The tax reform act of 1986 and the housing affordability crisis: is it time for a home mortgage interest credit?

Brown, Christopher L. ; Simpson, William R.

ABSTRACT

The purpose of this paper is to propose a home mortgage interest credit (HMIC) as an alternative to the current home mortgage interest deduction (HMID). The proposed HMIC will encourage homeownership among lower income taxpayers and create a more equitable distribution of tax benefits. We use simulated tax returns for taxpayers at the 20th, 40th, 60th, 80th, and 95th percentiles of 1999 household income to show the effect of the proposed HMIC and the current HMID on taxpayers at different income levels. We show that the HMID provides very little tax benefit to lower- and middle-income households. The majority of the tax benefit goes to taxpayers above the 80th percentile of household income. A 20 percent HMIC would leave all but the highest income taxpayers better off, and the tax benefits to lower- and middle-income households would make homeownership a more affordable option.

INTRODUCTION

The U.S. Department of Housing and Urban Development (HUD) recently submitted its Strategic Plan for FY 2000--FY 2006 to Congress. In this document, HUD reports that while the United States is currently enjoying the longest economic expansion in its history, the availability of affordable housing has actually decreased in recent years (FY 2000-FY2006 Strategic Plan).

This shortage of affordable housing primarily affects very-low-income (family income of less than 30 percent of the area median) and low-income (family income of less than 50 percent of the area median) families. This affordability problem also appears to be moving up the income scale. Stegman, et al. (2000) suggest that this "critical housing problem" increased by 17 percent among working families between 1995 and 1997. They suggest that not only is this problem a threat to the families involved, but also to the communities in which they live. For instance, the inability of middle-class working families to obtain affordable housing might cost a community a substantial number of its policemen, firemen, and teachers over time.

Among its other responses to this problem, HUD has called for an increase in national homeownership rates from 67.2 percent in the second quarter of 2000 to 70 percent in 2006 (FY 2000-FY2006 Strategic Plan). HUD hopes to accomplish this goal by reducing the homeownership gap between minorities and non-minorities (by 15 percent) and between higher-income and lower-income householders (by 25 percent).

Historically, one method used by Congress to increase housing affordability (and thus homeownership rates) has been to provide various subsidies to homeowners through the Internal Revenue Code (IRC). Examples of these subsidies including the home mortgage interest deduction (HMID), the deduction for state and local property taxes, and since May, 1997, an exclusion of any capital gains on the sale of a personal residence for all but the wealthiest of taxpayers. Green and Vandell (1996) suggest that two basic justifications are commonly cited as public-policy grounds for these types of tax subsidies for homeownership. The first is based on the theory that an increase in homeownership will result in an increase in household wealth accumulation over time. This increase in household wealth, in turn, should produce a number of positive benefits for the overall economy. The second is based on the theory that an increase in homeownership will result in greater neighborhood stability and upkeep. It is assumed that owners take better care of their homes than renters (it is the owner's investment) and tend to stay in their homes longer. Such long-term stakeholders will presumably take the necessary action to maintain property values and the standard of living in such neighborhoods.

This article focuses on one of these tax subsidies: the HMID. We report findings suggesting that the changes made by the Tax Reform Act of 1986 (TRA86) resulted in a HMID that is not equitably distributed among taxpayers. Worse yet, the HMID has become worthless to most, if not all, lower-income taxpayers. It continues to lose value for other taxpayers as the standard deduction increases each year with inflation. As a result, the loss in value of the HMID continues to climb up the income ladder. Therefore, it has little remaining value to many middle-income taxpayers as well. As homeowners lose this tax subsidy, housing affordability decreases.

Of course, the argument can be made that the standard deduction contains an element representing the housing-related expenses incurred by taxpayers. To the extent this is the case, the financial well being of lower-income taxpayers improves each year due to the increase in the standard deduction. A counter argument is that it is the perceptions of taxpayers that dictate their behavior. Since all taxpayers receive the standard deduction regardless of the housing acquisition choice made (i.e., rent vs. buy), the perception on the part of taxpayers is that the term "tax benefit" actually means any "extra" reduction in taxable income (TI) based on this housing acquisition choice. Viewed in this way, the only perceived tax benefit related to the "buy decision" (vs. renting) is the "extra" reduction in TI that results from the purchase of a personal residence. Since the word "extra" is commonly perceived to mean over and above the standard deduction, this perceived benefit decreases as the standard deduction increases (i.e., the perceived tax benefit is inversely related to the standard deduction).

