G-DAE Working Paper No. 03-01: “Read My Lips: More New Tax Cuts”
Appendix 2. Details of Calculations to Estimate Tax Savings by AGI Category
For each AGI category shown in Table 3, the IRS presents data on average taxable
income in 2000. These data are presented in Table A1 below. Given taxable income,
one can compare this to an IRS tax rate table and determine the appropriate marginal tax
rate. Assuming this tax rate represents the rate of dividend taxation, it can simply be
multiplied by average dividend income to estimate the savings of repealing dividend
taxes. However, the applicable marginal tax rate is contingent upon filing status. Table
A1 indicates the 2002 marginal tax rates for each taxable income amount for the statuses
of single, married filing jointly, and married filing separately.
The most recent data on the distribution of tax filing status by AGI is from the 1999 tax
returns.23 These data are presented in Table A1. The maximum AGI category in 1999
was $1 million or more. The filing status distribution of $1 million or more from 1999 is
assumed to apply to all 2000 AGI categories above $1 million. Note that most filers with
a low AGI are single while the vast majority of very high-income filers are married.
To estimate the marginal rate applied to dividends for each AGI category, the 2002
marginal tax rate is weighed by the distribution by filing status. In cases where the
marginal rate for an AGI category is constant across filing statuses, weighing is not
necessary. However, for AGI categories such as $40,000-to-$50,000, an estimated
applicable rate is dependent upon the distribution of filers. The estimated applicable rate,
presented in the last column, is the tax rate assumed to apply to dividend income for each
AGI category. Multiplying this rate by the average amount of dividend income in each
AGI category produces an estimate of the tax savings should dividend taxes on
individuals be repealed.
23 “Individual Income Tax, All Returns, 1999: Adjusted Gross Income, Exemptions, Deductions, and Tax
Items, by Size of Adjusted Gross Income and Marital Status,” Statistics of Income, 1999, Individual
Income Tax Returns, October 2001, November 2001. Downloadable Excel spreadsheet available at
http://www.irs.gov/taxstats/article/0,,id=96978,00.html (Accessed Feb. 20, 2003).
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