Tax Reform in 2010

Recent Tax Cuts Have Been Regressive: Percent increase in after-tax income from 2001 and 2003 tax cuts when tax cuts are fully in effect

In 2001 and 2003, Congress passed sweeping legislation to reduce the tax burden on American households and businesses. The logic behind the tax cuts was that when families had increased resources available, they would have more to spend, which would in turn create demand for more goods and services. Businesses would be able to respond to this increased demand by creating more jobs. Thus, the promise was that everyone would benefit from these tax cuts. But that’s not the way it turned out.

Between 2001 and 2008, the tax cuts cost the U.S. government nearly $1.7 trillion in lost revenue, leading to spending freezes or cuts in many of the discretionary programs that serve low-income households and communities, such as Temporary Assistance for Needy Families (TANF), the Child Care and Development Block Grant, and, as mentioned above, housing assistance.¹ The tax cuts themselves disproportionately favored the highest-income households. As low-income households and communities suffered cuts in critical services while waiting for the benefits to trickle down to them, the U.S. economy, for the first time, experienced an economic expansion that produced no net increase in jobs. Not only did the economy not produce the expected jobs, but the median income of working families fell by $1,107 and 4.4 million more people entered the ranks of the poor, including 1.6 million more children.²

The tax cuts of 2001 and 2003 begin to expire in 2010. There will surely be a battle over which ones to keep and which to let expire. The Center on Budget and Policy Priorities estimates that the top 1 percent of households—a group whose average income exceeded $450,000 in 2008—will receive 31 percent of the benefits from the tax cuts over the next 10 years if the cuts are made permanent.³ To put the country on a more inclusive path, it is certainly possible to design a tax code that distributes benefits more equitably; 2010 may be the best time because of the opportunity opened by the expiration of the 2001 and 2003 tax cuts.

Issues