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Comparing the Growth and Income-Boosting Effects of Tax Reform Options

By: Erica York, Garrett Watson, Huaqun Li

As policymakers evaluate changes to 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. code, such as proposals coming from presidential candidates and the White House, it will be important for them to evaluate the relative effects of various provisions. There are many ways to raise a dollar of revenue, and many ways to offer tax relief—some tax changes are more efficient than others, providing more economic benefit for less change in revenue. In other words, policymakers ought to be asking, “How can I get the most bang for my buck?”

We’ve used the Tax Foundation General Equilibrium Model to compare four tax reductions and one tax increase: making Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. 100 percent bonus depreciation permanent, making the TCJA individual provisions permanent, increasing the child tax credit (CTC)The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to ,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers. by $500, implementing a $10,000 Roth-style universal savings accounts (USAs) for taxpayers making under $200,000, and implementing a corporate minimum tax such as one proposed by former Vice President Joe Biden.

The chart below shows the estimated change in gross domestic product (GDP) and 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 after-tax income. for taxpayers in the middle quintile (40 percent to 60 percent) per billion dollars of revenue for each policy

 Full expensing offers biggest "bank for your buck" for new tax reform options. 100 percent bonus depreciation, individual income tax cut, corporate tax increase, universal savings accounts, corporate tax cut, and Biden-style minimum income tax

Once made permanent, 100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. would generate more long-run economic output and a larger increase in after-tax income per dollar of forgone revenue than the other four proposals. Making bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. permanent would be one of the most efficient ways to increase after-tax incomes for the middle class.

Comparisons like this can help improve the process of navigating upcoming TCJA expirations and staking out new policy ideas. For example, we estimate that making the individual provisions permanent would increase long-run economic output by 2.2 percent, but this would reduce long-run federal revenue by $165 billion annually. On the other hand, permanence for TCJA 100 percent bonus depreciation would increase economic output by 0.9 percent at a long-run annual cost of $10 billion of revenue. Proposals such as USAs, a larger 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. , or a 1 percentage point corporate rate reduction are less efficient tax cuts in terms of economic output, while a corporate minimum tax is a less efficient revenue increase. See the tables below for the macroeconomic and distributional effects of all five policies.

Keeping in mind which policies offer the most cost-effective growth helps illustrate the economic and distributional trade-offs among different tax proposals.

Macroeconomic Effects of Five Federal Tax Proposals

Source: Tax Foundation General Equilibrium Model, November 2019.

Proposal 100 Percent Bonus Depreciation Permanent TCJA Individual Provisions Permanent Universal Savings Accounts Maximum Child Tax Credit Increase to $2,500 Reduce Corporate Income Tax to 20 Percent Corporate Minimum Tax
Gross Domestic Product 0.9% 2.2% 0.04% 0.06% 0.1% -0.3%
Capital Stock 2.2% N/A 0.07% 0.1% 0.1% -0.7%
Wages 0.8% 0.9% 0.01% 0.03% 0.1% -0.2%
Full-Time Equivalent Jobs 172,000 1.5 million 6,750 88,000 23,000 -56,000
Conventional Long-Run Annual Revenue (billions) -$10 billion -$165 -$1.4 -$29 -$12 $26.6
Distributional Effects of Five Federal Tax Proposals

Source: Tax Foundation General Equilibrium Model, November 2019.

Income Group 100 Percent Bonus Depreciation Permanent TCJA Individual Provisions Permanent Universal Savings Accounts Maximum Child Tax Credit Increase to $2,500 Reduce Corporate Income Tax to 20 Percent  Corporate Minimum Tax
0% to 20% 0.76% 1.2% 0% 0.36% 0.1% -0.32%
20% to 40% 0.73% 1.6% 0% 1.26% 0.09% -0.25%
40% to 60% 0.73% 1.4% 0.01% 0.84% 0.09% -0.26%
60% to 80% 0.70% 1.6% 0.01% 0.48% 0.09% -0.25%
80% to 100% 0.79% 1.5% 0.02% 0.06% 0.09% -0.40%

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