GOP Tax Proposal Risks a Substantial Tax Shift From High-Income Households to Low- and Middle-Income Households

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By Chuck Marr and Chye-Ching Huang
November 18, 2011

The Toomey plan from Republican negotiators on the deficit-reduction "supercommittee" would produce only a modest increase in revenues — about $300 billion over ten years, relative to a baseline that assumes Congress extends all of the Bush tax cuts. But it would accomplish this through what appears to be a substantial shift in tax burdens from households at the top of the income scale to low- and middle-income households.

That shift reflects the plan's two main components: 1) a 20 percent reduction in marginal tax rates below the levels under the Bush tax cuts (so that, for example, the top income tax rate would be 28 percent rather than the Bush 35 percent); and 2) a reduction in tax expenditures that is reportedly based on a plan advanced by Harvard economist Martin Feldstein and others.[1] The first component — the large reductions in tax rates — would cut taxes disproportionately for high-income people; the second component would raise taxes disproportionately on lower- and middle-income people (that would be the effect of the basic Feldstein proposal, as Feldstein has acknowledged). The combined result of such a package would be tax increases for lower- and middle-income people to finance further tax cuts (beyond those that the Bush tax cuts already provide) for wealthy people, with a small contribution to deficit reduction.

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The fact that the plan would cut all rates by an equal percentage does not mean the cuts would affect all income groups equally. In reality, the rate cuts would benefit high-income people much more than middle- or lower-income people, both in the dollar amount of their tax cuts and in the percentage increase in their after-tax incomes. There are two reasons why.

Because the current tax structure is progressive, an across-the-board cut in tax rates results in much larger percentage-point reductions in tax rates in the higher tax brackets than in the lower brackets. For example, the top rate would fall by seven percentage points (from 35 to 28 percent), while the 15 percent rate would fall by only three percentage points (to 12 percent).
High-income people would benefit from the reductions in all of the lower brackets as well, since part of their income falls into those lower brackets.

The Urban-Brookings Tax Policy Center recently estimated the effects of a 20 percent reduction in current marginal tax rates in the manner of the Toomey proposal. (The TPC analysis examines the rate cuts by themselves; it does not include accompanying changes in tax expenditures.) The Tax Policy Center found that the average individual who makes more than $1 million a year would receive an average tax cut of $92,000 — 100 times as much as the benefit that the average family earning between $50,000 and $75,000 would receive. The proposal would boost the average millionaire's after-tax income by 4.4 percent, compared to a 1.7 percent increase for the average family earning between $50,000 and $75,000 (see chart). (These amounts are in addition to the tax cuts that people would receive from extension of the Bush tax cuts.)

In short, the proposed tax-rate cut would be quite regressive, on top of the already regressive (and costly) Bush tax cuts.

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