There are many ways to analyze the recently-released House Tax Cuts and Jobs Act, but one of the most important considerations is its effect on Americans’ take-home pay. That issue could be approached in a number of ways, but since the bill’s impact on the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden of lower-middle income households is a subject of considerable interest across the ideological spectrum, it’s worth focusing on that today.
The bill more than doubles the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , which amounts to a large middle-class tax cut. At the same time, it eliminates the personal exemption, which reduces the benefit of that larger standard deduction, especially for larger families. Meanwhile, it expands the benefit of, and eligibility for, the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , creates a new temporary $300 per person family tax credit, and places more income in lower tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. . Clearly, there are provisions that cut both ways; the challenge is to put them into context.
Fortunately, the Tax Foundation’s Taxes and Growth model produces distributional analyses. On a static basis, households with incomes in the second-lowest quintile (representing the 20th to 40th percentiles) would see their after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. increase by 1.4 percent in 2018 were the bill to go into effect as introduced, while those with incomes in the middle quintile (the 40th to 60th percentiles) would see their after-tax income rise by 2.2 percent.
Ten years out, the increase in after-tax income, on a static basis, would be significantly lower, at 0.7 and 0.5 percent respectively, since several important provisions are set to expire partway through the ten-year budget window, including the $300 family credit, while tax bracket indexing will have transitioned to chained CPI, a slower measure of growth. Expiring provisions on the business side, while not directly impacting individual tax liability, will also have effects on the broader economy that are important to taxpayers’ after-tax income growth.
According to the Taxes and Growth model, long-run GDP growth will increase by 3.9 percent above what it would have done otherwise, wages will rise by 3.1 percent higher wages, and we’ll create 975,000 more full-time equivalent jobs. Those dynamic effects should increase after-tax income by 4.5 percent for those in the second-lowest quintile, and by 4.6 percent for those in the middle quintile.
| Source: Tax Foundation Taxes and Growth Model, March 2017. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All changes, 2018 | All changes, 2027 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Income Group | Static | Income Group | Static | Dynamic | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0% to 20% | 0.8% | 0% to 20% | 0.4% | 4.6% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 20% to 40% | 1.4% | 20% to 40% | 0.7% | 4.5% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 40% to 60% | 2.2% | 40% to 60% | 0.5% | 4.6% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 60% to 80% | 2.4% | 60% to 80% | 0.9% | 4.9% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 80% to 100% | 3.6% | 80% to 100% | 1.1% | 4.1% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 80% to 90% | 2.4% | 80% to 90% | 0.8% | 4.8% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 90% to 95% | 1.5% | 90% to 95% | -0.1% | 3.8% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 95% to 99% | 1.6% | 95% to 99% | -0.3% | 3.6% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 99% to 100% | 7.5% | 99% to 100% | 3.3% | 3.9% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TOTAL | 2.9% | TOTAL | 0.9% | 4.4% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The static figures, moreover, could be higher if Congress opted to extend the family tax credit and other provisions sunsetting at the end of the ten-year budget window.
Our assumptions differ from those of the Joint Committee on Taxation in at least one way that bears noting: our analysis accounts for the switch to chained CPI indexing for brackets, the standard deduction, and the refundable portion of the child tax credit, but not for the Earned Income Tax Credit (EITC) used by low-income families, a provision that was inserted after the initial draft of the bill was filed. This change will slow the growth in after-tax income for low-income families who claim the EITC.
Even bearing that in mind, however, our analysis demonstrates significant growth in static after-tax income during the years when all provisions are in effect, and substantial dynamic increases in later years even should Congress allow certain provisions to expire. If some of those provisions were extended, the benefit may prove even larger.
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