Whom Would Tax Cut Help?

Would the rich make out like bandits from the tax-cut bill that is the object of intense behind-the-scenes debate in Congress? Or would low-income taxpayers not only hold their own but come away with more than their share of tax breaks?

Republicans are inclined to argue that the bill, notably its provision to extend beyond 2008 today’s low tax rates on investment income, would particularly benefit the poor. Nonsense, say most Democrats; the bill is tilted sharply to the rich.

By their own terms, they’re both right. It depends on how you look at it.

There’s no doubt how Sen. Charles E. Grassley (R-Iowa) looks at it. His angle matters a lot because, as chairman of the Senate Finance Committee, he is the lead Senate negotiator in the lengthy talks with the House on tax legislation, which could wrap up this week.

Grassley ratcheted up the fairness debate last week by contending that taxpayers in the lower brackets -- particularly the elderly -- would actually do better than those earning $200,000 and up.

The low rates on income from dividends and profits from the sale of investments, he said, “give meaningful benefits to taxpayers across the income spectrum, not just the rich.... Lower-income taxpayers have proportionately more at risk if these rates expire at the end of 2008 than higher-income taxpayers.”

Democrats, not surprisingly, scoff at this argument.

“We’re not casting partisan criticism, but this analysis stretches the figures to the point of absurdity,” Rep. Charles B. Rangel of New York, the top Democrat on the House Ways and Means Committee, said through a spokesman. “An overwhelming majority of taxpayers earning under $50,000 a year have neither capital gains nor dividend income.”

Senate and House tax writers have agreed on the central elements of the main tax bill -- namely, relief in the 2006 tax year from the alternative minimum tax and extension for two more years, through 2009 and 2010, of the tax breaks for investment income.

What has delayed negotiations, which began late last year, are the contents of a second bill, potentially including extensions of the research and development tax credit and of the deduction for some college tuition costs, and more careful scrutiny of the tax-exempt status of charitable organizations.

Virtually everyone in the tax debate -- Republican and Democrat, House and Senate -- favors the alternative minimum tax provision of the chief tax bill. The tax was enacted in 1969 to make sure that the very rich could not shelter virtually all their income from the Internal Revenue Service, but growing numbers of the middle class have been snared by the tax as their wages have risen with inflation.

Most Democrats and some moderate Republicans, however, have resisted the extension of the low tax rates on dividends and capital gains, or the profits from the sale of investments.

Grassley was angling for their support when he issued a statement asserting that the low tax rates on investment income “have allowed millions of taxpayers to keep more money in their pockets to spend in the economy or add to their savings.”

Grassley reached this conclusion after looking at the data from a particular vantage point.

First, he considered only those taxpayers who had investment income. In the $0 to $50,000 income bracket, which embraces not only the poor but a substantial share of the middle class, 6.3 million taxpayers -- about one in 15 -- have any investment income. Including all other taxpayers would bring down the average investment income of those who have such income.

Second, he looked not at the dollar amount of these taxpayers’ tax break, but at the tax break as a share of what they would otherwise owe. Because they are in the lower tax brackets, they owe relatively little in taxes, and so their tax break as a share of what they would otherwise owe is relatively large.

Using these measurements, Grassley found that taxpayers with incomes of $50,000 or less could look forward to a 7.6% reduction in taxes owed in 2008 as a result of the low tax rates on dividends and a 10.2% reduction as a result of the capital gains tax break.

By contrast, according to Grassley’s calculations, taxpayers with incomes of $200,000 or more would get tax breaks of 2.2% (from dividends) and 7.6% (capital gains).

What Grassley did not say is that the average dividend and capital gains tax break, measured in cold cash, would be $340 for the low-income taxpayers with investment income -- a small fraction of the $14,385 for the wealthy.

The disparity only grows if the averages account for all taxpayers, not just those with dividend and capital gains income. The average savings for all low-income taxpayers would be $17, compared with $4,045 for the wealthy.

Put differently, according to the nonpartisan Tax Policy Center, millionaires -- who represent 0.3% of all taxpayers and shoulder 16% of the income tax burden -- would reap 45% of the benefits from the low dividends and capital gains tax rates. Taxpayers reporting income of less than $50,000 -- who represent 61% of all taxpayers and bear 12% of the tax burden -- would get 3.7% of the benefits.

“Supporters of these tax cuts like to claim that the benefits are widespread,” said Joel Friedman, a tax specialist with the liberal Center for Budget and Policy Priorities.

“But they typically fail to acknowledge that, for less-well-off households, the tax cut amounts only to a few dollars, reflecting the modest amount of taxable assets these taxpayers hold.”