How the 2001 and 2003 Tax Cuts Affect Hypothetical Families in Tax Year 2003

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How do the 2001 and 2003 tax cuts affect families and tax filers? What are the tax consequences of having children or being middle-income? The following three tables address these questions for an array of families with varying income, number of children, and marital status, for tax year 2003.

Table 8.1 shows the amount of tax cut each hypothetical family received from the 2001 tax cut, the 2003 tax cut, and the two tax cuts combined. Table 8.2 shows the total amount of taxes these families would have owed in 2003 under laws in effect before the 2001 tax cut, after the 2001 tax cut, and after the 2003 tax cut (that is, under what is now current law). Table 8.3 shows the increase in after-tax income due to the 2001 tax cut, the 2003 tax cut, and for both combined. The tables also show the estimated number of filers in the actual population for each type of household.¹ For instance, there are about nine million joint filers who claim one child under age 17 and the same number who claim two children under age 17, only about 40 thousand who claim 6 such children.²

The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA" or "the 2001 tax cut") lowers tax rates and expands several different tax benefits over a 10-year period. The Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA" or "the 2003 tax cut") accelerated a number of provisions in EGTRRA and cut taxes on capital gains and dividends. For this analysis, we focus only on how the legislation affects the tax liability of households filing in 2004 for tax year 2003. For tax year 2003, EGTRRA created the 10 percent tax bracket, reduced most tax rates by a percentage point or so, made the child credit refundable and increased it to $600 per child, and pushed back the phase-out point for the earned income tax credit for joint filers. The 2003 tax cut accelerated the major provisions of the 2001 tax cut, such as the individual tax rate reductions, marriage penalty relief, and the $1,000 per child tax credit. It also reduced taxes on capital gains and stock dividends.

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