it's because the media emphasized the absolute size of the tax cuts that higher-income people got. In a progressive tax system, with higher marginal tax rates for higher incomes, a given percentage tax cut will cut taxes of the people who pay a lot in taxes much more than it cuts taxes for people who pay only a little.

You might wonder why I can't cite a government document showing distribution tables for the 2001 tax cut. Bruce Bartlett explains:
Unfortunately, the long, drawn-out conclusion to the 2000 election, which wasn't resolved until the Supreme Court decided Bush v. Gore on December 12, deprived Bush of a third of his transition period. His advisers didn't have formal access to Treasury until the transition began, which prevented them from getting revenue estimates and distribution tables on possible alternate policies.

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COMMENTS (16 to date)
Henry writes:

Steven Landsburg argued that the Bush tax cuts would in fact likely result in higher absolute levels of tax for the rich, because the increasing deficits would need to eventually be made up with by tax hikes, tax hikes that out of political necessity would need to fall at least proportionally on the rich.

Mark Little writes:

Yes, an important point.

What should be disturbing to all of us, ranging from Krugman to you and me, is that the Bush increase in the progressivity of the income tax has left half of the American citizenry paying no income tax at all. Any true supporter of democracy should see this as a threat to his core values; Krugman really should rethink where he stands here.

(On another note, Chait's quip "If a Gingrich administration proposed spending a trillion dollars to erect a 100-foot-tall solid-gold Winston Churchill statue on Mars, Snowe would no doubt decide, after careful deliberation, that the wise course was to trim the height down to 90 feet and perhaps use a cheaper bronze alloy in the base." is a criticism of establishment 'moderate' thought that resonates at all ends of the political spectrum. I wonder if Krugman realizes that in this his liberal conscience is at one with the conservative conscience.)

Daniel Kuehn writes:

If both Field and Krugman are on the same page about the 2001 cut alone, perhaps they're right on that and you're right on all three?

Your point about amount paid vs. rate is good - I think a lot of people make this mistake. Veronique de Rugy was recently caught making a similar mistake to argue the opposite point.

Krugman always argues that X% of the tax cuts went to the wealthiest 1% - and obviously the number is huge, while de Rugy argues that Y% of all taxes paid come from the wealthiest 1% (also huge). I don't see much of a difference between the two's approach. As you say it's not really the right way to go about thinking about this stuff.

dave smith writes:

Krugman is wrong. Anyone who glances at the Bush tax cut provisions will quickly discover that the biggest winners are middle class people with kids. The increase in the child tax credit and the new 10% bracket gave a family of 4 making 60,000/year an 1,800 dollar tax cut and nearly took them off the tax roles completely.

Seth writes:

DK - The difference is whether there is intention to make a deceptive argument.

Does Krugman acknowledge that while the absolute tax cuts went to the wealthy, a) that is an artifact of the math, b) tax rates would still be very progressive after the cuts went into place, c) and that the wealthy would still shoulder a large percentage of the burden to fund government?

Maybe he did. I don't know. I don't recall, however, hearing the "tax cuts are for the rich" crowd wanting being clear on these points since they only weakened their position.

de Rugy could acknowledge these same points and they would only strengthen her argument. The wealthy do pay a large percentage of the total taxes collected and they also pay a higher tax rate.

Do you think de Rugy ignored these points to be deceptive? If so, what was she trying to hide?

Daniel Kuehn writes:

Seth -
I don't think either de Rugy or Krugman were trying to be deceptive. They both have always struck me as honest players with a dedication to good policymaking and solid economic science.

I think the point is more that it's easy to embrace less-than-compelling evidence if its in support of an argument you find compelling for other reasons. That's not a character flaw - it's just a fact of life. It's also why the feedback loop provide by the economics blogosphere is so important.

Charlie writes:

David, what source are you citing? Why should it matter that the transition was short to get accurate numbers to study the tax cut? Bruce Bartlett in his article incredibly critical of the Bush tax cut is saying the tax cut might not of been so ill-conceived if the administration had a longer transition period. Finishing your quote, "One of the casualties may have been a rethinking of the tax cut. In the year since it was passed, economic conditions had changed drastically...Maybe if Bush's economic advisers had more time to work on the tax plan during the transition they would have come up with something better."

