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tax topics
 
Analysis of the Expiration of the 2001-2003 Tax Cuts

Most of the tax cuts enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) will expire at the end of 2010 unless Congress acts to extend them. If the cuts do expire as scheduled, income taxes will rise sharply for most Americans.

Observers expect that Congress will extend some of the cuts but it’s uncertain which provisions would continue for whom. The various provisions have varying effects on different taxpayers: some would affect primarily people at the top of the income distribution, while others would mainly affect poorer households.

The Tax Policy Center (TPC) has compared the effects of allowing all of the tax cuts to expire as scheduled and extending all of the cuts. Overall, extending the cuts—termed current policy—would reduce the average effective tax rate for all taxpayers by 2.7 percentage points compared with letting all the cuts expire—termed current law. High-income tax units would get larger cuts, measured in both percentage point and dollar terms, but tax units in the second quintile would get the largest tax cuts relative to their current-law tax liabilities.

CL_CP_Overall_All_v3

CL_CP_Overall_Top_v3

Download underlying data.



Incremental Effects of Allowing the 2001-2003 Tax Cuts to Sunset

Moving from Current Policy to Current Law

Distributional Estimates

A comparable analysis shows the impact of assuming permanent extension of all of the 2001-2003 tax cuts and then removing the provisions of that legislation in steps comparable to—but in the reverse order from—the steps described above. Those steps are thus:

  • Estate tax: restore the estate tax to its pre-2001 level—a 55 percent top tax rate and a $1 million exemption, not indexed for inflation
  • Provisions primarily affecting high-income tax units
    • Restore the 36 and 39.6 percent top tax brackets
    • Re-impose the personal exemption phaseout (PEP) and the limitation on itemized deductions (Pease)
    • Raise tax rates on long-term capital gains to 10 percent for tax units in 15 percent bracket or lower and to 20 percent for tax units in tax brackets above 15 percent
    • Tax qualified dividends the same as long-term capital gains
  • Provisions primarily affecting low- and middle-income tax units
    • Eliminate the expansions of the EITC, the Child and Dependent Care Tax Credit (CDCTC), the Child Tax Credit (CTC), and the student loan interest deduction
    • Restore marriage penalties by reducing the standard deduction and widths of the 10 and 15 percent tax brackets for couples filing jointly to 1.67 times those for singles and make the earned income tax credit (EITC) phaseout threshold the same for all tax filers
    • Eliminate the 10 percent tax bracket and raise the 25 and 28 percent tax rates to 28 and 31 percent, respectively
  • Alternative minimum tax: stop patching the AMT and keep it at its permanent level without indexing for inflation

CL_CP_Change_All_v2

CL_CP_Change_Top_v2

Download underlying data.

Incremental Extension of the 2001-2003 Tax Cuts

Moving from Current Law to Current Policy

Distributional Estimates

In addition, TPC has estimated the distributional effects of incrementally extending provisions that of the 2001 and 2003 tax acts. We based the order in which we analyzed specific provisions on our estimation of the likelihood that Congress would extend them. That order is as follows:

  • Alternative minimum tax: permanently patch the AMT at 2009 levels, indexed for inflation
  • Provisions primarily affecting low- and middle-income tax units
    • Extend the 10, 25, and 28 percent tax brackets
    • Reduce marriage penalties by setting the standard deduction and widths of the 10 and 15 percent tax brackets for couples filing jointly to double those for singles and maintain the higher earned income tax credit (EITC) phaseout threshold for couples filing jointl
    • Expand, the EITC, the Child and Dependent Care Tax Credit (CDCTC), the Child Tax Credit (CTC), and the student loan interest deduction
  • Provisions primarily affecting high-income tax units
    • Tax qualified dividends the same as long-term capital gains
    • Reduce tax rates on long-term capital gains (0 percent for tax units in 15 percent bracket or lower, 15 percent for tax units in tax brackets above 15 percent)
    • Repeal the personal exemption phaseout (PEP) and the limitation on itemized deductions (Pease)
    • Extend the 33 and 35 percent tax brackets
  • Estate tax: reduce the estate tax to its 2009 level—a 45 percent tax rate and a $3.5 million exemption, not indexed for inflation

Distributional Estimates

Links to the full set of tables showing the distributional analyses described above.