The Effects of Tax Cuts

Bush’s tax cuts have rewarded the rich, right? The Congressional Budget Office has released information on effective tax rates for various income groups in 2005 compared to the average over the period 1979-2005. Greg Mankiw highlights the key numbers. The first number is the effective tax rate for that group in 2005; the second, in parentheses, is the average effective tax rate for that group over 1979-2005.

All households: 20.5 (21.6)

Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)

Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)

Notice that taxes on all but the highest quintile have gone down substantially. The average effective tax rate, overall, has dropped 5%. But the rate for the bottom quintile has dropped 40%. For the second quintile, 25%; the third, 17%; the fourth, 13%; the top quintile, 2%. The effective rate for the top 10% is slightly higher.

Tax cuts make the tax system more progressive, not less, when you look not at nominal rates but at the taxes people actually pay.

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