TaxVox Stimulating the Well-Off—or Not
Roberton C. Williams
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The stimulus bill President Obama signed on Tuesday concentrates tax cuts and payments on lower-income households—but only if you ignore the entirely misplaced patch for the alternative minimum tax (AMT). In our report card on the bills’ tax provisions, we panned the patch as “neither timely nor targeted” and making “no sense as economic stimulus.” We knew it crowded out provisions that might have helped boost the economy. But a closer look shows it also made the tax provisions less progressive, shifting benefits to higher-income households who are much less likely to spend their tax savings and stimulate economic activity.

Without the patch, the tax breaks are highly progressive, giving the largest benefits—measured as the percentage gain in after-tax income—to the poorest tax units. (See the blue bars in the graph.) Households making under $10,000 will see their after-tax income jump an average of more than 6 percent, while those making over $100,000 would gain an averageof less than 1 percent. Overall, after-tax income goes up 1.2 percent.

But add the AMT patch and the benefits become much less progressive. Those with income between $100,000 and $500,000 double their benefit to more than 2 percent of after-tax income, more than for all but the poorest households. (See the red bars.) The patch bumps the average benefit to 2 percent of after-tax income and accounts for 40 percent of the cost of the bill’s tax provisions.

The distributional effects only reinforce our evaluation of the AMT patch: It’s not stimulus.

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Primary topic Individual Taxes
Research Area Individual Taxes