The Tax Foundation - Tax Revenue and Distributional Effects of Lowering 10% Bracket to Zero for 2008

January 18, 2008

Tax Revenue and Distributional Effects of Lowering 10% Bracket to Zero for 2008

Fiscal Fact No. 117

The Tax Foundation has estimated what the revenue impact of an income tax rebate of the 10% rate would be in 2008. Media reports suggest this may be one component of President Bush's plan to stimulate the economy. Taxpayers would receive a rebate check, likely based on their 2006 tax returns. The 10% rate would be set to zero when taxpayers file returns for tax year 2008.

The Tax Foundation estimates assume all tax returns would benefit from the lower rate, including high-income returns and dependents. This may not ultimately be what comes out of Congress as some have speculated that the rebates would not apply to higher income individuals. Specifically, some media reports suggest that congressional Democrats are seeking a more modest tax rebate that would be capped at $110,000 for joint filers ($85,000 for singles), while other stimuli would be provided via direct spending programs. The Tax Foundation plans to provide fiscal and distributional estimates of other proposals as more information becomes available.

Because any reduction in ordinary marginal income tax brackets will send more people into AMT, we analyze the proposed reduction under two baseline scenarios: Table 1 below shows the distributional effect (by a tax return's AGI group) under a baseline of current law (no AMT patch for 2008) and Table 2 shows the distributional effect assuming an AMT patch for 2008.

Summary of Results

Under a baseline assumption of no AMT patch (current law), reducing the 10% rate to zero would cost approximately $58 billion for calendar year 2008 (static score).
Under a baseline assumption of an AMT patch, reducing the 10% rate to zero would cost approximately $96 billion for calendar year 2008.
Reducing the 10% rate to zero would push about 11 million more returns into AMT for 2008 (under current law) and raises the price of an AMT patch for 2008 from $55 billion to $93 billion.
Approximately 29.6% of tax returns (representing 41.2 million of the nation's projected 139 million tax returns in 2008) are scheduled to pay nothing in federal individual income taxes in 2008 and would therefore receive no savings by a mere reduction in the 10% rate. This does not include an additional 15-20 million "tax units" that do not file an income tax return.
Currently, 41.2 million returns pay nothing in federal individual income taxes in 2008, and reducing the 10% rate to zero for 2008 would increase this number to 62.9 million.
Due to the non-payers and because high-income individuals are more likely to be married, 21.2 percent of the tax savings from the reduction will go to those tax returns earning over $100,000, despite the fact that they make up only 13.8 percent of tax returns. (Assumes AMT patch baseline). However, ignoring the non-paying taxpayers, this reduction would make the tax code more progressive, because those making $60,000 receive greater savings as a percentage of their incomes as compared to those making $1 million.

Table 1: Impact of Reducing 10% Tax Rate to Zero for 2008 (assuming no AMT patch)

Income Group (AGI)	% of Returns with Positive Income Tax After Credits		Average Income Tax After Credits		Average Savings Per All Tax Returns	Total Tax Savings for Income Group (in millions)
Income Group (AGI)	Before Cut	After Cut	Before Cut	After Cut	Average Savings Per All Tax Returns	Total Tax Savings for Income Group (in millions)
All Tax Returns	70.5%	55.5%	$8,345	$7,926	$419	$58,246
$1 - $4,999	2.9%	0.0%	$6	$1	$5	$46
$5,000 - $9,999	30.2%	0.0%	$44	$1	$43	$486
$10,000 - $14,999	49.3%	1.9%	$190	$4	$186	$1,963
$15,000 - $19,999	54.8%	27.1%	$415	$71	$344	$3,386
$20,000 - $24,999	62.2%	41.2%	$734	$313	$422	$4,057
$25,000 - $29,999	69.7%	45.2%	$1,112	$598	$514	$4,547
$30,000 - $39,999	78.2%	59.9%	$1,850	$1,173	$678	$9,893
$40,000 - $49,999	85.6%	73.3%	$2,845	$2,037	$808	$8,875
$50,000 - $74,999	94.3%	88.5%	$4,832	$3,979	$852	$17,106
$75,000 - $99,999	98.6%	97.9%	$8,250	$7,823	$427	$5,552
$100,000 - $199,999	99.8%	99.7%	$18,725	$18,623	$102	$1,482
$200,000 - $499,999	99.8%	99.8%	$59,914	$59,880	$33	$122
$500,000 - $999,999	99.8%	99.8%	$161,570	$161,031	$539	$341
$1 million and over	99.7%	99.7%	$745,599	$744,568	$1,032	$390

Source: Tax Foundation Microsimulation Tax Calculator

Table 2: Impact of Reducing 10% Tax Rate to Zero for 2008 (assuming AMT patch)

Income Group (AGI)	% of Returns with Positive Income Tax After Credits		Average Income Tax After Credits		Average Savings Per All Tax Returns	Total Tax Savings for Income Group (in millions)
Income Group (AGI)	Before Cut	After Cut	Before Cut	After Cut	Average Savings Per All Tax Returns	Total Tax Savings for Income Group (in millions)
All Tax Returns	70.4%	54.8%	$7,949	$7,257	$692	$96,209
$1 - $4,999	2.9%	0.0%	$6	$1	$5	$46
$5,000 - $9,999	30.2%	0.0%	$44	$0	$43	$487
$10,000 - $14,999	49.3%	1.8%	$189	$3	$186	$1,963
$15,000 - $19,999	54.8%	27.1%	$415	$71	$344	$3,386
$20,000 - $24,999	62.2%	41.2%	$734	$312	$422	$4,058
$25,000 - $29,999	69.6%	45.1%	$1,111	$596	$514	$4,552
$30,000 - $39,999	78.2%	59.7%	$1,846	$1,157	$689	$10,056
$40,000 - $49,999	85.2%	71.8%	$2,822	$1,968	$855	$9,393
$50,000 - $74,999	93.9%	85.6%	$4,727	$3,578	$1,149	$23,059
$75,000 - $99,999	98.2%	95.8%	$7,630	$6,243	$1,387	$18,030
$100,000 - $199,999	99.7%	99.5%	$16,667	$15,330	$1,337	$19,409
$200,000 - $499,999	99.8%	99.8%	$55,858	$55,573	$285	$1,038
$500,000 - $999,999	99.8%	99.8%	$161,568	$161,028	$540	$342
$1 million and over	99.7%	99.7%	$745,621	$744,589	$1,032	$390

Source: Tax Foundation Microsimulation Tax Calculator