Raising the Top Income Tax Rate Would Offset Economic Benefits of TCJA Individual Permanence

Congress and the White House continue to explore options to raise revenue as part of their effort to extend the expiring provisions of the 2017 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. Cuts and Jobs Act (TCJA). Recently, some have floated raising the top ordinary income tax rate and bracket above TCJA levels to help pay for the larger tax package.

Raising the top income tax rate would raise several hundred billion dollars but would offset most of the pro-growth effects of making the TCJA’s individual tax provisions permanent by reducing incentives to work and invest.

As part of a broader reform to the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , the TCJA reduced five of the seven individual income tax rates, including bringing the top tax rate from 39.6 percent to 37 percent, and changed the width of the 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. . But the reforms expire after the end of this year.

Starting in 2026, the top tax rate is scheduled to revert back to 39.6 percent and kick in at $546,750 in taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. for single and head of household filers and $615,100 for joint filers. If the TCJA is extended, the 37 percent top tax bracket would start at $642,950 in taxable income for single and head of household filers and $771,550 for joint filers.

While exact details haven’t been announced, policymakers have recently considered two possible changes to extending the TCJA design for rates and brackets: allowing the top tax rate and bracket to revert to pre-TCJA design or adding a 40 percent tax bracket on incomes over $1 million.

Relative to current law, allowing the TCJA’s top tax rate and bracket to expire would not raise additional revenue, as it is already scheduled to go into effect, but it would lower the extension cost.

We compare how the cost of extending the TCJA individual provisions—$4 trillion on a conventional basis and $3.47 trillion on a dynamic basis—falls with these two potential changes to the top rate. Relative to full TCJA extension, letting the top rate and bracket changes expire would reduce the cost of TCJA individual permanence by $409 billion over 10 years on a conventional basis.

Raising the top rate offsets some of the economic benefit of full TCJA extension. On a dynamic basis, letting the top rate revert only reduces the cost by $187.5 billion over 10 years.

Extending the TCJA’s 37 percent rate and bracket but applying a new 40 percent top rate on income above $1 million for all filers would reduce the cost of TCJA individual permanence by $274.8 billion over 10 years on a conventional basis. On a dynamic basis, the 40 percent top rate would reduce the cost of TCJA extension by $114.9 billion over 10 years.

Table 1. 10-Year Conventional and Dynamic Revenue Effects of Options to Raise the Top Ordinary Income Tax Rate, Billions of Dollars (Relative to TCJA Individual Permanence)

Note: Estimates are stacked after making individual TCJA provisions permanent. The 40 percent tax rate option begins at $1 million in taxable income for all filing statuses. Tax brackets are indexed for inflation over the budget window.
Source: Tax Foundation General Equilibrium Model, April 2025.

Relative to permanence for all the expiring individual provisions, options that do not extend the top rate, or that increase the top rate further, would produce a smaller increase in economic output by reducing incentives for work and investment. Full TCJA individual permanence would boost long-run GDP by 0.4 percent, but without also extending the top rate and bracket, long-run GDP would increase by just 0.1 percent.

In other words, most of the economic boost from extending the TCJA individual provisions comes from reducing the top marginal income tax rate, while the remaining provisions have a smaller effect on GDP.

Table 2. Long-Run Economic Effects of Raising the Top Ordinary Income Tax Rate and Changing the Top Tax Bracket

Note: Items may not sum due to rounding. Estimates are stacked after making individual TCJA provisions permanent. The 40 percent tax rate option begins at $1 million in taxable income for all filing statuses. Tax brackets are indexed for inflation over the budget window.
Source: Tax Foundation General Equilibrium Model, April 2025.

Creating a narrower additional top tax bracket of 40 percent on ordinary incomes above $1 million would offset about half of the economic benefit of TCJA individual permanence. The economic harm of a top tax rate increase on million-dollar incomes is only slightly smaller than reverting the entire top rate and bracket, reducing long-run GDP and American incomes by 0.2 percent.

While only a small number of taxpayers earn above $1 million, they account for a large share of the economy: 0.5 percent of taxpayers reported adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” above $1 million in 2022, but they represented about 18.4 percent of total income. Pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. owners reporting $1 million or more in total income for 2022 earned about 34.7 percent of total pass-through business income.

Table 3. Long-Run Economic Effects of Creating a New 40% Tax Bracket on Taxable Income over $1 Million

Note: Items may not sum due to rounding. Estimates are stacked after making individual TCJA provisions permanent. The 40 percent tax rate option begins at $1 million in taxable income for all filing statuses. Tax brackets are indexed for inflation over the budget window.
Source: Tax Foundation General Equilibrium Model, April 2025.

Distributionally, proposals to raise the top ordinary income tax rate would reduce after-tax incomes for the top 5 percent of tax filers on a conventional basis. Compared to extending the TCJA, reverting to a pre-TCJA top rate and bracket reduces after-tax incomes for the top 1 percent by 1.4 percent in 2026, for example, with no impact for the bottom 95 percent of tax filers.

Table 4. Distributional Effect of TCJA Individual Permanence and Raising the Top Ordinary Income Tax Rate and Changing the Top Tax Bracket, Percent Change in After-Tax Market Income

Note: Market income includes adjusted gross income (AGI) plus 1) tax-exempt interest, 2) non-taxable social security income, 3) the employer share of payroll taxes, 4) imputed corporate tax liability, 5) employer-sponsored health insurance and other fringe benefits, 6) taxpayers’ imputed contributions to defined-contribution pension plans. Market income levels are adjusted for the number of exemptions reported on each return to make tax units more comparable. After-tax income is market income less: individual income tax, corporate income tax, payroll taxes, estate and gift tax, custom duties, and excise taxes. The 2026 income break points by percentile are: 20%-$17,735; 40%-$38,572; 60%-$73,905; 80%-$130,661; 90%-$188,849; 95%-$266,968; 99%-$611,194. Tax Units with negative market income and non-filers are excluded from the percentile groups but included in the totals. Estimates are stacked after making individual TCJA provisions permanent.
Source: Tax Foundation General Equilibrium Model, April 2025.

Adding a 40 percent bracket for million-dollar earners relative to TCJA permanence would reduce after-tax incomes of the top 1 percent by 1.0 percent.

Table 5. Distributional Effect of TCJA Individual Permanence and Creating a New 40% Tax Bracket on Taxable Income Over $1 Million, Percent Change in After-Tax Market Income

Note: Market income includes adjusted gross income (AGI) plus 1) tax-exempt interest, 2) non-taxable social security income, 3) the employer share of payroll taxes, 4) imputed corporate tax liability, 5) employer-sponsored health insurance and other fringe benefits, 6) taxpayers’ imputed contributions to defined-contribution pension plans. Market income levels are adjusted for the number of exemptions reported on each return to make tax units more comparable. After-tax income is market income less: individual income tax, corporate income tax, payroll taxes, estate and gift tax, custom duties, and excise taxes. The 2026 income break points by percentile are: 20%-$17,735; 40%-$38,572; 60%-$73,905; 80%-$130,661; 90%-$188,849; 95%-$266,968; 99%-$611,194. Tax Units with negative market income and non-filers are excluded from the percentile groups but included in the totals. Estimates are stacked after making individual TCJA provisions permanent.
Source: Tax Foundation General Equilibrium Model, April 2025. Share this article