NCPA - National Center for Policy Analysis

Distribution Tables Distort Tax Cut Debate

August 10, 1999

Attacks against the House and Senate tax bills can be summarized briefly: the tax cuts are nothing but give-aways to the rich. However, the distribution tables that allegedly show how the tax bills will affect people or households with different incomes in reality are very unlikely to tell how tax liabilities will change.

The distribution tables are necessarily averages and always present income ranges rather than specific income levels -- such as the quintile, representing 20 percent of families or households.

Also, the Treasury's definition of income doe not correspond to income people actually pay taxes on, which the Internal Revenue Service calls Adjusted Gross Income (AGI).

  • The Treasury takes AGI and adds something called "Family Economic Income," which includes estimates of unreported and underreported income; deductible contributions to IRAs, 401(k)s and Keogh accounts; nontaxable transfers such as Social Security and welfare payments; employer- provided fringe benefits; and so forth.
  • On average, the Treasury's definition of income inflates AGI by about 50 percent.
  • The Treasury has lately started producing distribution tables based on what it calls cash income.
  • Still, "cash income" has little relationship to AGI because it includes tax-exempt interest, employer contributions for Social Security, government transfers and even the corporate income tax.

Furthermore, the Treasury attributes certain tax cuts to incomes, when the taxes are paid out of assets, not incomes, such as the estate tax, gift tax and capital gains, making the proposed tax cuts appear tilted much more toward the rich.

Leading scholars, such as Professor Michael Graetz of Yale University, have actually suggested that distribution tables not even be produced during tax debates. Better, he says, that such tables only be issued after the fact, showing how tax legislation affected the tax liabilities of real people.

Source: Bruce Bartlett (NCPA Senior Fellow), "Income Distribution," Brief Analysis No. 303, August 10, 1999, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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