Were the Bush tax cuts worse for progressivity or for revenues?

November 2, 2011

The Bush tax cuts of the early 2000s reduced the progressivity of federal taxes, but not that much. The chart below shows the effective federal tax rate for each quintile of households and for the top 1% in the business-cycle peak years of 2000 and 2007. The tax rate dropped by a similar amount for each quintile, and only slightly more for the top 1%. (For more discussion and analysis, see pages 24-31 of this CBO report.)

What should we make of this? On the one hand, it’s good that there was little reduction in progressivity. The progressivity of federal taxes helps to offset the regressivity of state and local sales taxes.

On the other hand, there was a compelling case in the early 2000s (and still today) for increasing the progressivity of federal taxes. One of the chief rationales for progressive taxation is that those with high income can afford to contribute a larger share of that income. In the 1980s and 1990s, the top 1% of Americans enjoyed whopping income gains. Between 1979 and 2000,  the average (inflation-adjusted) income of households in the top 1% jumped from $350,000 to $1 million. For households in the bottom 20%, average income barely budged; it was $15,300 in 1979 and $16,500 in 2000. Given these developments, it would have been sensible to increase the effective tax rate a bit for those at the top and perhaps reduce it a little for those at the bottom. President Bush and the Congress instead chose to reduce rates for everyone.

The chief harm inflicted by the Bush tax cuts wasn’t to progressivity. It was to government revenues. The average effective federal tax rate for all households dropped from 23% in 2000 to 20.4% in 2007. Judging from the CBO’s data on income, that two-and-a-half percentage point decline subtracted roughly $300 billion from federal tax revenues in 2007. Proponents of the tax cuts hoped the economy would grow faster, mitigating the revenue loss caused by the lower rates, but that didn’t happen.

$300 billion a year wouldn’t address all of our revenue needs, but it could do a lot of good.

3 Responses to “Were the Bush tax cuts worse for progressivity or for revenues?”

  1. joshmccabe Says:

    To be fair, it could also do a lot of harm. It might go to social welfare programs but it also might go to funding wars (both foreign and the domestic sort) or subsidizing big business.

  2. gordon Says:

    According to a 2009 press release from Citizens for Tax Justice, “The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for
    the remaining 99 percent of Americans (29.4 percent).”

    http://www.ctj.org/pdf/taxday2009.pdf

    So on that analysis (top one percent versus the rest), the US already has flat taxes.

  3. Fred Says:

    Why is the solution to artificially raise the bottom 20% when the reality is the bottom 20% exists for a reason – perhaps the analysis should take into consideration the very negative impact these types of interventions have on the other 80%? As an example the various changes to the CRA in the early 90s directly and indirectly created the foundation for the runaway structured finance market. Also, has anyone here actually looked at the historical Gini Coefficient for the US over the last 40 years? Perhaps the solution is to simply outlaw poverty and convert foodstamps & welfare into a national work program. That’ll provide incentive to move up the ladder…..


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