Tax Cuts and Economic Mobility
January 9, 2003
In evaluating the fairness of President Bush's proposed tax cuts, economists advise keeping in mind the fact that Americans move up and down the income ladder and change tax brackets during their lifetimes.
Those who object to marginal tax cuts assume that once rich, Americans stay rich; and once poor, they stay poor. But this is wrong, because it ignores the large amount of economic mobility in the U.S.
That fluidity has real implications for marginal tax rates which penalize the last dollar of income earned.
- In the first year after rates are cut, roughly 28 percent of taxpayers face a lower marginal tax rate -- that is, benefit from a reduced tax rate on their last dollar of income.
- But in the next 10 years, about half of taxpayers benefit from lower marginal tax rates.
- Everyone's tax rate changes with decisions we make about jobs, marriage, children, whether to own a home and when to retire.
- This explains why more than half of taxpayers change tax brackets -- both up and down -- within a 10-year period.
Assuming that the president's tax cuts had been in place over a 10-year period, more than one-fourth of taxpayers would have moved to a higher bracket -- and about two-thirds of taxpayers at the bottom rung would have moved up after 10 years.
More than one-fourth also would have moved to a lower bracket. And more than half facing the top rate in the first year, would be in a lower tax bracket after 10 years.
Source: R. Glenn Hubbard (Chairman of President Bush's Council of Economic Advisers), "Measure Tax-Cut 'Fairness' Over a Lifetime," Wall Street Journal, January 8, 2003.
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