Did tax policy contribute to rising inequality over the past four decades? The tax changes most often cited in the fairness debate are the Bush tax cuts introduced in 2001, 2002, and 2003 and the Reagan tax cuts introduced in 1981.
An analysis of the Bush tax cuts by the Tax Foundation combines the three Bush tax cuts and assumes they occurred in 2003. Table 19.1 gives the share of total income tax liability for each quintile before and after the Bush tax cuts. It also gives the share of the Bush tax cuts received by each quintile.
|
Quintile |
Share of income tax liability before tax cuts |
Share of income tax liability after tax cuts |
Share of total tax relief |
|
First quintile |
0.5% |
0.3% |
1.2% |
|
Second quintile |
2.3% |
1.9% |
4.2% |
|
Third quintile |
5.9% |
5.2% |
9.4% |
|
Fourth quintile |
12.6% |
11.6% |
17.5% |
|
Top quintile |
78.7% |
81.0% |
67.7% |
The share of total tax relief received by the first four quintiles was modest, while those in the top quintile received more than two-thirds of the total benefits of the three tax cuts. However, the share of income taxes paid by each of the first four quintiles fell as a result of the tax cuts, while the share paid by the top quintile rose.
Source: William Ahean, “Comparing the Kennedy, Reagan, and Bush Tax Cuts,” Tax Foundation Fiscal Facts, August 24, 2004.
Tax cuts under George W. Bush were widely criticized as being tilted unfairly toward the rich. And certainly, Table 19.1 shows that the share of total tax relief received by the first four quintiles was modest, while those in the top quintile garnered more than two-thirds of the total benefits of the three tax cuts. Looking at the second and third columns of the table, however, gives a different perspective. The share of income taxes paid by each of the first four quintiles fell as a result of the tax cuts, while the share paid by the top quintile rose. Further, we see that each of the first four quintiles paid a very small share of income taxes before and after the tax cuts, while those in the top quintile ended up shouldering more than 80% of the total income tax burden. We saw in Figure 19.1 that those in the top quintile received just over half of total income. After the Bush tax cuts, they paid 81% of income taxes. On that basis, one might conclude that the Bush tax cuts contributed to equalizing income. Others are quick to point out that those same tax cuts were accompanied by reductions in expenditures for some social service programs designed to help lower income families. Still others point out that the tax cuts contributed to an increase in the federal deficit and, therefore, are likely to have distributional effects over many years and across several generations. Whether these changes increased or decreased fairness in the society is ultimately a normative question.
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