Case Study

Case Study Assignment #1 InstructionsCalifornia’s Budget Crisis, Tax Reform and Domestic and International Tax Competition
This case highlights the continuing “progressivity debate.” It draws on a number of central
concepts including the elasticity of tax bases, the tradeoffs between equality and efficiency in
Question #3: Aside from its effects on economic growth, is COTCE’s move toward a less
progressive system morally just? (i.e.: less progressivity may increase growth but places a
greater burden on the poor; or would it reduce tax inequality)
When can we tell when the tax system has reached the right level of progressivity?
Question #5: After reading the case and assigned readings, can progressive taxation survive in
the modern economy and ease the tension or tradeoff between economic growth and tax burden
distribution?
Patrick Henry’s Resolutions Against the Stamp Act
May 29-30, 1765
Although celebrated for his “Liberty or Death” speech at St. John’s Church in Richmond on
March 23, 1775, Patrick Henry probably regarded his Stamp Act Resolutions as a greater
contribution to American independence. In the Parson’s Cause of 1763, Henry’s address to the
jury had foreshadowed his emergence as a popular defender of the rights of colonial Americans.
Two years later, by his vigorous opposition to the Stamp Act, Henry had extended his influence
beyond Virginia as a powerful voice against Britain’s attempt to impose taxation on the
American colonies. Attacking the Stamp Act in the heated debates of the House of Burgesses in
1765, Henry hurled defiance at Parliament. Timid souls blanched as he compared George III to
Julius Caesar and Charles I, but Henry responded that the king might “profit by their example.”
Patrick Henry had written seven resolutions, each more radical than the next. He introduced five
resolutions during the debate in the House of Burgesses. The fifth was adopted by a margin of
only one vote. The next day, under pressure from governor and the Council, the House rescinded
Henry’s fifth resolution and had it erased from the official journal. Virginia’s royal governor,
Francis Fauquier, even prevented the publication of the four resolutions in the Virginia Gazette.
Despite the attempt to suppress news of the legislature’s denunciation of the Stamp Act, within a
few weeks versions of all seven of Henry’s resolutions were published in other colonies. As
printed in Maryland, Rhode Island, Massachusetts, and other colonies, Henry’s resolves
articulated the principles of American rejection of Parliamentary authority. As a result, Henry’s
contemporaries in recognized him as “the man who gave the first impulse to the ball of
revolution.” The importance that Henry attached to his Stamp Act Resolutions is evident from
the message he left for posterity along with his last will and testament: “The alarm spread
throughout America with astonishing quickness, and . . . the great point of resistance to British
taxation was universally established in the colonies,” Henry wrote. “This brought on the war
which finally separated the two countries and gave independence to ours.”
One: Patrick Henry’s Resolutions Against the Stamp Act
From the Journals of the House of Burgesses
Resolved, That the first Adventurers and Settlers of this his Majesties Colony and Dominion of
Virginia brought with them, and transmitted to their Posterity, and all other his Majesty’s
Subjects since inhabiting in this his Majesty’s said Colony, all the Liberties, Priviledges,
Franchises, and Immunities, that have at any Time been held, enjoyed, and possessed, by the
People of Great Britain.
Resolved, That by two royal Charters, granted by King James the First, the Colonists aforesaid
are declared entitled to all the Liberties, Priviledges, and Immunities of Denizens and natural
Subjects, as if they had been abiding and born within the Realm of England.
Resolved, That the Taxation of the People by themselves, or by Persons chosen by themselves to
represent them, who can only know what Taxes the People are able to bear, or the easiest Mode
of raising them, and must themselves be affected by every Tax laid on the People, is the only
Security against a burdensome Taxation, and the distinguishing Characteristick of British
Freedom, without which the ancient Constitution cannot exist.
Resolved, That his Majesty’s liege People of this most ancient and loyal Colony have without
interruption enjoyed the inestimable Right of being governed by such Laws, respecting their
internal Polity and Taxation, as are derived from their own Consent, with the Approbation of
their Sovereign, or his Substitute; and that the same hath never been forfeited or yielded up, but
hath been constantly recognized by the Kings and People of Great Britain.
Two: Patrick Henry’s Resolutions Against the Stamp Act
Printed in the Newport Mercury (Rhode Island), June 24, 1765 and reprinted in Boston and New
York newspapers.
Resolved, That the first Adventurers, Settlers of this his Majesty’s Colony and Dominion of
Virginia, brought with them and transmitted to their Posterity, and all other his Majesty’s
Subjects since inhabiting in this his Majesty’s said Colony, all the Priviledges and Immunities
that have at any Time been held, enjoyed, and possessed by the People of Great Britain.
