The 1997 Budget Deal - What It Means to Taxpayers

Policy Backgrounders | Taxes

No. 144
Wednesday, February 04, 1998
by Bruce Bartlett

Who Benefits from the Tax Cuts?

Figure IV - Estimates of the Net Revenue Loss from the Tax Package

From the beginning, Congress and the Clinton administration disagreed on the distributional effects of the tax bill. Treasury Secretary Robert Rubin led the administration's effort to tilt the benefits of the tax cut toward those with lower incomes and away from the wealthy. In a June 11, 1997, letter to Ways and Means Committee Chairman Bill Archer, Rubin asserted that 67.9 percent of the benefits from cuts in the House version of the tax bill would go to the highest-earning 20 percent of families. In a letter to Finance Committee Chairman Bill Roth on June 18, Rubin estimated that 65.5 percent of the Senate tax bill would go to the highest-earning 20 percent.

Congress responded with analyses from the JCT showing a somewhat more balanced distribution of benefits. For example, a June 17 analysis of the Senate Finance Committee bill estimated that only 43.3 percent of the tax benefits would go to the top income group.44

"Families making less than $30,000 per year pay more than half of all cigarette taxes."

But the debate over how much of the tax cut would go to the wealthy versus the poor was really about apples versus oranges, the result of methodological differences between the Treasury and JCT going back many years. [See the Sidebar on Calculating Distributional Effects.] Because Congress and the administration were under the political control of opposing parties, it was often implied (incorrectly) that the conflicting analyses simply represented different political biases.

Figure V - Estimates of the Revenue Effect of the Capital Gains Rate Cuts

Figure IV shows how the two agencies scored the impact on federal revenues from the Taxpayer Relief Act. The JCT forecast a substantially larger revenue loss from the legislation than did the Treasury. The difference between the two estimates derived largely from the different estimates by Treasury and the JCT of the effects of the capital gains provision. Figure V indicates how the JCT and Treasury scored the revenue effect of the final capital gains provision. There was a difference of almost $25 billion between the two estimates for the period 1997-2007. [Also see Appendix Tables I and II.]

These sharply contrasting revenue estimates had important effects on the distributional analyses. The reason is that both Treasury and the JCT calculate distribution on a static basis. In other words, they assume that assets that are sold solely due to the lower capital gains rate would have been sold even in the absence of any tax change. Thus the larger the unlocking effect of cutting the capital gains tax, the bigger the tax cut for those with capital gains as reflected in the distributional tables. Because Treasury estimates a much larger unlocking effect than the JCT, it allocates a much larger tax cut to the wealthy in its distributional tables than does the JCT.

"Both Treasury and the JCT assume that assets that are sold solely due to the lower capital gains rate would have been sold even without a tax change."

As Figure VI and Appendix Tables III and IV indicate, a result of these methodological differences is that the estimated revenue loss from the Taxpayer Relief Act is 50 percent higher in Treasury's distribution table than in the JCT's. Indeed, Treasury's estimate of the tax cut distribution by income group is almost twice as much as the projected revenue reduction in its own revenue estimate, shown in Figure IV. By contrast, the distributed tax cut in the JCT's table is much closer to its estimate of the revenue loss.

Figure VI - Estimates of How Various Income Groups Gained from the Tax Changes

While there is no evidence that the Treasury or the JCT manipulate their distribution tables for political purposes, the ultimate result of their different methodologies was to bolster the political agendas of their respective masters. The JCT's methodology showed a smaller tax cut for the rich, thereby aiding the goals of the Republican Congress. Treasury's analysis supported the view of the Clinton administration that the tax cut was tilted toward the rich, even though Treasury's own revenue estimate scored the capital gains provision as a net revenue raiser over the entire forecast period.

"The JCT forecast a substantially larger revenue loss than did the Treasury."

In recent years, academic researchers have begun to pay greater attention to the problems inherent in calculating the distributional effects of tax changes over different income levels.45 Debate over the 1997 tax bill clearly shows that more work needs to be done.

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