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

From: The Tax Foundation Blog
by Patrick Fleenor and Gerald Prante

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 summary of our 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.
  • 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.

Click here to read the full analysis. Click here for more Tax Foundation discussion of the stimulus proposals.