Resolved, That by two Royal Charters, granted by King James the First, the Colonists aforesaid
are declared and intitled to all the Priviledges and Immunities of natural born Subjects, to all
Intents and Purposes, as if they had been abiding and born within the Realm of England.
Resolved, That his Majesty’s liege People of this his antient Colony have enjoy’d the Right of
being thus govern’d, by their own Assembly, in the Article of Taxes and internal Police; and that
the same have never been forfeited, or any other Way given up, but have been constantly
recogniz’d by the King and People of Britain.
Resolved, therefore, That the General Assembly of this Colony, together with his Majesty or his
Substitutes, have, in their Representative Capacity, the only exclusive Right and Power to lay
Taxes and Imposts upon the Inhabitants of this Colony: And that every Attempt to vest such
Power in any other Person or Persons whatever, than the General Assembly aforesaid, is illegal,
unconstitutional and unjust, and have a manifest Tendency to destroy British as well as
American Liberty.
Resolved, That his Majesty’s liege People, the Inhabitants of this Colony, are not bound to yield
Obedience to any Law or Ordinance whatever, designed to impose any Taxation whatsoever
upon them, other than the Laws or Ordinances of the General Assembly aforesaid.
Resolved, That any Person, who shall, by speaking or writing, assert or maintain, that any Person
or Persons, other than the General Assembly of this Colony, have any Right or Power to impose
or lay any Taxation on the People here, shall be deemed an Enemy to this his Majesty’s Colony.
Three: Patrick Henry’s Resolutions Against the Stamp Act
Printed in the Maryland Gazette, July 4, 1765
That the first Adventurers and Settlers of this his Majesty’s Colony and Dominion of Virginia,
brought with them, and transmitted to their Posterity, and all other his Majesty’s Subjects since
inhabiting in this his Majesty’s said Colony, all the Liberties, Priviledges, Franchises, and
Immunities, that have at any Time been held, enjoyed, and possessed, by the People of Great
Britain.
That by Two Royal Charters, granted by King James the First, the Colonies aforesaid are
Declared Entitled, to all the Liberties, Priviledges and Immunities, of Denizens and Natural
Subjects (to all Intents and Purposes) as if they had been Abiding and Born within the Realm of
England.
That the Taxation of the People by Themselves, or by Persons Chosen by Themselves to
Represent them, who can only know what Taxes the People are able to bear, or the easiest
Method of Raising them, and must themselves be affected by every Tax laid upon the People, is
the only Security against a Burthensome Taxation; and the Distinguishing Characteristic of
British Freedom; and, without which, the antient Constitution cannot exist.
That his Majesty’s liege People of this his most Ancient and Loyal Colony, have [enjoyed],
without Interruption, the inestimable Right of being governed by such Laws respecting their
internal Polity and Taxation, as are derived from their own consent, with the Approbation of the
Sovereign, or his Substitute; which Right hath never been Forfeited, or Yielded up, but hath been
constantly recognized by the Kings and People of Great Britain.
Resolved, therefore, That the General Assembly of this Colony, with the Consent of his Majesty,
or his Substitute, HAVE the Sole Right and Authority to lay Taxes and Impositions upon It’s
Inhabitants: And, That every Attempt to vest such Authority in any other Person or Persons
whatsoever, has a Manifest Tendency to Destroy AMERICAN FREEDOM.
That any Person who shall, by speaking, or writing, assert or maintain, that any Person or
Persons, other than the General Assembly of this Colony, with such Consent as aforesaid, have
any Right or Authority to lay or impose any Tax whatever on the Inhabitants thereof, shall be
Deemed, AN ENEMY TO THIS HIS MAJESTY’S COLONY.
Four: Patrick Henry’s Resolutions Against the Stamp Act
From Henry’s manuscript owned by the Colonial Williamsburg Foundation, Inc.
Resolved, That the first Adventurers and Settlers of this his Majesties Colony and Dominion
brought with them and transmitted to their Posterity and all other his Majesties Subjects since
inhabiting in this his Majestie’s said Colony all the Priviledges, Franchise and Immunities that
have at any Time been held, enjoyed, and possessed by the People of Great Britain.
Resolved, That by two royal Charters granted by King James the first the Colonists aforesaid are
declared intituled to all the Priviledges, Liberties and Immunities of Denizens and natural born
Subjects to all Intents and Purposes as if they had been abiding and born within the Realm of
England.
