Impact of 2001 & 2003 Tax Reform

Following is the distribution of the savings accruing to tax filers for the rate reductions for Long Term Capital Gains (LTCG) and qualified dividends passed in the 2001 and 2003 Tax Acts. This analysis is based on IRS data for all returns filed for the 2007 tax year. Performing the analysis required that certain assumptions and generalizations be made which cause this analysis to approximate the distribution of savings. For instance, the actual tax rate used to calculate the savings from the reduced tax rates assumes that all tax returns are filed as Married Filing Jointly because the IRS data does not provide the detailed income data by tax filing status. Using the Married Filing Jointly status would tend to understate the savings resulting from the rate reductions because tax rates for this filing status are lower than for other filing statuses. All long term capital gains and qualified dividends above AGI's up to $63,700 are taxed at a 5% rate and then at a rate of 15% beyond $63,700. The income levels referred to below are Adjusted Gross Income (AGI) brackets which include all income including capital gains minus certain deductions such as IRA contributions, education and moving expenses, etc. The tax rates used to calculate savings are based on net taxable income which, generally, is adjusted gross income minus the standard or itemized deduction and the personal exemptions.

The method for calculating the savings of the reduced tax rates below is as follows:
1) Determine the mid-point marginal tax rate for each Adjusted Gross Income (AGI) income bracket published in the IRS stats.
2) Subtract the new tax rate (5% or 15% depending on AGI) from the marginal tax rate determined in step one above.
3) Multiply the reduced tax rate percentage by the qualified dividends or long term capital gains total income for the bracket to determine the dollar amount saved by the filers in the individual brackets. For instance, if for a given income bracket the marginal tax rate was 33% then the tax rate reduction would be 18% (33% - 15%).

QUALIFIED DIVIDENDS

$155.9b of total qualified dividends were reported in 2007. The reduced tax rates for qualified dividends reduced US Treasury tax receipts in 2007 by approximately $24.5 billion. 80.9% of total qualified dividends were reported by tax filers with AGI's of $100K or more, 64.4% were reported by tax filers with AGI's of $500K or more.


LONG TERM CAPITAL GAINS (LTCG)

The reduced tax rates reduced US Treasury tax receipts by approximately $306.8b. 94.2% of total LTCG tax savings were to tax filers with AGI's of $200K or more and 71.2% to filers with AGI's of $1 million or more.

TAX RECEIPT IMPACT OF FINANCIAL BAILOUT

In order to recapitalize the banks to prevent bank failures, the Federal Reserve significantly reduced the federal funds rate. Essentially, this increased income to the banks by increasing the spread which was accomplished by lowering the interest rate that banks pay to borrow funds.

Total interest, both taxable & tax exempt, reported in 2007 was $347.41b ($268.1b taxable interest). Assuming that interest rates earned by tax filers declined 80% from 2007 and that balances in accounts on which interest is taxable remained constant, reduced interest rates will reduce treasury tax receipts by $56.4b and will reduce the income of US taxpayers by $277.93b. This $277.93b is a transfer from US taxpayers to bank balance sheets.