With 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. reform in the news and Thursday’s release of the Senate version of the Tax Cuts and Jobs Act, Americans are trying to understand how changes to the tax code will affect their families. The Senate’s plan would grow the economy while simplifying the tax code and reducing marginal rates.
Using the Tax Foundation’s Taxes and Growth (TAG) macroeconomic model, our analysis found that “the plan would significantly lower marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s and the cost of capital, which would lead to a 3.7 percent increase in GDP over the long term [and] 2.9 percent higher wages.”
The TAG model estimates that the plan would result in the creation of roughly 925,000 new full-time equivalent (FTE) jobs, while increasing the 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. s by 4.4 percent in the long run, meaning families would see an after-tax income boost of 4.4 percent by the end of the decade. The increase in family incomes is due in part from 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. reductions and the broader rise in productivity and wages due to economic growth. These estimates take into account all aspects of the Senate version of the Tax Cuts and Jobs Act, including changes to the individual and corporate tax codes.
The table below illustrates the state-by-state impact of the plan for both new jobs and the boost to after-tax incomes for middle-income families.
|Source: The above income figures are increases in each state’s median income, using data from the U.S. Census Bureau and our Taxes and Growth Model.|
|Note: Our analysis includes corrections made to our model in November 2017, to address concerns raised by the Washington Center for Equitable Growth. Therefore, these results are not directly comparable to the House results issued on November 3, 2017.|
|Estimated FTE Jobs Added||Estimated Gain in After-Tax Income for Middle-Income Family|
|United States Total||925,000||$2,598|
|District of Columbia||5,004||$3,123|