Resolved, That the Taxation of the People by themselves or by Persons chosen by themselves to
represent them who can only know what Taxes the People are able to bear and the easiest Mode
of raising them and are equally affected by such Taxes Themselves is the distinguishing
Characteristick of British Freedom and without which the ancient Constitution cannot subsist.
Resolved, That his Majestie’s liege People of this most ancient Colony have uninterruptedly
enjoyed the Right of being thus governed by their own assembly in the Article of their Taxes and
internal Police and that the same hath never been forfeited or any other Way given up but hath
been constantly recognized by the Kings and People of Great Britain.
Resolved, Therefore that the General Assembly of this Colony have the only and sole exclusive
Right and Power to lay Taxes and Impositions upon the Inhabitants of this Colony and that every
Attempt to vest such Power in any Person or Persons whatsoever other than the General
Assembly aforesaid has a manifest Tendency to destroy British as well as American Freedom.
Patrick Henry’s final thoughts about the Stamp Act
Written on the back of Henry’s copy of the Stamp Act Resolutions was a message to posterity (as
printed by William Wirt Henry from the manuscript then in his possession).
The within resolutions passed the House of Burgesses in May, 1765. They formed the first
opposition to the Stamp Act and the scheme of taxing America by the British Parliament. All the
colonies, either through fear, or want of opportunity to form an opposition, or from influence of
some kind or other, had remained silent. I had been for the first time elected a Burgess a few
days before, was young, inexperienced, unacquainted with the forms of the House, and the
members that composed it. Finding the men of weight averse to opposition, and the
commencement of the tax at hand, and that no person was likely to step forth, I determined to
venture, and alone, unadvised, and unassisted, on a blank leaf of an old law-book, wrote the
within. Upon offering them to the House violent debates ensued. Many threats were uttered, and
much abuse cast on me by the party for submission. After a long and warm contest the
resolutions passed by a very small majority, perhaps of one or two only. The alarm spread
throughout America with astonishing quickness, and the Ministerial party were overwhelmed.
The great point of resistance to British taxation was universally established in the colonies. This
brought on the war which finally separated the two countries and gave independence to ours.
Whether this will prove a blessing or a curse, will depend upon the use our people make of the
blessings which a gracious God hath bestowed on us. If they are wise, they will be great and
happy. If they are of a contrary character, they will be miserable. Righteousness alone can exalt
them as a nation. Reader! whoever thou art, remember this; and in thy sphere practise virtue
thyself, and encourage it in others.
– P. HENRY
FISCAL
FACT
No. 596
June 2018
The Distributional Impact of the
Tax Cuts and Jobs Act over the
Next Decade
Huaqun Li
Economist
Kyle Pomerleau
Economist and
Director, Center for Quantitative Analysis
Key Findings
•• The Tax Cuts and Jobs Act (TCJA) made changes to both the individual
income and corporate income tax, while scaling back the estate and gift tax.
•• Over the next decade, we estimate that the TCJA will reduce federal
revenues by about $1.8 trillion on a conventional basis. In addition, we
estimate that the economy would be about 2 percent larger on average than
it otherwise would have been between 2018 and 2027.
•• Lower tax liabilities and higher output will boost taxpayer after-tax income,
but the impact will differ over time due to many provisions phasing in or
expiring over the next decade.
•• Using the Tax Foundation model, we estimate the distributional impact of the
TCJA for each year over the next decade (2018-2027) on both a conventional
and dynamic basis.
•• On a conventional basis, the TCJA would result in an increase in after-tax
income for taxpayers in all income groups from 2018 to 2025.
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•• In 2026 and 2027, the expiration of the individual income tax cuts will result
in a reduction of after-tax income for taxpayers in all income groups relative
to prior law on a conventional basis.
•• On a dynamic basis, the larger economy will result in higher after-tax incomes.
However, the economic impact of the TCJA will be modest in the first few
years but increase as the economic effects phase in over time.
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Introduction
On December 22, 2017, President Donald Trump signed into law the bill known popularly as the “Tax
Cuts and Jobs Act” (TCJA). The TCJA made changes to both the individual income and corporate
income tax, while scaling back the estate and gift tax. Over the next decade, we estimate that the
TCJA will reduce federal revenues by about $1.8 trillion on a conventional basis. In addition, the TCJA
is projected to improve the incentives to work and invest, boosting the size of the economy. We
estimate that the economy will be about 2 percent larger than it otherwise would have been between
2018 and 2027.
