Details and Analysis of the “Main Street Tax Plan”

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Key Findings:

• The “Main Street 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. Plan” would enact a number of changes that would lower marginal tax rates while broadening the U.S. tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .
• The “Main Street Tax Plan” would reduce tax revenue by over $1 trillion over the next decade on a static basis. However, the plan would end up collecting $679 billion over the next decade when accounting for increased economic output in the long run.
• A majority of the revenue loss from the plan would come from the elimination of the Medicare payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. , which would reduce revenues by $2.6 trillion over a decade.
• According to the Tax Foundation’s Taxes and Growth Model, the plan would increase GDP by 7.6 percent over the long term due to lower marginal tax rates on capital and labor.

Recently, the Hudson Institute released a tax reform proposal called the “Main Street Tax Plan.”[1] The plan would reform the individual income tax by reducing the top 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. from 39.6 to 33 percent, broadening the tax base by eliminating many itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s, and limiting the value of many tax credits. It would also reform the business tax code by reducing the 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. to 25 percent, allowing the full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It 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. of capital investments, and eliminating deferral taxation of foreign profits. The plan also eliminates the Medicare payroll tax, reduces the federal estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , and eliminates the deduction for interest paid by businesses.

Our analysis finds that the plan would reduce revenue by $1.1 trillion over a decade. The plan would also reduce marginal tax rates on both labor and capital. As a result, the plan would increase the size of gross domestic product (GDP) by 7.6 percent over the long term. This increase in GDP would translate into 5.5 percent higher wages and 2.2 million more full-time equivalent jobs. Accounting for the economic effects of the tax changes, the plan would end up increasing federal tax revenues by $679 billion over a decade.

Details of the Plan

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. Changes

• Eliminates the both the 39.6 and 35 percent tax brackets and creates a new 20 percent tax bracketA 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. .

Table 1. Tax Brackets under “The Main Street Plan”

Ordinary Income	Single Filers	Married Filers
10%	$0 to $9,275	$0 to $18,550
15%	$9,275 to $37,650	$18,550 to $75,300
20%	$37,650 to $51,025	$75,301 to $102,050
25%	$50,026 to $91,150	$102,052 to $182,300
28%	$91,151 to $101,150	$182,301 to $202,300
33%	$101,151 and above	$202,301 and above

• Eliminates the head of household filing status
• Reduces 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. by $1,000 ($2,000 for married taxpayers filing jointly) to $5,300 ($10,600 for married taxpayers filing jointly).
• Eliminates the personal exemption phase-out (PEP) and the Pease limitation on itemized deductions.
• Creates a new “child tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. ” of $2,000.
• Eliminates all itemized deductions except the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. and the charitable deduction.
• Taxes carried interest at ordinary income tax rates.*
• Increases AMT exempt levels by 50 percent and eliminates their phase-out.

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. Changes

• Makes all credits non-refundable except for the Earned Income Tax Credit and the ACA health insurance credits.
• Reduces the value of the Child Tax Credit by 50 percent, to $500 per child.
• Converts the Child and Dependent Care tax credit to a deduction of up to $5,000 per child.

Payroll Tax Changes

• Eliminates both the employer- and employee-side Medicare payroll tax.

Business Tax Changes

• Reduces the corporate income tax rate to 25 percent.
• Allows for full expensing of all capital investments
• Eliminates the deduction for interest paid by businesses.
• Ends the deferral of taxation of foreign profits, but with a 66 percent exclusion of foreign profits.*
• Enacts a deemed repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. of all currently deferred foreign profits with a 50 percent exclusion.

Other Changes

• Reduces the top marginal estate tax rate to 20 percent.*

Note: The asterisks (*) indicate provisions that were not modeled. For more information, see Modeling Notes, below.

Economic Impact

According to the Tax Foundation’s Taxes and Growth Model, the Main Street Tax Plan would increase the economy’s size by 7.6 percent in the long run. The plan would lead to 5.5 percent higher wages, a 21.0 percent larger capital stock, and 2.2 million more full-time equivalent jobs. The larger economy would result from lower marginal tax rates on both capital and labor income.