One approach to this problem (i.e., of a perceived decrease in the tax benefit associated with the HMID) would be to replace the HMID with a credit (HMIC). This credit would provide taxpayers, at all income levels, with the same amount of subsidy per dollar of home mortgage interest paid. Tax returns of taxpayers at different income levels are simulated using the current HMID and the proposed HMIC. Comparisons of the results demonstrate that the proposed HMIC would provide a more equitable distribution of tax benefits across income levels than the current HMID provides.

The remainder of the article will be presented as follows. The HMID and the significant changes made regarding this deduction by TRA86 will be discussed in the next section. The third section identifies the related literature and discusses the contribution of this study. The assumptions used in the analysis are explained in the fourth section, followed by a presentation and discussion of the simulated tax returns. The conclusions and recommendations follow.

THE HMID AND TRA86

Under current tax law, the HMID provides homeowners with a potential deduction for the amount of mortgage interest they pay each year. However, the deduction provided is an "itemized" deduction. This means that the HMID is only deductible if the total amount of the allowable itemized deductions exceeds the allowable standard deduction amount. Therefore, whether a particular amount of HMID ultimately results in a reduction of a taxpayer's tax liability (i.e., produces a tax benefit for the taxpayer) is contingent on a number of issues related to the individual taxpayer's situation. Included are such issues as the amount of a particular taxpayer's standard deduction, the amount of the taxpayer's itemized deductions "other" than the HMID, and the amount of home-mortgage interest paid.

TRA86 significantly decreased the tax-related value of the HMID in three ways. First, it re-introduced the standard deduction into the IRC. Prior to tax years beginning in 1987 (following the passage of TRA86), a zero bracket amount was used. TRA86 also provided that the standard deduction for each filing status would increase by a set amount in 1988. It also provided that beginning in 1989 the standard deduction would be tied to (indexed for) inflation. As a result, it continues to increase each year. For some taxpayers this means that their home mortgage interest expense will never be deductible because their mortgage is too small to result in an interest expense amount that is in excess of the standard deduction. For those taxpayers that are initially able to take advantage of the HMID, this annual increase in the standard deduction represents a creeping threat to that deduction.

Second, TRA86 reduced the amount of certain "other" itemized-deduction types that can be included as an itemized deduction on a given taxpayer's return in a given tax year. A new category labeled "miscellaneous-itemized deductions" was created that resulted in a limitation on formerly includible items. For example, items like tax-return preparation fees, non-interest-related investment expenses, and non-reimbursed employee expenses were deductible without any adjustments prior to TRA86. After TRA86, they are only included to the extent that the total of such deductions exceeds 2 percent of adjusted gross income (AGI). Also, most consumer-interest expense (e.g., credit-card loans, automobile loans, etc.) can no longer be included as an itemized deduction as was the case prior to the passage of TRA86. The result of these changes is that a given taxpayer's total itemized deductions will most likely be a smaller amount than would have been the case prior to the passage of TRA86.

Third, overall tax rates were cut by TRA86. As a result, the tax subsidy available to those still able to use the HMID has been decreased. This last provision is of less concern to lower/middle-income taxpayers, however, since many of them are ineligible to take the HMID anyway for the reasons discussed above.

Table 1 contains an example that demonstrates how the standard deduction works to make the HMID less valuable to lower-income taxpayers. The assumption is made that neither taxpayer has any "other" itemized deductions. The presence of such "other" deductions would change these results. However, higher-income taxpayers are more likely than lower-income taxpayers to incur substantial amounts of these "other" deductions (e.g., contributions to charity, state income taxes, property taxes, etc.) because they have more money to spend on such items. Therefore, the skewness of the results presented in Table 1 would most likely be exacerbated were these "other" itemized deductions included in the model.