The reduction in tax liability will boost taxpayers’ after-tax income. However, the tax law’s impact
on taxpayers each year over the next decade will vary due to the phase-in and phaseout of many
provisions and, most notably, the expiration of most of the individual income tax cuts. While most
taxpayers will see a tax cut in 2018, many will end up seeing a tax increase by 2027 if the individual
income tax cuts expire as scheduled.
In addition, the larger economy will also mean higher incomes for taxpayers. However, the economic
effects of the tax law will take time to materialize. As a result, individuals’ after-tax incomes due to
higher wages and capital income will not occur immediately. Rather, they will gradually increase over
the next decade.
In this paper, we use the Tax Foundation Taxes and Growth Model to provide detailed estimates of
how after-tax incomes will change in each year from 2018 to 2027 for taxpayers in different income
groups, both on a conventional basis and on a dynamic basis.
Overview of the Main Provisions of the Tax Cuts and
Jobs Act
Individual Income Tax
The TCJA reduced statutory tax rates across the board (except for the 10 percent bracket) while
slightly altering the width of tax brackets for taxpayers with taxable income over $200,000.1
In addition, the TCJA reformed family benefits by doubling the standard deduction to $12,000
($24,000 married filing jointly), eliminating the deduction for personal exemptions, and increasing the
generosity of the Child Tax Credit from $1,000 to $2,000, while capping its refundability at $1,400.
The Child Tax Credit was also expanded to high-income taxpayers by increasing income at which it
begins to phase out from $75,000 ($110,000 married filing jointly) to $200,000 ($400,000 married
filing jointly). The TCJA also created a nonrefundable $500 credit for non-child dependents.
1
For more details on the TCJA see “Preliminary Details and Analysis of the Tax Cuts and Jobs Act,” Tax Foundation, Dec. 18, 2017, https://taxfoundation.org/
final-tax-cuts-and-jobs-act-details-analysis/.
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The TCJA also broadened the individual income tax base by eliminating and scaling back several
itemized deductions. The state and local tax deduction was capped at $10,000. The home mortgage
interest deduction was also scaled back so that borrowers can only deduct interest on loans with
a principal balance of $750,000 (down from $1,000,000). The TCJA also eliminated the “Pease”
limitation on itemized deductions.
The TCJA established a 20 percent deduction of qualified business income from certain pass-through
businesses. Specific service industries, such as health, law, and professional services, are excluded.
However, joint filers with income below $315,000 and other filers with income below $157,500
can claim the deduction fully on income from service industries. Individuals earning about these
thresholds are also subject to additional limitations, meant to prevent abuse of the provision.
The Alternative Minimum Tax was retained, but was scaled back by increasing the exemption level
and the income level at which it phases in. The exemption level was increased to $70,300 ($109,400
married filing jointly) and the phaseout of the exemptions begins at $500,000 $1 million for married
filing jointly).
Tax parameters will now be adjusted based on chained CPI-U instead of CPI-U. Chained CPI-U
measures inflation by considering consumers’ behavior, resulting in a measure of inflation that rises
more slowly than CPI-U. As a result, individual income will tend to rise into higher tax brackets, or
phase out of tax benefits such as the Child Tax Credit and the Earned Income Tax Credit more quickly.
Lastly, the TCJA doubled the estate tax exemption from $5.6 million to $11.2 million.
Corporate Income Tax and other Business Provisions
The TCJA cut the corporate income tax rate from 35 percent to 21 percent and eliminated the
corporate alternative minimum tax.
The TCJA also expanded expensing for all businesses (corporations and pass-through businesses) by
increasing bonus depreciation from 50 percent to 100 percent for five years, while increasing the
expensing cap for Section 179 from $500,000 to $1 million.
The TCJA changed the treatment of the foreign profits of multinational corporations. It introduced
a “participation exemption,” which exempts foreign profits paid back to the United States from
domestic taxation. It also defined two new categories of foreign income, “Global Intangible Low Tax
Income” (GILTI) and “Foreign Derived Intangible Income” (FDII), which are taxed at a lower rate than
the statutory corporate tax rate of 21 percent. Lastly, the TCJA introduced a new minimum tax, “The
Base Erosion and Anti-Abuse Tax” (BEAT), aimed at preventing multinationals from stripping income
from the U.S. tax base with excess payments to foreign-affiliated corporations.
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At the same time the TCJA limited the deductibility of net interest expense to 30 percent of earnings
before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of
earnings before interest and taxes (EBIT) thereafter. It also eliminated net operating loss carrybacks
and limited carryforwards to 80 percent of taxable income. It also eliminated the Section 199
deduction for manufacturing income and introduced many miscellaneous base broadeners.
