The 2003 Tax Cut: Proposals and Issues Page: 24 of 36
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CRS-21
making a combined $39,000 will receive a total of $1,100 in tax relief, compared to
the taxes they paid in 2002, under the President's plan...".'4
The "marriage penalty" occurs for certain families when the incomes are
combined and subjected to progressive income tax rates.'5 In contrast, it is possible
that others experience a "marriage bonus," particularly in cases where two incomes
are unequal, since the exemption amounts and rate brackets are broader under the
prior law for married couples. In terms of the taxation of families with children, an
assessment of the "fairness" of the existing tax system is contingent upon how one
believes children and family sizes should be treated vis a vis the income tax system.
Several theories are available to guide this choice such as: treating children as
consumption, treating children as investment, and maintaining comparable before-tax
and after-tax income between families of different sizes (ability to pay). Regardless
of the treatment of families before the proposals, the distribution of all of the
proposals favored married couples and families compared to single taxpayers.
As the largest single provision in terms of reduced revenue, the reduction or
elimination of the taxation of dividends, and at times, capital gains, exhibits specific
vertical and horizontal distributional effects.16 In terms of horizontal equity, it may
be argued that owners of capital were unfairly taxed under the prior tax structure
compared to those holding other investments such as corporate debt. Therefore, any
reduction in these taxes would have disproportionately benefitted owners of
corporate equity over other classes. However, this argument fails to account for the
mobility of investment in search of equal, risk-adjusted returns on an after-tax basis.
(Those holding corporate equities at the time of passage may indeed benefit from a
one-time windfall from the reduction in taxes.) Horizontal fairness considerations,
in other words, do not apply in the usual way because investors are free to choose
whether or not to invest in heavily taxed assets.
As a result, the more significant analysis might reside with issues of vertical
equity: do the tax reductions contribute to distributional issues within the tax system?
Most economists believe that the economic incidence of a tax on capital income
largely falls on the owners of capital (as opposed to labor, for example). Further, the
distribution of both dividends and capital income is more concentrated among those
taxpayers with higher incomes compared to those with lower incomes, generally. As
illustrated in Table 7, with the exception of the lowest income categories, dividends
generally account for a higher percentage of income for those with the highest
incomes. The distribution of capital gains make up an even greater proportion of
adjusted gross income for tax returns from higher income groups than from lower
income groups. Consequently, and notwithstanding the limitations of using adjusted
4 U.S. Department of the Treasury, Secretary Snow's Opening Statement before the House
Ways and Means Committee Testimony on the President's Budget, JS-02, Feb. 4, 2003.
Posted on the Treasury's website at [http://www.treas.gov/press/releases/js02.htm].
15 For further information on the marriage tax penalty, see CRS Report RL30419, The
Marriage Tax Penalty: An Overview of the Issues, by Jane G. Gravelle.
16 For a more extensive discussion of issues of equity and distribution, see CRS Report
RL31597, The Taxation of Dividend Income: An Overview and Economic Analysis of theIssues, by Gregg A. Esenwein and Jane G. Gravelle.
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Brumbaugh, David L. & Richards, Don C. The 2003 Tax Cut: Proposals and Issues, report, July 16, 2004; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc855800/m1/24/: accessed July 17, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.