This Piketty-Saez study shows from 2001 to 2004, rates on the top 1 percent fell 20 percent, while the rates on the bottom 21% fell 8%. Taxes on the decile fell 15%.

As for your statement about the second lowest quintile versus the top quintile. P-S says that the 20 - 40 groups taxes fell 12% and the top quintile fell 15%.

Are you sure you want to call this progressive?

mikedc writes:

What should be disturbing to all of us, ranging from Krugman to you and me, is that the Bush increase in the progressivity of the income tax has left half of the American citizenry paying no income tax at all. Any true supporter of democracy should see this as a threat to his core values; Krugman really should rethink where he stands here.

I hear people say this a lot, but why?

The income tax is only one particular tax of many. Folks who don't pay it generally pay payroll, sales and excise taxes. And for that matter, we had a relatively democratic society before we ever had an income tax.

I'd go so far as to say we'd be in even better shape if we got rid of it altogether

Scott Gustafson writes:

The overall effect of the Bush tax cuts was to skew tax payments to the higher income levels. As of 2007, the top 20% paid 68.9% of all federal taxes. That's up from 66.6% in 2000.

For Federal Income taxes, tax payments from the top 20% increased from 81.2% in 2000 to 86.0% in 2007.

Mark Brady writes:

If we define the extent to which a tax (or tax system) is progressive in terms of the entire economy (in other words, if we calculate the average rate of tax paid by each income group across every level of household income, and not just with reference to one household's income increasing), our answer would depend not only on when higher marginal tax rates kick in but also on the relative sizes of different income groups.

Thus if the number of households facing the highest tax bracket were to rise enough, it would be possible for a cut in the top marginal tax rate to be associated with a rise in the average tax rate.

And if the number of households facing the highest tax bracket were to fall enough, it would be possible for a rise in the top marginal tax rate to be associated with a fall in the average tax rate.

I think that's correct.

Charlie writes:

Well, my comment is stuck in moderation land. One of the perils of citing sources. For the Cliffs, David is wrong according to the Piketty Saez data in "How Progressive is the US Federal Tax System: A Historical Perspective" that was published in the JEP.

My impending comment will give the details, but the paper is available on google scholar for those interested.

It's unclear to me what source DH was citing.

David R. Henderson writes:

Thanks for the cite. Here’s the paper Charlie is referring to:

Check out Table 2. It makes my point. Compare 2000 (before the Bush tax cuts) with 2004 (after the Bush cuts.) Notice that the % reduction in tax rates was higher for lower-income people than for higher-income people.

Charlie writes:

The top quintile got a larger reduction than the bottom quintile (if you look at table A.3). The group that did worst was the 60 - 80 quintile. The group that killed was the second quintile (the one DH chose).

The group that did best in the top quintile was the top one percentile, specifically, the 99th to 99.5th percentile, oddly enough.

Ken B writes:

Charlie & maybe others: Shouldn't we compare quintiles to quintiles, not quintiles to per centiles? Otherwise unless a tax change is uniformly progressive or uniformly regressive you will be able to make comparisons showing whatever you want. Every student in the school got a higher mark after the policy change except Elmore, who did worse. Do I conclude there was no improvement by comparing a tranche of 50 students to the Elmore tranche?

Charlie writes:

"Shouldn't we compare quintiles to quintiles, not quintiles to per centiles?"

If you look right above your comment, then you'll see the quintile analysis. The top quintile did better than the bottom quintile, but the second to the bottom did the best.

Then I wanted to know more about what happened within the quintiles. So what if you don't care how Elmore did? Other people do.

Charlie writes:

I've been thinking about it, and I'm not sure we are using the right definition of progressive/regressive.

I think progressive/regressive distinction is of the tax rate as a line and when that line gets steeper it is a progressive move and when it gets flatter it is a regressive move. But an equal tax cut where everyone's rate is 10% lower, will actually flatten out that line. In order for a tax cut to be progressive, it should at least maintain the original progressivity of the tax code. Thus, lower groups would have to get larger percentage reduction proportional to the starting progressivity of taxes.

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