When the Average Isn't Average

January 29, 2008
Posted by Jay Livingston

Here’s George Bush in the State of the Union last night urging Congress to make his tax cuts permanent.

Unless the Congress acts, most of the tax relief we have delivered over the past 7 years will be taken away. Some in Washington argue that letting tax relief expire is not a tax increase. Try explaining that to 116 million American taxpayers who would see their taxes rise by an average of $1,800.

You can’t blame a guy for trying, and you can’t blame the general public for not appreciating why the “average” tax cut is not the same as the tax cut for the average person. But income and income tax distributions are so skewed that using the average is misleading. When Bill Gates walks into the room, the average income goes way up, but everyone in the room except Gates is now below average.

The Tax Policy Center has computed the tax savings for each income quintile. For the middle income quintile, those tax cuts meant a savings of, on average, $814. In other words, the median savings was less than half the mean that Bush mentioned.

The big winners in the tax cuts are those at the top. The savings for the top fifth averaged $7452. For the top 0.5%, the tax cuts have meant an annual savings of over $100,000.