Many Aspects of the TCJA Will Phase Out or Expire over the Next
Decade
For lawmakers to satisfy Senate budget rules, while still providing a net tax cut during the decade,
major portions of the TCJA were set to phase out or expire. These changes have a direct impact on
the distribution of the tax changes each year. The timeline below shows how major features of the
TCJA are scheduled to change over the next decade.
From 2018 until 2021, all business and individual provisions will be in effect (Figure 1). At the end
of 2021, two business base broadeners will be phased in. First, businesses will no longer be able
to expense research and development costs. Instead, they will need to amortize those costs over
five years. Second, the limitation on interest expense will tighten from 30 percent of EBITDA to 30
percent of EBIT, a narrower definition of corporate income.
At the end of the next year (2022), 100 percent bonus depreciation will begin to phase out, further
increasing tax collections from businesses. Bonus depreciation will slowly phase out between 2023
and 2027, when the depreciation system will revert to MACRS.
At the end of 2025, a significant number of policy changes are scheduled to occur. All three of the
new international provisions (GILTI, FDII, and BEAT) will change. All three scheduled changes are
set to raise the tax burden on U.S. multinational corporations. The estate tax exemption will revert
to pre-TCJA levels. Most significantly, however, is that nearly all the individual income tax cuts will
expire. The new statutory tax rates and brackets, the standard deduction, the personal exemption,
the Child Tax Credit, the Alternative Minimum Tax will all revert to pre-TCJA rates and levels. The
only significant individual income tax change that will remain is the use of chained-CPI to adjust tax
parameters for inflation.
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FIGURE 1
Timeline of Scheduled TCJA Changes over the Next Decade
TIMELINE
After the end of 2021
Businesses will be required to deduct research and
experimentation costs over five years, rather than immediately
After the end of 2021
The deduction for business net interest expense will be limited to
30% of EBIT, rather than 30% of EBITDA
After the end of 2022
Full expensing for short-life business investments will begin
phasing out
After the end of 2025
The reduction of individual income tax rates will expire
After the end of 2025
The increase in the standard deduction, elimination of the personal
exemption, and doubling of the child tax credit will expire
After the end of 2025
Limits on the state and local tax deduction and the mortgage
interest deduction will expire
After the end of 2025
The reduction of the alternative minimum tax will expire
After the end of 2025
The newly created pass-through deduction (§199A) will expire
After the end of 2025
Three international-related provisions (GILTI, FDII, and BEAT) will
become more restrictive
After the end of 2025
The reduction of the estate tax will expire
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The Budgetary and Economic Effect of the TCJA
According to the Tax Foundation Taxes and Growth Model, 2 the Tax Cuts and Jobs Act would reduce
federal revenue by $1.8 trillion over the next decade (2018-2027), excluding the revenue impact
of the individual mandate repeal (Table 1). Some $1.1 trillion in the revenue loss would be due to a
reduction in individual income taxes, $647 billion from the corporate income tax, and the remaining
$72 billion from the estate and gift tax.
The revenue impact of the TCJA would begin large in the first few years of the decade and then
decline over time as corporate and business-side base broadeners phase in and the impact of 100
percent bonus depreciation phases out. By 2026, with the expiration of the individual income tax
cuts, the TCJA would end up raising federal revenue by $16 billion. The corporate income tax would
continue to raise less revenue due to the permanent nature of the corporate rate reduction.
TABLE 1.
10-Year Static Federal Revenue Estimate, 2018-2027
2018
2025
2026
2027 2018-2027
Individual Income Tax -$149 -$148 -$154 -$154 -$163 -$163 -$163 -$164
$73
$80
-$1,105
Corporate Income Tax
-$74
-$73
-$103
-$87
-$73
-$57
-$40
-$33
-$57
-$50
-$647
Estate and Gift Tax
-$8
-$8
-$8
-$9
-$9
-$9
-$10
-$11
$0
$0
-$72
-$232 -$229 -$265 -$250 -$245 -$229 -$213 -$208
$16
$30
-$1,824
Total
2019
2020
2021
2022
2023
2024
Source: Tax Foundation Taxes and Growth Model, April 2018
The Tax Foundation model also projects that the TCJA would boost the size of the economy over the
next decade (Table 2). In the first few years, the economic impact will be modest as companies begin
to invest more, building the capital stock. In 2018, we project the economy to be 0.3 percent over
baseline and by 2020, it will be 1.4 percent over baseline. By 2025, the economy will be 3 percent
over baseline—its highest point over the next decade. In 2026, when the individual provisions expire,
and 100 percent bonus depreciation has fully phased out, the size of the economy will stop growing
in excess of baseline and begin to shrink. By 2027, the size of the economy will be 2.8 percent larger
than it otherwise would have been. On average, GDP will be about 2 percent above baseline between
2018 and 2027.