Table 2. Economic Impact of the Main Street Tax Plan

Source: Tax Foundation Taxes and Growth Model, October 2015.
GDP	7.6%
Capital Investment	21.0%
Wage Rate	5.5%
Full-time Equivalent Jobs (in Thousands)	2,288

Revenue Impact

Overall, the plan would reduce federal revenue on a static basis by $1.1 trillion over 10 years. Most of the revenue loss is due to the elimination of the Medicare payroll tax, which we project would reduce revenues by approximately $2.6 trillion over the next decade. Corporate income tax revenues would be reduced by an additional $1.1 trillion over the next decade. Changes to the individual income tax would end up raising $2.1 trillion over a decade.

After accounting for the economic impact of the plan, it would end up raising $679 billion over a decade. The larger economy would increase wages, which would narrow the revenue loss from the payroll tax changes to about $2.2 trillion and increase individual income tax revenue by about $1 trillion to $3.4 trillion over a decade.

Table 3. Ten-Year Revenue Impact of the Main Street Tax Plan (Billions of Dollars)

Tax	Static Revenue Impact (2016-2025)	Dynamic Revenue Impact (2016-2025)
Note: Individual items may not sum to total due to rounding.
Source: Tax Foundation Taxes and Growth Model, October 2015.
Individual Income Taxes	$2,128	$3,467
Payroll Taxes	-$2,685	-$2,226
Corporate Income Taxes	-$1,131	-$990
Excise Taxes	$0	$46
Estate and Gift Taxes	$0	$11
Other Revenue	$0	$70
Total	-$1,086	$679

Distributional Impact

On a static basis, the Main Street Tax Plan would increase 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. across all taxpayers by 0.5 percent. Taxpayers with income in the bottom decile would see an increase in after-tax income of 0.5 percent. The next three deciles (between the 10th and 40th percentiles) would see a reduction in after-tax income of between 0.1 percent and 3 percent due mainly to making most tax credits non-refundable. Taxpayers in the middle-income deciles (40th to 90th percentiles) would see an increase in after-tax income of between 0.8 percent and 1.1 percent. Those in the top 10 percent would see no change in after-tax income. The top 1 percent of all taxpayers would see a 0.4 percent increase in after-tax income.

On a dynamic basis, the plan would increase after-tax incomes by an average of 6.6 percent. All deciles would see an increase in after-tax income of at least 3.4 percent over the long term. Taxpayers that fall in the middle deciles (between the 40th and 80th percentiles) would see the largest increases in after-tax incomes, of at least 8 percent. The top 10 percent of taxpayers would see an increase in after-tax income of 5 percent. The top 1 percent of all taxpayers would see an increase in after-tax income of 4 percent.

0% to 10%

0.5%

6.8%

Table 4. Distributional Analysis for The Main Street Tax Plan

Effect of Tax Reform on After Tax Income Compared to Current Law
All Returns by Decile	Static Distributional Analysis	Dynamic Distributional Analysis
Source: Tax Foundation Taxes and Growth Model, October 2015.
10% to 20%	-3.0%	3.4%
20% to 30%	-1.8%	4.9%
30% to 40%	-0.1%	6.9%
40% to 50%	0.8%	8.1%
50% to 60%	1.0%	8.4%
60% to 70%	1.0%	8.3%
70% to 80%	1.0%	8.0%
80% to 90%	1.1%	7.8%
90% to 100%	0.0%	5.0%
99% to 100%	0.4%	4.0%
TOTAL FOR ALL	0.5%	6.6%

Conclusion

The Main Street Tax Plan would enact a number of changes that would reduce marginal tax rates on individuals and businesses, while broadening the tax base. These changes would increase the incentive to work and invest and would increase the size of the economy in the long run, leading to higher incomes for taxpayers at all income levels. The plan would be a net tax cut and would reduce revenue by about $1.1 trillion over a decade on a static basis, but would end up raising revenue by $679 billion over the same period when accounting for the larger economy.

Modeling Notes

The Taxes and Growth Model does not take into account the fiscal or economic effects of interest on debt. It also does not require budgets to balance over the long term, nor does it account for the potential macroeconomic or distributional effects of any changes to government spending that may accompany the tax plan.

We modeled the revenue and economic impacts of the tax provisions outlined above except for the taxation of carried interest at ordinary income tax rates, provisions involving the taxation of overseas income, and the proposed changes to the estate tax. [2] The omissions were due to either data limitations or insufficient details of how the plan would be enacted. We do not model any potential transitional costs associated with the plan.

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