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Dynamic Distributional Impact Shows the TCJA Lifts After-Tax Incomes Across Income Groups

2 min readBy: Nicholas Anderson, Erica York

A recent 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. Foundation report analyzed the distributional impact of the Tax Cuts and Jobs Act (TCJA) on both a conventional and dynamic basis, and found it will lead to higher after-tax incomes over the 2018-2027 decade for all income groups. This is because of lower tax liabilities, on average, for all taxpayers, while 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. cuts are in effect, and higher economic growth generated by the law.

Lower tax rates across brackets, an expanded 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. , and other changes to the individual income tax will be in effect through 2025, leading to increases in 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. in these years. This effect is immediate: for example, in 2018, after-tax incomes will be, on average, 2.6 percent higher on a dynamic basis. Specifically, in 2018, the bottom quintile will see after-tax incomes increase by 1.1 percent, the middle quintile by 1.9 percent, and the top one percent will see incomes increase by 4.1 percent.

Other provisions in the TCJA are projected to increase the size of the economy, boosting pretax incomes for all taxpayers. This increase takes time to materialize; by 2025 after-tax incomes will be higher on a dynamic basis (accounting for growth) than on a conventional basis. In 2025, after-tax incomes for the bottom quintile will be 3.9 percent higher; for the middle quintile, 4.1 percent higher; and for the top one percent, 5.4 percent higher.

Even in 2027, when the individual income tax changes have expired, individuals will see higher after-tax incomes due to economic growth. In 2027, all income groups will be see an average increase of 2.7 percent.

Source: Tax Foundation Taxes and Growth Model, April 2018
2018 2022 2025 2027
The Dynamic Distributional Impact of the TCJA, Select Years
0% to 20% 1.1% 3.2% 3.9% 2.6%
20% to 40% 1.8% 3.4% 3.7% 2.0%
40% to 60% 1.9% 3.6% 4.1% 2.5%
60% to 80% 1.9% 3.7% 4.2% 2.4%
80% to 100% 2.9% 4.7% 4.9% 2.8%
80% to 90% 1.9% 3.8% 4.3% 2.6%
90% to 95% 2.1% 4.0% 4.5% 2.8%
95% to 99% 3.3% 5.1% 5.4% 2.8%
99% to 100% 4.1% 5.6% 5.4% 3.1%
TOTAL 2.6% 4.3% 4.6% 2.7%

The combination of both the rate reductions and higher economic growth is projected to benefit income earners across the spectrum over the ensuing decade.

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