Table 2 contains an example that demonstrates how the growth of the standard deduction, that occurs due to the indexing for inflation, makes the HMID subsidy of a particular homeowner less valuable over time. Of course, the real effect would be worse than indicated by the results in Table 2. This is the case because the amortization of the mortgage will result in a lower interest element being paid each year. Therefore, at the same time that the interest amount eligible for the HMID is decreasing, the standard deduction amount is increasing. The result is less tax benefit to the taxpayer from the HMID each year.

RELATED LITERATURE

Green and Vandell (1996) state that in the late 1960s and early 1970s homeowners were enjoying increasing wealth accumulation at the same time that federal budget problems were also increasing. They suggest that as a result, articles began to appear that took a critical look at the tax subsidies provided to homeowners by the IRC. An example of this early literature is Aaron (1979a; 1979b) who performed an analysis of the revenue costs to the federal treasury associated with the HMID and the property-tax deduction.

More recently, in a series of articles, Follain and several related authors (e.g., Follain & Ling, 1991; Follain, et al., 1993; Follain & Dunsky, 1997; Follain & Melamed, 1998) examine the efficiency and neutrality issues associated with the housing subsidies provided under the federal tax laws. A tax is efficient if it accomplishes its goal at the least possible cost (e.g., if housing costs are subsidized and housing affordability is increased at the lowest overall cost to the federal treasury). A tax is neutral if it treats different taxpayers in a similar manner (e.g., homeowners and renters).

Follain et al. (1993) conclude that TRA86 was a mixed bag. On the one hand, by lowering the overall tax rates and by raising the standard deduction amount, TRA86 increased both the efficiency and neutrality of homeowner-related subsidies. On the other hand, these same changes resulted in a federal tax law that contains an "anti-mortgage bias." This bias results in a distribution of the homeowner tax subsidies that is skewed in favor of higher-income taxpayers (i.e., it is regressive). This bias works against lower-income taxpayers precisely because it is these taxpayers that most depend on a mortgage to finance housing. These taxpayers have higher loan-to-value (LTV) ratios as a group than do higher-income taxpayers. Therefore, this "anti-mortgage" bias has apparently resulted in a decrease in the affordability of home ownership for those in the lower-income groups.

Follain et al. (1993) suggest that one method of addressing this bias is to make home mortgage interest deductible "for AGI" and not deductible "from AGI" as an itemized deduction. While this would overcome the problem faced by many taxpayers (i.e., the inability to deduct any portion of the HMID), an inequity between lower-income and higher-income taxpayers would remain. Given that lower-income taxpayers are in a lower-tax bracket, they would not receive as much subsidy per dollar of home mortgage interest expense as would higher-income taxpayers. One solution to this problem is to change the HMID to a credit (HMIC). At least two prior studies have examined the feasibility of adopting a HMIC. Rosen (1979a; 1979b) ran a simulation of the impact of a 25 percent credit. This credit was based on the amount of the HMID plus the amount of the property tax paid. Green and Vandell (1996) also looked at the impact of a HMIC. Their proposed credit is one based on the property's value. The focus of both of these studies was to determine the impact of these credits on housing consumption and tenure figures.

A study that demonstrates the impact that changing the HMID to a HMIC on simulated tax returns will have on different groups of taxpayers is needed at this time. The primary reason such a study is needed is the continuing increase in the standard deduction due to inflation adjustments. The effect of these continuing increases in the standard deduction on housing affordability needs to be examined every few years. Intuitively, these increases in the standard deduction seem to be decreasing the affordability of housing for an increasingly larger section of the population by reducing the tax benefit associated with the HMID subsidy. A secondary reason is that a number of changes have occurred since the prior studies cited herein were conducted.

As discussed above, Green and Vandell (1996) examined the impact a HMIC, based on the property's value, would have on housing consumption and tenure. Because it is related to housing affordability, the focus of the current study is different.

The Rosen (1979a; 1979b) studies, which propose a credit much more similar to the one proposed herein, were conducted prior to the passage of TRA86. Therefore, all of the differences discussed regarding that tax law change suggest a new study is needed.