TABLE 2.
10-Year Economic Impact, Percent Change in Level, 2018-2027
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
GDP
0.3%
0.8%
1.4%
1.9%
2.2%
2.6%
2.9%
3.0%
3.0%
2.8%
Wages
0.1%
0.4%
0.8%
1.1%
1.3%
1.5%
1.7%
1.7%
1.8%
1.7%
Capital Stock
0.7%
1.8%
3.0%
4.1%
4.8%
5.5%
6.1%
6.4%
6.3%
5.9%
Source: Tax Foundation Taxes and Growth Model, April 2018
2
Stephen J. Entin, Huaqun Li, and Kyle Pomerleau, “Overview of the Tax Foundation’s General Equilibrium Model,” Tax Foundation, April 2018 Update,”
https://files.taxfoundation.org/20180419195810/TaxFoundaton_General-Equilibrium-Model-Overview1.pdf.
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Conventional Distributional Impact of the Tax Cuts and
Jobs Act
On a conventional basis, the TCJA will result in a reduction in tax liability for taxpayers in all income
groups for most of the decade. The increase in after-tax income is largest in the first few years of the
decade. Over time, however, as major provisions of the TCJA begin to phase out and base broadeners
begin to phase in, the size of the tax cut will decline and taxpayers will see smaller increases in aftertax income relative to the baseline. By 2026 and 2027, when the individual provisions have expired,
taxpayers in most income groups will see tax increases relative to prior law.
In the first year of the TCJA (2018), after-tax income for taxpayers in all income groups will increase,
on average, by 2.3 percent (Table 3). Taxpayers in the bottom quintile (0% to 20%) 3 will see a 0.8
percent increase in after-tax income. Taxpayers in the middle three income quintiles will see an
increase in after-tax income between 1.5 and 1.6 percent. This represents an increase in after-tax
income of $589 for taxpayers in the middle quintile (40% to 60%). The income group that will see the
largest increase in after-tax income in 2018 is the top 1 percent, at 3.8 percent.
In 2022, the total size of the tax cut declines slightly from 2018, but taxpayers in the bottom four
quintiles (0% to 20%, 20% to 40%, 40% to 60%, and 60% to 80%) continue to see an increase in aftertax income similar to that of 2018 (between 0.9 percent and 1.7 percent). A noticeable difference in
the distribution of the tax burden is the impact on the top 1 percent. In 2022, the top 1 percent’s tax
cut will decline from 3.8 percent in 2018 to 2.9 percent. This is due chiefly to the tightening of the
interest deduction cap and the amortization of research and development, which reduce the size of
the business tax cut.
In later years of the decade (2025), the size of the tax cut for all taxpayers will continue to decline.
The average increase in after-tax income for all taxpayers in this year is 1.6 percent, which is a little
more than two-thirds the total tax cut in 2018 of 2.3 percent. Taxpayers in the bottom four quintiles
continue to see tax cuts on average, but they are smaller than they were in 2022 and 2018. The top 1
percent’s increase in after-tax income declines even more as bonus depreciation is nearly fully phased
out.
In 2027, after the major individual provisions have expired, taxpayers, on average, will see a 0.1
percent decline in after-tax income, meaning that on average, taxpayers will be paying more in tax
than before passage of the TCJA. Taxpayers in the bottom 20 percent will see a 0.2 percent reduction
in after-tax income. Taxpayers in the second quintile (20% to 40%) will see the largest reduction in
after-tax income of 0.5 percent (a tax increase of about $116 in 2018 dollars).
3
The income (adjusted gross income) breakpoints in 2018: 0% to 20%: $70,168, 80% to 90%: $70,168 – $99,773, 90% to 95%: $99,773 – $139,936, 95% to 99%: $139,936 – $345,877,
99% to 100%: >$345,877.
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TABLE 3.
