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Visualizing the Static Impact of the Tax Cuts and Jobs Act on 25,000 Taxpayers

4 min readBy: Erica York, Amir El-Sibaie

Earlier today, The New York Times put out a great visualization of what 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. bill would look like for middle-class families. With the help of the Open Source Policy Center, they illustrated new tax liabilities for 25,000 sample families.

Some of our earlier blog posts revolved around illustrating the proposal’s effects on a smaller set of nine families. A smaller set of data helps visualize the changes on an individual level, but it doesn’t fully capture the inherent complexity among millions of American taxpayers. However, it is worth noting that The Times only conducted a static analysis; dynamic results that account for economic growth show a more complete picture of how tax reform could benefit different taxpayers.

The visualization highlights that many families, similar to our analysis, would see a tax decrease in 2018 under the Senate’s tax plan. When considering households that currently take 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. , nearly everyone gets a tax cut, but the results are split more evenly when factoring in individuals who itemize. From the selected sample families, about 40 percent of households that itemize would see a tax increase in 2018 under the proposed Senate bill.

Many factors lead to these results. Recent tax reform proposals have emphasized removing tax preferences by cutting tax expenditures as a means to pay for lower overall rates, but this inherently means that some who currently benefit from such tax preferences could see a tax increase. Eliminating the deduction for state and local taxes could increase tax burdens on taxpayers from states with high state and local tax rates, such as New York, California, and Connecticut. Additionally, tax cuts for households without children are much less pronounced as they do not benefit from the enhanced 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. in the Senate bill. The proposed Senate bill would double the child tax credit to $2,000 per child and would not begin phasing out that benefit until households earn $500,000. This enhancement results in larger tax cuts for families with children and thus offsets some of the effects of removing other specific tax preferences for these families. However, households without children do not receive any benefit from this provision—about half these families would see tax increases without the benefit of the expanded child tax credit.

Overall, as analysis from the Joint Committee on Taxation (JCT) shows, all income groups do see a decrease in tax liability in 2018.

Due to the temporary nature of the individual portion of the Senate proposal, in 2027, the spread of families with tax increases compared to tax decreases looks much less certain. If the individual provisions sunset after 2025, as currently stated in the bill, almost all Americans would see a tax increase on a static basis when compared to current law. This would occur mainly because the Senate proposal includes changing the measure by which tax brackets are adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . Moving from the traditional Consumer Price Index (CPI), the Senate proposal adopts the Chained Consumer Price Index (C-CPI) measure of inflation. C-CPI is typically a less generous inflator, but the move will more accurately account for product substitutions in reaction to price fluctuations.

However, these results only include static tax calculations, and do not attempt to account for any economic growth generated from the Senate’s tax plan. Incorporating the JCT’s assumption that 25 percent of the economic benefit of corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. cuts are passed on to workers in the form of higher incomes results in far fewer families facing a tax increase. In fact, almost half the sample families would see a tax cut in 2027 under the changes in the Senate bill, even assuming other individual provisions would be sunset. Additionally, this likely understates the dynamic impacts of the corporate tax changes, as JCT’s 25 percent assumption is conservative. Increasing the dynamic response of the corporate tax changes would increase the likelihood that individuals would receive a tax cut in the out years.

Despite this, there are questions as to whether Congress would allow these tax cuts to expire. Previous tax cuts under previous administrations were extended, limiting the potential future tax increase, though raising the overall cost of the plan.

While these estimates provide a great visualization of what the Senate bill changes would look like for middle-class families, they only do so on a static basis. Incorporating the full dynamic feedback that would occur because of the proposed tax changes would provide a more accurate picture of new tax liabilities for middle-class families.