ASSUMPTIONS OF THE ANALYSIS

We assume that consumers exhibit rational economic behavior. Consistent with this assumption, we assume consumers are more likely to purchase a home, ceteris paribus, the lower the cost of homeownership.

In order to construct simulated tax returns it is necessary to make certain assumptions about the size of the mortgage relative to the income level, the financing terms, the filing status and number of dependents, and the amount of "other" itemized deductions. We assume the taxpayer purchases a home and obtains a mortgage equal to 2.5 times annual income. The mortgage is assumed to be a 30-year, fixed-rate mortgage with monthly principal and interest payments and a 9 percent interest rate. We do not incorporate property taxes into the analysis, since property taxes vary greatly depending on the location of the property. Also, in an effort to simplify the analysis, we assume there are no "other" itemized deductions.

We assume the taxpayer is married filing a joint return with two dependents (i.e., is eligible for a total of four exemptions). We focus on the married-filing-jointly status because income surveys indicate the majority of taxpayers fall into this category. Changing this assumption does impact the findings; therefore, we also simulate the tax returns of a single taxpayer with no dependents for comparison purposes. Population statistics from the U.S. Bureau of the Census indicate that 52.8 percent of households are comprised of married couple families, while 31.3 percent are non-family households. The remaining 16 percent are families with one parent not present (U.S. Census Bureau, Current Population Reports, 2000).

We simulate tax returns for five different income levels, representing the 20th, 40th, 60th, 80th, and 95th percentiles of household income in 1999 (U.S. Census Bureau Current Population Surveys, 2000) . We also simulate tax returns for the mean income within each of the five income categories (0-20%, 21-40%, 41-60%, 61-80%, 81-95%, and 96-100%) to determine the approximate cost per 100 taxpayers of the HMID and the proposed HMIC. The 1999 household income levels by quintile are shown in Table 3.

SIMULATED TAX RETURNS

The simulated tax returns for married-filing-jointly status are shown in Table 4. The returns are simulated using 1999 tax law and 1988 tax law to determine the loss in value of the HMID over that time period. The net HMID is the first year's mortgage interest minus the standard deduction. The tax benefit calculations are based on the net HMID.

The HMID has lost considerable value to taxpayers at the 60th percentile of household income. The simulated returns for taxpayers with income at the 60th percentile indicate that such taxpayers would receive a tax benefit of $1,773 under the tax structure in effect in 1988, compared to a benefit of only $620 using 1999 tax law.

Table 4 also compares the tax benefit of the HMID to a HMIC of 15 percent and 20 percent. A taxpayer with income at the 60th percentile of household income would be much better off with a 15 or 20 percent HMIC than under the current HMID. Under the current HMID, the tax benefit would be $620. A 15 percent HMIC would produce a tax benefit of $1,700 and a 20 percent HMIC would provide a benefit of $2,266. Taxpayers at the 80th percentile of household income would be slightly worse off under a 15 percent HMIC (tax benefit of $2,671) than under the current HMID (tax benefit of $2,969). Taxpayers at the 80th percentile would be better off with a HMIC of 20 percent (tax benefit of $3,561) than under the current HMID. Taxpayers at the 95th percentile would be better off with the HMID than with either a 15 or 20 percent HMIC.

The impact of a 15 percent HMIC on lower-income taxpayers can be seen by evaluating taxpayers at the 40th percentile of household income. These taxpayers receive no tax benefit under the current HMID, but would receive a benefit of $1,077 ($89.75 per month) with a 15 percent HMIC. This is based on an $80,000 mortgage financed for 30 years at 9 percent interest. The additional benefit would decrease the effective monthly house payment by approximately 14 percent (from $643.70 to $553.95).

Table 5 shows the loss in value of the HMID from 1988 to 1999 by computing the tax benefit as a percentage of the mortgage interest paid. Lower-income taxpayers lost very little because the HMID was already worthless to them in 1988. The loss in value of the HMID as a percentage of annual home mortgage interest was significantly higher for taxpayers at the 60th percentile of household income than for higher-income taxpayers. A taxpayer in the 95th percentile of household income would receive a tax benefit of 27.82 percent of their home mortgage interest in 1988, compared to 23.99 percent in 1999. A taxpayer in the 60th percentile of household income would receive a tax benefit of 15.65 percent of their home mortgage interest in 1988, compared to only 5.47 percent in 1999. Higher-income taxpayers receive a significantly higher HMID than middle-income taxpayers and lower-income taxpayers receive no HMID. The significant reduction in the value of the HMID for middle income taxpayers has resulted in the HMID becoming a deduction for the wealthy at the expense of middle- and lower-income taxpayers.

