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This study was prepared by the staffs of the Human Resources and Community Development Division and the Tax Analysis Division of the Congressional Budget Office, under the supervision of Nancy M. Gordon, Assistant Director, Human Resources and Community Development Division and James M. Verdier, Assistant Director, Tax Analysis Division. Questions regarding the analysis may be addressed to Patricia Ruggles or Joseph Minarik.
 
 

This memorandum examines the impact of the revenue and spending changes enacted during the first session of the 97th Congress on households in different income categories.

The analysis is limited by the complexity of the tax and expenditure programs involved and by the lack of complete data about them. The estimates include only changes in those federal taxes and benefits that directly affect specific households.¹ Thus, for example, changes in spending in areas such as defense have not been included, since the benefits arising from these expenditures are not directly allocable to specific households. In addition, the reductions in grants-in-aid to state and local governments (other than those for individual assistance) have not been allocated to particular income categories, although the characteristics of those affected by these cuts are discussed.²

Similarly, only the major individual income tax cuts enacted in the Economic Recovery Tax Act are included in the detailed analysis. The tax cuts for businesses are not included because it is not known whether the tax savings will be passed 6n to shareholders, and because data regarding the ownership of corporate stock are not available.

Federal benefits for individuals are valued at the cost to the federal government of providing them, which may either exaggerate or understate their value to individuals. This is especially likely if the assistance is provided as goods or services rather than in cash. A reduction in federal outlays for a medical care program, for example, may reduce the perceived well-being of the recipients less than an equal dollar reduction of cash benefits.

The estimates of changes in taxes and benefits are averages for large income categories. Those who receive tax cuts and those who experience benefit reductions in a given income category are often not the same, particularly in the lowest income group. Moreover, some households will be affected by several changes and others by none. Therefore, the impact of the tax and benefit reductions upon those who receive them may be substantially greater than the averages for the entire income group would indicate.

A final caution with respect to the findings is that the analysis does not include any assumed macroeconomic impact of the tax and benefit reductions. If the program changes taken together should significantly raise the rate of economic growth and reduce unemployment, then they would provide higher incomes (beyond the tax cuts) that would offset the reductions in benefits.

The major conclusions of this study are:

• Cains from federal tax reductions rise substantially with household income. In 1983, for example, households with incomes less than $10,000 will pay on average about $120 less in taxes than they would have under prior law, while households with incomes over $80,000 will pay on average about $15,000 less. Total federal revenue losses win be about $82 billion in 1983, and about 85 percent of these reductions will benefit households with incomes over $20,000.
  
  
• Reductions in federal benefit payments for Individuals will be greatest for households with incomes below $10,000. In 1983, households with incomes less than $10,000 will lose on average about $360 in federal benefits, while those with incomes over $80,000 will lose on average about $120. Total federal savings will be about $17 billion in 1983, about two-thirds of which will come from reductions affecting households with incomes below $20,000.
  
  
• About 60 percent of the savings from reductions in grants to state and local governments will come from programs targeted toward low-income individuals or those receiving public assistance. Total reduction in grants to state and local governments (excluding grants for direct benefit programs) will range from $12 billion to $14 billion annually during fiscal years 1982 through 1984.

These results are in part determined by the distributions of tax liabilities and of benefit payments under prior law. Cuts in the federal income tax will be greater in dollar terms for those with higher incomes, who pay more in taxes. Likewise, because government benefit payments for individuals in the programs that were cut were often targeted at those with low incomes, reductions tend to be concentrated upon that group. While the income tax reductions are approximately proportional to prior law liabilities, however, the reductions in outlays for means-tested programs are generally proportionately larger than the reductions in programs that are not means-tested.

Summary Table 1 illustrates the changes in direct taxes and benefit payments in 1983, the first full year in which all of the expenditure changes enacted in the first session of the 97th Congress will be in effect. The table shows total federal savings or revenue losses, average federal savings or losses per household, and savings or losses as a percentage of income for each of five income categories. The impact of the tax cut rises over time for all income categories, as it is phased in. Corresponding information for 1982, 1984, and 1985 is presented in the text.

This document is available in its entirety in PDF.

1. Household income as defined in this study includes cash benefits and food stamps, but excludes all other benefits provided in kind, although the distribution of changes in in-kind benefits over the five income categories has been estimated.

2. The estimates of reductions in grants to state and local governments discussed in the second part of this memorandum represent changes in budget authority, rather than in outlays as for individual assistance programs, since estimating outlay changes for these grants is often not feasible. Further, these estimates are for fiscal years rather than calendar years.