The Conventional Distributional Impact of the TCJA,
Select Years
2018
2022
2025
2027
0% to 20%
0.8%
0.9%
0.7%
-0.2%
20% to 40%
1.5%
1.4%
1.0%
-0.5%
40% to 60%
1.6%
1.6%
1.3%
-0.1%
60% to 80%
1.6%
1.7%
1.4%
-0.2%
80% to 100%
2.6%
2.4%
1.8%
-0.1%
80% to 90%
1.6%
1.7%
1.4%
0.0%
90% to 95%
1.8%
1.8%
1.4%
0.0%
95% to 99%
2.9%
2.8%
2.2%
-0.3%
99% to 100%
3.8%
2.9%
2.1%
-0.1%
TOTAL
2.3%
2.1%
1.6%
-0.1%
Source: Tax Foundation Taxes and Growth Model, April 2018
There are two notable trends in the distributional impact of the TCJA (Figure 2). First, the top 1
percent’s increase in after-tax income starts out large at first and declines significantly over the
decade. The increase in the top 1 percent’s after-tax income declines from 3.8 percent in 2018 to
1.2 percent in 2025. After the individual provisions expire in 2026, the top 1 percent tax cut declines
even further to a 0.1 percent increase in after-tax income. This is driven by the plan’s effect on
corporate taxes. The tax cut for corporations starts out large in the first few years and declines over
time as base broadeners phase in and other business provisions phase out.
Second, low-, middle-, and upper-income taxpayers’ increase in after-tax income is relatively stable
while the individual income tax cuts are in effect. The benefit to these taxpayers only slightly declines
between 2018 and 2025 due to the indexation of tax parameters to chained CPI-U. All three of these
groups see tax increases or no change relative to previous law after all the individual parameters
expire in 2026, however.
TA X FOUNDATION | 9
FIGURE 2.
Percent Change in After-tax Income for Four Income Groups
under the TCJA, 2018-2027
4.0%
3.5%
99% to 100%
3.0%
2.5%
90% to 95%
2.0%
40% to 60%
1.5%
1.0%
0% to 2 0%
0.5%
0.0%
-0.5%
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Source: Tax Foundation Taxes and Growth Model, April 2018
TAX FOUNDATION
For middle-income taxpayers (those in the 40% to 60% quintile), the majority of the increase in aftertax income, on a conventional basis, for most of the decade, is due to the individual income tax cuts 4
(Figure 3). Between 2018 and 2025, the individual income tax cuts contribute between 1.1 and 1.4 to
after-tax income to middle-income taxpayers’ total change in income.. Middle-income taxpayers will
also receive benefits from the corporate income tax, but they are smaller than the individual income
tax cuts. In 2026 and 2027, when the individual provisions expire, the tax increase from the individual
income tax will outweigh the effect of the remaining corporate tax cut for these taxpayers.
4
Including the impact of the Section 199A deduction for pass-through businesses.
TA X FOUNDATION | 10
FIGURE 3.
Corporate vs. Individual Income Effect on After-Tax Income,
Middle Income (40% to 60%)
2.0%
Individual Income Tax
Corporate Income Tax
1.5%
1.0%
0.5%
0.0%
-0.5%
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Source: Tax Foundation Taxes and Growth Model, April 2018
In
contrast,
the top 1 percent receives a meaningful boost in after-tax income from both the
TAX
FOUNDATION
individual income and corporate income tax cuts on a conventional basis (Figure 4). Rather, the top 1
percent’s benefit from the TCJA is primarily through the reduction in the corporate income tax. From
2018 until 2025, before the expiration of the individual provisions of the TCJA, the top 1 percent’s
increase in after-tax income from the individual income tax remains around 1.9 to 1.6 percent. In
2026 and 2027, after the individual provisions have expired, the individual income tax ends up
reducing the top 1 percent’s after-tax income. In 2026, the corporate tax cut is enough to offset the
individual income tax increase for the top 1 percent, but in 2027, the impact of the individual income
tax increase completely offsets the impact of the corporate income tax cut.
TA X FOUNDATION | 11
FIGURE 4.
Corporate vs. Individual Income Tax Effect on After-Tax Income,
Top 1 Percent
4.0%
Individual Income Tax
Corporate Income Tax
3.0%
2.0%
1.0%
0.0%
-1.0%
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Source: Tax Foundation Taxes and Growth Model, April 2018
TAX FOUNDATION
Dynamic
Distributional Impact of the Tax Cuts and
Jobs Act
We project that the TCJA will increase economic output over the next decade. Increased economic
output will lead to higher incomes for all taxpayers. As such, our dynamic analysis shows that
taxpayers will see an increase in after-tax incomes due to lower tax liabilities and higher incomes.