The simulated tax returns for single taxpayers are shown in Table 6. Since single taxpayers receive a lower standard deduction than taxpayers that are married filing jointly, the HMID is more valuable to them. A single taxpayer in the 60th percentile of household income receives a slightly larger benefit under the current HMID than with a 15 percent HMIC. Single taxpayers with income levels above the 60th percentile of household income would be significantly worse off with a 15 percent HMIC than under the current HMID. However, single taxpayers generally have lower income levels than family households. The median family household income in 1999 was $49,940 compared to $24,566 for nonfamily households (U.S. Census Bureau, Current Population Reports (2000)). This indicates that a low proportion of single taxpayers would be adversely impacted by moving to a 15 percent HMIC.

The approximate cost of a 15 percent HMIC, a 20 percent HMIC, and the current HMID are shown in Table 7. The cost is calculated as a cost per 100 taxpayers. The cost of the HMID is estimated to be $193,425 per 100 taxpayers. The cost of a 15 percent HMIC is estimated to be $177,810 and the cost of a 20 percent HMIC is estimated to be $237,105. This indicates that a 15 percent HMIC would actually create higher tax revenues for the federal government. Given the current surplus, the 20 percent HMIC would be more desirable. Only the wealthiest of taxpayers would be worse off with a 20 percent HMIC than under the current HMID. Taxpayers at the mean income of the 81-95 percentiles would receive a tax benefit of $4,579 under a 20 percent HMIC compared to $4,395 under the HMID.

CONCLUSIONS AND RECOMMENDATIONS

Based on our findings, it appears that a HMIC provides a solution to several problems inherent in the HMID. The HMID provides tax relief to the homeowners that need it the least, and provides virtually no benefit to taxpayers below the 60th percentile of household income. Based on our assumptions, a HMIC would provide the same tax benefit to all homeowners: a fixed percentage of the mortgage interest paid. A HMIC of 15 percent would lower the effective monthly house payment for a taxpayer at the 40th percentile of household income by approximately 14 percent. A 20 percent HMIC would lower the effective monthly payment by approximately 19 percent.

Given the current housing affordability crisis, and the homeownership goals that have been set by HUD, changes need to be made to the tax code to provide tax benefits to those who need them most. A HMIC could lower monthly payments for a large proportion of taxpayers and might be the difference in them being able to afford to purchase a home. It should be noted that higher-income taxpayers will not lose all of the tax benefits associated with their annual home mortgage interest expense should the HMIC proposed herein be adopted. We are merely promoting the idea that the tax benefit should be a fixed percentage of the mortgage interest paid. The wealthiest taxpayers will continue to receive the largest tax benefits because they pay more in mortgage interest (because they purchase more expensive homes). A HMIC is an equitable method to spread the tax benefits across income levels and, at the same time, make housing more affordable for a large percentage of the population.

REFERENCES

Aaron, H. (1972). Shelter and Subsidies, Washington, D.C.: The Brookings Institution.

Follian, J. R. & D. C. Ling. (1991). The federal tax subsidy to housing and the reduced value of the mortgage interest deduction, National Tax Journal, 44(2), 147-68.

Follian, J. R., D. C. Ling & G. A. McGill. (1993). The preferential income tax treatment of owner-occupied housing: Who really benefits?, Housing Policy Debate, 4(1), 1-24.

Follian, J. R. & L.S. Melamed. (1998). The false Messiah of tax policy: What elimination of the home mortgage interest deduction promises and a careful look at what it delivers, Journal of Housing Research, 9(2), 179-99.

Green, R. K. & K. D. Vandell. (1996). Giving Households Credit: How Changes in the Tax Code Could Promote Homeownership, Working Paper No. 96-10, University of Wisconsin, Center for Urban Land Economics Research, August.

