Land of Treasury
The Rich are Poor and the Poor are Rich
Commentary by year Bruce Bartlett
Why Treasury's Numbers Don't
One of the most important factors in evaluating tax legislation is the distributional impact of the tax changes. The Treasury Department produces tables showing the effects of tax cuts and tax increases on people with different incomes. However, Treasury's distribution tables bear no relationship to reality, and fail to convey to policymakers any sense of how people are actually affected by proposed tax changes. They make some people appear to be much wealthier than they actually are and others poorer. Most taxpayers who look at these tables will derive a very distorted picture of how the proposed tax changes will affect them.
In recent days, Treasury has alleged that the benefits of the tax legislation approved by the House Ways and Means Committee and the Senate Finance Committee are skewed heavily toward the rich. According to the Treasury analysis, 67.9 percent of the Ways and Means bill and 65.5 percent of the Finance Committee bill benefits will go to the richest 20 percent of families. Treasury's Strange Concept of Income. Problems with the Treasury analysis, however, cast grave doubt on its validity. Many of the problems relate to concepts of income. Treasury uses a concept called Family Economic Income (FEI), which has little relationship to income as ordinary people understand it or even to income as people compute it for their tax returns. For this reason, the Treasury analysis is very misleading.
Most people are familiar with
the basic concept of Adjusted Gross Income (AGI), which the
Internal Revenue Service uses to determine tax payments. AGI
includes wages, salaries, taxable interest, dividends, alimony,
realized capital gains, business income, pensions and other
familiar forms of income. Treasury starts with AGI but adds to it
many forms of income that are not included on tax returns and
that most taxpayers would not consider income at all.
For example, in Treasury's calculations:
As Figure I shows, the result of all these changes is to
portray most taxpayers as 50 percent richer than their tax
returns say they are and thus to make many taxpayers of
relatively modest means appear rich in Treasury's distribution
table. Omitting Income But Not Taxes. On the other hand, the
Treasury method excludes much income that taxpayers do find
familiar. For example, since pension contributions and all
corporate profits are already attributed to taxpayers, actual
pensions and dividends received by taxpayers are not treated as
Capital Gains: Reality vs. Treasury. A major reason for this anomaly is capital gains. Reductions in the capital gains tax rate in 1978 and 1981, as well as the rate increase in 1986, had enormous effects on asset sales and thus on revenues. Even Treasury admits that lowering the capital gains tax rate as proposed in both congressional tax bills would temporarily increase federal revenues by increasing capital gains realizations. Yet Treasury's distribution table shows owners of capital assets getting a big tax cut. In effect, Treasury assumes that all capital gains - including those only induced by the lower tax rate - would have been realized
Congress's Joint Committee on Taxation (JCT) uses the same methodology, which has the effect of making those paying more in capital gains taxes appear to be paying less. Professor Michael Graetz of Yale Law School points out that in 1990 the JCT's distribution table showed President Bush's proposed cut in the capital gains tax giving taxpayers a $15.9 billion tax cut, although the JCT's own estimate showed that federal revenues would be lower by at most $4.3 billion. Based on this contradiction, Graetz constructed the chart shown in Figure II. As one can see, those with incomes above $200,000 appear to be getting a tax cut four times larger than is possible. Professor Graetz believes the methodology for creating distribution tables is so deeply flawed that the tables should be abandoned altogether during the legislative process. If distributional tables are produced, it should only be after the fact and should show the true impact of a tax change on taxpayers. Another reason to abandon distributional tables is that during the legislative process they tend to overwhelm sound principles of tax policy. As a way of conveying to taxpayers how tax bills would actually affect them, the distribution tables are utterly worthless.
Source: Bruce Bartlett, senior fellow, National Center for
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