October 31, 2002 | WebMemo on Taxes
Repeal of the Bush 2001 tax plan in 2003 would increase taxes or reduce refunds for filers in all income classes in 2004. (See Table 1.) Overall, the rate of increase in income taxes after refundable credits would be greatest for those with incomes between $10,000 and $30,000. Many tax filers with incomes less than $15,000 would notice the tax change as a reduction in their refundable tax credits. Taxpayers with incomes over $500,000 would have the smallest percentage increase.
All tax filers, including those with incomes under $10,000, would lose the benefit of the new 10 percent tax bracket. This new bracket lowers the tax rate on the first $6,000 of income for single filers and the first $12,000 of income for married couples filing jointly. The new bracket is a major source of tax relief for tax filers with incomes less than $100,000.
Families with incomes between $10,000 and $30,000 would also lose the benefits provided by changes to the child tax credit. Repealing the 2001 tax cut would reduce the value of the child credit by over 15 percent in 2004. In addition, many taxpayers who pay little if any tax would no longer qualify for the refundable child credit. Prior to the Bush tax plan, the credit was refundable only for families with three or more qualifying children.
Repealing the tax rate reductions, which are the source of important economic incentives, would be particularly noticeable for taxpayers with incomes over $50,000.
Ralph A. Rectoris a Research Fellow in The Heritage Foundation's Center for Data Analysis, where he also serves as Project Manager.
Table 1 - The Effect on Taxpayers in 2004 if the Bush Tax Plan is Repealed in 2003
|Adjusted Gross Income (AGI) Class ($2002)||Percent of Income Tax Returns||Percent Increase in Average Tax after Refundable Credits|
|AGI of 1-10,000||18.5%||8.1%|
|AGI of 10,000 to 20,000||16.5%||74.2%|
|AGI of 20,000 to 30,000||13.5%||44.9%|
|AGI of 30,000 to 50,000||18.5%||15.1%|
|AGI of 50,000 to 10,000||22.2%||10.1%|
|AGI of 100,000 to 500,000||9.4%||6.5%|
|AGI of > 500,000||0.5%||4.4%|
NOTE: The Percentage Increase in Average Tax in
Table 1 refers to a change in the Federal personal income tax after
refundable credits and includes an inflation adjustment. Average
increases for income classes below $20,000 reflect lower refundable
credits. Taxpayers with AGI less than zero are included in the
total. The averages are based on projections of the total number of
tax returns filed. The effective date for the tax change is assumed
to be January 1, 2004. Tax changes include estimates for the child
credit, individual marginal rates, the 10 percent bracket,
limitation of itemized deductions, the personal exemption phaseout,
the standard deduction, 15 percent bracket, the Earned Income
Credit and the Alternative Minimum Tax.
Calculations in the table were made using The Heritage Foundation's Center for Data Analysis microsimulation tax model. This model estimates the change in federal taxes for a representative sample of federal income tax filers using data from the public use version of the 1995 Tax Model File produced by the Statistics of Income (SOI) Division of the Internal Revenue Service. Data from the SOI file have been supplemented with addition information from the March 1996 Current Population Survey (CPS) produced by the Bureau of the Census. The March 1996 CPS contains family income information for 1995. The 1995 data from the SOI and CPS have been "aged" to 2004 using a forecast produced from the WEFA macroeconomic model, that has been calibrated to the 2001 baseline economic assumptions published by the Congressional Budget Office.