Rosen, H. S. (1979a). Housing decisions and the U. S. income tax: An econometric analysis, Journal of Public Economics, 11, 1-23.

Rosen, H. S. (1979b). Owner occupied housing and the federal income tax: Estimates and simulations, Journal of Urban Economics, 6, 247-66.

Stegman, M., R. Quercia & G. McCarthy. (2000). Housing America's working families, New Century Housing, 1(1), 1-48.

U.S. Census Bureau, Current Population Reports, (2000). P60-209, Money Income in the United States: 1999 Washington, D.C.: U.S. Government Printing Office.

U.S. Census Bureau, Current Population Surveys, selected March supplements (2000). Retrieved October 12, 2000 from the World Wide Web: http://www.census.gov/hhes/income/histinc, Tables H-1 and H-3.

U.S. Department of Housing and Urban Development FY 2000-FY 2006 Strategic Plan, (2000), September, 1-97. Retrieved October 8, 2000, from the World Wide Web: http://www.hud.gov/reform/strpln.html.

Christopher L. Brown, Western Kentucky University

William R. Simpson, Southeastern Louisiana University

Table 1: Lower vs. Higher Income Taxpayers--Tax Year 1999

Information Lower-Income Higher-Income

Adjusted Gross Income $15,000 $150,000
Filing Status Married Joint Married Joint
Mortgage $37,500 $375,000
Interest Rate 9% 9%
Home Mortgage Interest $3,364 $33,646
Standard Deduction $7,200 $7,200
Deductible Mortgage Interest $0 $26,446
Marginal Tax Rate 15% 31%
Home Mortgage Tax Benefit $0 $8,198

Table 2: Year 1988 Vs. Year 1999 Results
for the Same Taxpayer

 Tax Year Tax Year
Information 1988 1999

Adjusted Gross Income $25,000 $25,000
Filing Status Married Joint Married Joint
Mortgage $62,500 $62,500
Interest Rate 9% 9%
Home Mortgage Interest 5,608 $5,608
Standard Deduction $5,000 $7,200
Deductible Mortgage Interest $608 $0
Marginal Tax Rate 15% 15%
Home Mortgage Tax Benefit $91 $0

Table 3: 1999 Household Income

Percentile Upper Limit Mean

0-20% $17,196 $9,940
21-40% $32,000 $24,436
41-60% $50,520 $40,879
61-80% $79,375 $63,555
81-95% $142,021 $102,071
>95% NA $235,392

Table 4: Simulated Tax Returns for
Married-Filing-Jointly Taxpayers

Panel A: Tax Returns Using 1999 Tax Rates and Rules

 1999 Household Income Percentiles

Information 20th 40th 60th

Adjusted
 Gross Income $17,196 $32,000 $50,520
Exemption Amount $11,000 $11,000 $11,000
Standard Deduction $7,200 $7,200 $7,200
Net HMID $0 $0 $4,132
Marginal Tax Rate 15% 15% 15%
Tax Benefit $0 $0 $620
Tax Benefit
 of 15% HMIC $0 $1,077 $1,700
Tax Benefit
 of 20% HMIC $0 $1,436 $2,266

Panel B: Tax Returns Using 1988 Tax Rates and Rules

 1999 Household Income Percentiles

Adjusted
 Gross Income $17,196 $32,000 $50,520
Exemption Amount $7,800 $7,800 $7,800
Standard Deduction $5,000 $5,000 $5,000
Tax. Inc.
 before net HMID $4,396 $19,200 $37,720
Net HMID $0 $2,178 $6,332
Marginal Tax Rate 15% 15% 28%
Tax Benefit $0 $327 $1,773

 1999 Household Income
 Percentiles

Information 80th 95th

Adjusted
 Gross Income $79,375 $142,021
Exemption Amount $11,000 $11,000
Standard Deduction $7,200 $7,200
Net HMID $10,604 $24,656
Marginal Tax Rate 28% 31%
Tax Benefit $2,969 $7,643
Tax Benefit
 of 15% HMIC $2,671 $4,778
Tax Benefit
 of 20% HMIC $3,561 $6,371

