Individuals are also subject to an alternative minimum tax (AMT). This difference in how the cut is perceived fordistributional purposes arises from the choice of distributional measure. Some of the measures that have beenpresented include: (1) the share of taxpayersbenefitted that fall below an income level; (2) the percentage reduction in taxes paid, (3) the tax cut as a percentageof income (both pre-tax and disposable), (4)the distribution of the tax cut by income class and (5) the average tax cut. Almost any tax cut that is a generalone will benefit, in numbers, those outsidethe high income taxpayers, because high income taxpayers are, by definition, not very numerous. In discussing these measures that do relate to effects on income inequality, it first is important to distinguish between absolute measures and relative measures. Thus there is a tendency for absolute measures to show most across-the-board taxcuts as favoring higher income individuals -because these individuals have a large proportion of the income and pay an even larger fraction of the income tax. Moreover, unless a tax provision is refundable,it will have little benefit for the bottom fifth of the population. Table 6 provides a measure of relative equality by examining the percentage change in disposable income. The equal percentage point tax cut also redistributes income to favorhigher income individuals, although not to thedegree of the 10% tax cut. Increases in the standard deduction coupledwith an equal percentage increase in rates would probably be most likely to accomplish this effect althoughindividuals that are excluded from the tax wouldrequire an increase in a refundable credit (such as the earned income tax credit). These examples aresimplified because they do not account for a number of other features. The absolute measure is the same one discussedabove, and indicates that most of the tax cut is received by the highest income classes, and that benefits in thePresident's proposal and the House proposal aremore concentrated in the higher classes than is the Senate proposal, while the conference proposal falls in between.This effect occurs primarily because ofdifferences in the rate cuts, which are largest at higher income levels in the President's proposal and the House billsand smallest in the Senate proposal. 10 would make the size of cuts slightly larger, but would probablynot affect the distribution verymuch. Much of the revenue cost of H.R. (6)
However, if tax cuts are to be used for this purpose, tax changes which can be reflected in withholding tables (such as rate cuts and changes in standard deductionsand personal exemptions) would be more effective, as would reductions in taxes by individuals who are more likelyto spend the tax cut. 1836 is phased in and does not have an immediate effect on disposable incomes). Capital gains tax cuts, which had been discussed, are very concentrated amonghigher income individuals and would beunlikely to provide economic stimulus. Conclusion

This analysis has indicated that different types of across the board tax cuts can have substantially differenteffects on the distribution of income. Proposals that expand the rate bracket width provide no benefits to lower and moderate income individuals. Across the broad tax cuts do not tend to complicate the tax law, but tax cuts for high incomeindividuals could be used to simplify the tax if theywere directed at phase-outs and the AMT rather than rate cuts in higher brackets. Tax cuts may be used forcounter-cyclical purposes, but there are a variety ofreservations about such uses.
Across-the-board income tax cuts were an important feature of H.R. 1836 , the comprehensive tax cut of 2001. Distributional issues have been centralto the analysis of across-the-board tax cuts (although issues of growth and simplification are also of concern). Someplans have been described as primarilybenefitting the middle class; some plans, or even the same plans, have been criticized as unduly favoring highincome taxpayers.
The distributional measure used to characterize a tax cut affects how the cut is perceived. Absolute measures include tax cut per return and the distribution of therevenue cost: these measures show most tax cuts to favor high income individuals because income (and income taxliability) is concentrated in higher incomeclasses.
A variety of relative distributional measures are used, but the measure that indicates the change in income inequality is percentage change in disposable income. Using this measure, recent proposed tax cuts have had very different effects on inequality. A 10% cut in tax rates,for example, increases income inequality,causing disposable income in the top 20% of the population to rise by around 5%, while causing disposable incomein the bottom 80% to rise by less than 1%.(Note that outside of a refundable credit, however, the bottom fifth of the distribution would have a very small taxcut from any tax change because tax liability istypically zero in that income category.). A one percentage point cut in rates still increases income in higherbrackets by slightly more, but has a much smallereffect on increasing income inequality. To make a tax cut neutral or decrease inequality would require (using ratecuts) a larger percentage point cut in the lowerbrackets. An expansion of bracket widths would have no effect on the 70% of taxpayers who fall in the lowestbrackets; an increase in the standard deduction,however, would benefit these taxpayers. (These findings would be affected by the Alternative Minimum Tax (AMT)and capital gains tax rates.)
The 2001 tax cut, when permanently in place, would reduce the progressivity of the tax system and increase income inequality by this relative measures.
Tax cuts favoring higher income individuals are more likely to reduce marginal tax rates, which can have benefits for growth and efficiency. Cutting onlyindividual tax rates can worsen distortions (such as those between corporate and non-corporate investments) orundermine desirable subsidies. There are concernsabout using tax cuts for counter-cyclical purposes because of ; however, tax cuts used in this fashion are mosteffective if they can be reflected in withholding andif they provide benefits to lower and moderate income individuals (rather than high income individuals).
Tax cuts in general do not have important implications for simplification, although they do reduce the incentive to shelter income. They can complicate the taxlaw by increasing the number of taxpayers subject to the AMT, however. Tax cuts could also be focused on changesthat provide simplification (e.g. eliminatingphase outs and raising the exemption levels of the AMT). This report will be updated to reflect legislativedevelopments.