The Tax Foundation - How the Bush Tax Cuts Affect Families with Children at Different Income Levels

January 7, 2003

How the Bush Tax Cuts Affect Families with Children at Different Income Levels

Fiscal Fact No. 2

Today, President Bush outlined his economic growth plan which would accelerate all of the phased-in individual tax changes enacted in 2001. These include:

Raising the child tax credit from $600 to $1,000. For a family with two children (earning less than $110,000 per year), this provision alone will mean a tax cut of $800.
Reducing the marriage penalty by (1) setting the standard deduction at 2 times the single amount for married couples filing jointly (this increases the standard deduction from $7,950 to $9,500 for couples), and (2) setting the top 15% bracket threshold at 2 times the single amount for couples (this increases the top amount in the 15% bracket from $47,450 to $56,800).
Expanding the income threshold of the new 10% rate from $12,000 for couples to $14,000.
Accelerating all of the marginal rate cuts to January 1, 2003 (the new rates are: 10%, 15%, 25%, 28%, 33%, 35%).

These changes affect families in different ways at different income levels. For example, raising the child credit amount has the biggest impact on families earning below $110,000 per year – the phase out level – while the marginal rate cuts are more beneficial to families with higher incomes. The marriage penalty changes are most beneficial for families earning up to about $75,000 per year.

For the median family with two children, earning $67,000 per year, the Bush plan would mean a tax cut of $1,133 this year, erasing 22% of their current tax liability. A family earning $40,000 will see 96% of their tax liability erased, while a family earning $200,000 will see just 9% of their tax liability erased.

The calculations below assume a working couple with two children. We also assume the standard deduction for families earning $40,000 to $75,000. For families earning $100,000 and above, we assume itemized deductions worth 20% of AGI.

Families earning below $35,000 are not included because the tax cuts enacted in 2001 effectively eliminated their entire income tax liability.

	Current Law		Bush Plan
Adjusted Gross Income	Taxable Income (After Deductions and Exemptions)	Tax Liability	Taxable Income (After Deductions and Exemptions)	Tax Liability	Tax Cut in Dollars	Tax Cut as a Percentage of Liability
$40,000	$19,850	$1,178	$18,300	$45	$1,133	96%
$50,000	$29,850	$2,678	$28,300	$1,545	$1,133	42%
$67,000	$46,850	$5,228	$45,300	$4,095	$1,133	22%
$75,000	$54,850	$7,316	$53,300	$5,295	$2,021	28%
$100,000	$67,800	$10,812	$67,800	$8,570	$2,242	21%
$150,000	$108,046	$22,878	$108,046	$20,632	$2,247	10%
$175,000	$128,796	$28,905	$128,796	$26,243	$2,662	9%
$200,000	$149,546	$35,130	$149,546	$32,053	$3,077	9%

Assumptions:
Wage and Salary income only for a working couple with two children.
Standard deduction for families earning $40,000 — $75,000.
For families earning $100,000+ assume itemized deductions worth 20% of AGI.