Panel B: Tax Returns Using 1988 Tax Rates and Rules

 1999 Household Income
 Percentiles

Adjusted
 Gross Income $79,375 $142,021
Exemption Amount $7,800 $7,800
Standard Deduction $5,000 $5,000
Tax. Inc.
 before net HMID $66,575 $129,221
Net HMID $12,804 $26,856
Marginal Tax Rate 28% 33%
Tax Benefit $3,585 $8,862

Table 5: HMID Tax Benefit as a Percent of Total Interest Paid

Taxpayer 1988 1999

20th percentile income 0.00% 0.00%
40th percentile income 4.56% 0.00%
60th percentile income 15.65% 5.47%
80th percentile income 20.14% 16.68%
95th percentile income 27.82% 23.99%

Table 6: Simulated Tax Returns for Single Taxpayers
Panel A: Tax Returns Using 1999 Tax Rates and Rules

1999 Household Income Percentiles

Information 20th 40th 60th

Adjusted Gross Income $17,196 $32,000 $50,520
Exemption Amount $2,750 $2,750 $2,750
Standard Deduction $4,300 $4,300 $4,300
Tax. Inc. before net HMID $10,146 $24,950 $43,470
Net HMID $0 $2,878 $7,032
Marginal Tax Rate 15% 15% 28%
Tax Benefit $0 $432 $1,969
Tax Benefit of 15% HMIC $579 $1,077 $1,700
Tax Benefit of 20% HMIC $771 $1,436 $2,266

Information 80th 95th

Adjusted Gross Income $79,375 $142,021
Exemption Amount $2,750 $2,750
Standard Deduction $4,300 $4,300
Tax. Inc. before net HMID $72,325 $134,971
Net HMID $13,504 $27,556
Marginal Tax Rate 31% 36%
Tax Benefit $4,186 $9,920
Tax Benefit of 15% HMIC $2,671 $4,778
Tax Benefit of 20% HMIC $3,561 $6,371

Panel B: Tax Returns Using 1988 Tax Rates and Rules

1999 Household

Information 20th 40th 60th

Adjusted Gross Income $17,196 $32,000 $50,520
Exemption Amount $1,950 $1,950 $1,950
Standard Deduction $5,000 $5,000 $5,000
Tax. Inc. before net HMID $12,246 $27,050 $45,570
Net HMID $857 $4,178 $8,332
Marginal Tax Rate 15% 28% 33%
Tax Benefit $129 $1,170 $2,750

Information 80th 95th

Adjusted Gross Income $79,375 $142,021
Exemption Amount $1,950 $1,950
Standard Deduction $5,000 $5,000
Tax. Inc. before net HMID $74,425 $137,071
Net HMID $14,804 $28,856
Marginal Tax Rate 33% 28%
Tax Benefit $4,885 $8,080

Table 7: Simulated Tax Returns for Married-Filing
Jointly Taxpayers Using Mean Incomes for Each Quintile
and the Top 5 Percent

 1999 Household Income

Information 0-20% 21-40% 41-60%

Adjusted Gross Income $9,940 $24,436 $40,879
Exemption Amount $11,000 $11,000 $11,000
Standard Deduction $7,200 $7,200 $7,200
Tax. Inc. before net HMID $0 $6,236 $22,679
Net HMID $0 $0 $1,969
Marginal Tax Rate 15% 15% 15%
Tax Benefit $0 $0 $295
Tax Benefit of 15% HMIC $0 $822 $1,375
Tax Benefit of 20% HMIC $0 $1,096 $1,834

 1999 Household Income

Information 61-80% 81-95% >95%

Adjusted Gross Income $63,555 $102,071 $235,392
Exemption Amount $11,000 $11,000 $11,000
Standard Deduction $7,200 $7,200 $7,200
Tax. Inc. before net HMID $45,355 $83,871 $217,192
Net HMID $7,056 $15,695 $45,600
Marginal Tax Rate 28% 28% 36%
Tax Benefit $1,976 $4,395 $16,416
Tax Benefit of 15% HMIC $2,138 $3,434 $7,920
Tax Benefit of 20% HMIC $2,851 $4,579 $10,560