Taxes dropped for the poorest, but rose for the 1 percent. Why?

July 11, 2012

Income tax rates are at their lowest levels in 30 years, with a particularly noticeable decline since the recession, as my colleague Lori Montgomery reports. But taxes for some groups dropped more steeply than others: The bottom 20 percent of Americans saw the steepest drop in their tax rates between 2007 and 2009, according to the Congressional Budget Office, which released the new figures. By contrast, federal taxes on the top 1 percent actually increased slightly during the same period, though their taxes were generally on a steady decline throughout the 2000s.


(Congressional Budget Office)

Why? For the poorest Americans, the change in tax rate was partly spurred by new federal policies. Since the CBO counts food stamps as income but doesn’t tax them, the additional benefits may have brought down the poorest Americans’ tax rate even further, says Jared Bernstein, Vice President Biden’s former economic adviser.

Obama’s stimulus also included an expansion of the Earned Income Tax Credit and the Child Tax Credit, which were targeted to reduce taxes on poorer Americans. And even before the crisis, the Bush administration made a major push to expand food stamps, which the stimulus expanded upon as well. Finally, economics contributed as well: as the bottom 20 percent saw their paychecks begin to slide, some were pushed down into lower tax brackets.

On the flip side, the top 1 percent lost some of their tax advantage during the same period in part because of sharp declines in capital income, which is taxed at a lower rate and which suffered a steep, early blow from the 2008 financial crash. In other words, Bernstein says, the slight rise in the 1 percent’s tax rate appears to be the outcome of “economics, not policy.”

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