Treasury's Phony Distribution Tables
March 7, 2001
How much of a tax cut would you get under President Bush's proposed plan? If you looked at a distribution table from the Treasury Department under your income range to find out, you looked in the wrong place, says Bruce Bartlett.
Due to the way the Treasury's Office of Tax Analysis (OTA) inflates income figures, if people earning $40,000 wants to know how much taxes they will save, instead of looking at the $40,000 line on a Treasury distribution table, they should look at the line for those making $60,000, because that's where OTA puts most people with $40,000 in earnings.
For its calculations, OTA uses a measure called "family economic income," instead of the adjusted gross income (AGI) everyone reports on their tax return. This adds many other forms of income most Americans don't know they have.
- First, it makes up a number for unreported and underreported income and adds it to AGI. Last year, this amounted to $744 billion.
- Thus, OTA assumes tax cheats will get a tax cut on income they aren't reporting.
- Next, OTA adds changes in net worth -- in effect assuming everyone sells all their stock every year and pays taxes on the gains.
- It also adds currently nontaxable forms of income such as municipal bond interest; employee contributions to IRAs, Keogh and 401(k) plans; fringe benefits; and other nonreportable income.
Finally, OTA adds to homeowners' income the "rent" they pay to themselves. Thus if it would cost $1,000 to rent a home like yours, you have $12,000 per year of income you didn't know you had.
These adjustments inflate AGI by about half. In other words, all Americans are 50 percent richer than they think they are. This causes most tax cuts to appear skewed toward the rich.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 7, 2001.
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