September 23, 2004 | WebMemo on Taxes
Soon Congress will vote on extending several tax cuts that were enacted in 2001 and 2003. The key provisions that would be extended are the expansion of the child credit to $1000 per eligible child, the reduction of the penalty married couples face in filing jointly, the increase in the upper limit for the 15-percent income tax bracket, and the creation of the 10-percent bracket. Extending these tax cuts will save taxpayers $131 billion over the next ten years.
While these extensions offer substantial savings to millions of taxpayers, other elements of the 2001 and 2003 tax cuts, such as the marginal rate reductions, did more to increase economic growth. 'Bonus depreciation,' which allows businesses to write off expenses more quickly, will soon expire and was an important factor in the past year's business investment boom. The reduction of the taxation of capital gains and dividends also helped boost the economy over the last year by reducing the cost and risks of new business creation. Congress should make these pro-growth tax cuts permanent in order to encourage economic growth.
The child tax credit was enacted in 1997 at $500 per eligible child under 17 years old. In 2001, President Bush signed into law an expansion of the child tax credit to gradually bring the credit to $1000. Two years later, the 2003 Jobs and Growth Tax Reduction and Reconciliation Act (JGTRRA) immediately increased the child tax credit to $1000.
The tax cut conference report now in Congress holds the child tax credit at $1000 and extends it for five years. The Heritage Foundation's Center for Data Analysis (CDA) estimates that the parents of over 47 million children benefit from the 2003 expansion of the child tax credit that the conference report would extend.
Table 1: The Child Tax Credit by Congressional District - Alabama-Mississippi (PDF link)
Table 2: The Child Tax Credit by Congressional District - Missouri-Wyoming (PDF link)
The 2001 Economic Growth and Tax Reduction Reconciliation Act (EGTRRA) reduced taxes on millions of married couples. It increased the standard deduction for joint filers to twice that of single filers, and it increased the 15-percent tax bracket's upper limit for joint filers to twice the size of the bracket's upper limit for single filers.
A marriage penalty occurs when the total tax paid by a married couple exceeds the sum that they would pay if each filed as a single taxpayer. In other words, two unmarried working taxpayers who live together would have a lower total tax bite than if they married and filed a joint return. Couples are more likely to be affected by the marriage penalty when they both work and the second earner contributes at least 30 percent of their total income.
Before EGTRRA, two single filers who used the standard deduction and then married would have paid taxes on an extra $1500 of income. This is because the standard deduction for single filers was $4550 and for married filers it was $7600 until 2001. The standard deduction for married couples was $1500 less than the total standard deduction for two single individuals. As a result, millions of married couples using the standard deduction paid more in taxes because they were married.
Other married taxpayers pay a penalty because the upper limits of tax brackets for joint filers are less than twice the upper limits of tax brackets for single filers. In tax year 2001, a single filer entered the 25-percent bracket with $27,050 of taxable income. But for a married couple the 25 percent marginal tax rate at just $45,200. Thus, married couples paid the 25 percent marginal tax rate on an extra $8,900 of income simply because they filed jointly.
EGTRRA and JGTRRA helped reduce taxes for millions of married couples and reduced the tax bias against married couples in which both the husband and the wife work. Enacting marriage penalty reform is beneficial to the economy because it increases the benefit of a second earner entering the workforce. The CDA estimates that over 33 million joint tax filers will benefit from this bill.
Table 3: The Marriage Penalty Fix by State
EGTRRA created a new tax bracket, the 10-percent bracket, which offers the lowest marginal rate. The 10-percent tax bracket saves single filers $300, joint filers $600, and head-of-household filers $500. It does this by reducing the tax rate from 15 percent to 10 percent on the first $6,000 of taxable income for single filers, $12,000 for joint filers, and $10,000 for heads of households. While the 10-percent bracket was scheduled to expand in 2008, JGTRRA immediately expanded it in 2003, offering more tax relief to taxpayers. Today's legislation would continue to provide that relief by continuing the 2003 expansion.
The 10-percent bracket expansion does contribute some to economic growth. It encourages increased work for taxpayers in the 10-percent and 15-percent brackets, but does little to encourage work and investment for taxpayers in higher brackets. The CDA estimates that 80 million taxpayers would benefit from the extension of the 10-percent bracket's expansion.
Extending these three tax cuts is a small step in the right direction of making EGTRRA and JGTRRA permanent. The provisions that the conference report extends provide tax relief to millions of American taxpayers. But other provisions of the 2001 and 2003 tax bills, particularly those that reduce taxes on capital and taxes that discourage labor and investment, do more to encourage economic growth. To ensure continued economic growth, Congress should ensure that these other provisions are not allowed to expire and are made permanent.
Rea S. Hederman, Jr., is Senior Policy Analyst in the Center for Data Analysis at The Heritage Foundation.