While the effect of lower tax liabilities on after-tax income is immediate, the increase in pretax
income due to the projected larger economy takes time to materialize. As such, dynamic increases
in after-tax incomes are only modestly higher than on a conventional basis in the first few years.
However, by 2025, we project after-tax incomes to be meaningfully higher on a dynamic basis than
on a conventional basis. And even after the expiration of the individual income tax cuts in 2026 and
2027, after-tax income remains above pre-TCJA levels.
In 2018, the dynamic distributional impact of the TCJA will look similar to the conventional impact
(Table 4). After-tax incomes will be, on average, 2.6 percent higher on a dynamic basis (about 0.3
percent higher than our conventional estimates). The after-tax income of the bottom 80 percent of
taxpayers will increase by 1.1 to 1.9 percent. The top 1 percent’s after-tax income will increase the
most, at 4.1 percent.
TA X FOUNDATION | 12
By 2022, more of the economic effects of the TCJA have phased in. As a result, we project that aftertax incomes would increase by 4.3 percent (compared to the 2.1 percent increase in after-tax income
on a conventional basis). In 2025, taxpayer after-tax income peaks at 4.6 percent for all taxpayers. At
this point, we project that GDP will be at its highest point during the decade at about 3 percent over
baseline. After-tax income for the bottom 80 percent of taxpayers (those in the bottom four quintiles)
will increase by between 3.7 percent and 4.2 percent.
In 2027, after the major individual provisions have expired, after-tax income for all taxpayers will be
2.7 percent higher than otherwise. This increase in after-tax income will be due entirely to higher
pretax incomes as tax liability will be slightly higher in 2027. We project the economy will be about
2.8 percent larger than it otherwise would have been in the absence of the TCJA.
TABLE 4.
The Dynamic Distributional Impact of the
TCJA, Select Years
2018
2022
2025
2027
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%
Source: Tax Foundation Taxes and Growth Model, April 2018
Overall, the after-tax incomes of taxpayers in most income groups will steadily rise over the next
decade on a dynamic basis (Figure 5). Low-, middle-, and upper-middle-income taxpayers will see their
after-tax income steadily rise over the decade until 2025. In 2026, after-tax incomes will fall slightly
due to the expirations of the individual provisions of the TCJA. However, in both 2026 and 2027,
after-tax incomes will still be higher than they otherwise would have been, on a dynamic basis.
TA X FOUNDATION | 13
FIGURE 5.
Percent Change in After-tax Income
for Four Income Groups under the TCJA, 2018-2027
6.0%
99% to 100%
5.0%
90% to 95%
4.0%
3.0%
40% to 60%
0% to 2 0%
2.0%
1.0%
0.0%
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Source: Tax Foundation Taxes and Growth Model, April 2018
TAX FOUNDATION
Conclusion
The Tax Cuts and Jobs Act cut individual and corporate income taxes. As a result, taxpayers, of every
income level, will receive a tax cut in 2018 and for most of the next decade. The size of that tax cut
will vary over the decade because the TCJA is scheduled to phase in certain base broadeners and
phase out other provisions. Most notably, the individual income tax cuts are scheduled to expire,
meaning that by the end of the decade taxpayers could see tax increases relative to previous law.
However, the TCJA is also projected to boost the size of the economy. This means that taxpayers
will also see higher pretax income in the form of higher wages and capital income. The higher pretax
incomes will take time to materialize but will remain for at least two years after the individual income
tax cuts are scheduled to expire.
TA X FOUNDATION | 14
Methodology
The Tax Foundation uses its General Equilibrium Model to simulate the effects of government tax
and spending policies on the economy and on government revenues and budgets.5 The model can
produce both conventional and dynamic estimates of tax policy. For distributional analyses, the Tax
Foundation typically measures the long-run change in the distribution of the tax burden. As such, we
focus on the tax burden of individuals after a law has fully phased in, ignoring changes in tax liabilities
that may occur on an annual basis. Our analyses typically focus on the percent change in after-tax
income. This measures the change in living standards, or the amount of income taxpayers have
available to consume.
For this analysis, we expanded the scope of our distributional tables to include the effect of phaseins and phaseouts of provisions and economic effects that occur over the standard 10-year budget
window. The result is a series of distributional tables that capture the annual change in tax liability
and income for taxpayers, each year over the next 10 years.
For our conventional estimates, we hold the size of the economy constant and distribute changes in
each tax to taxpayers based on our standard methodology for each year over the budget window.
The individual income tax is borne entirely by those who pay it. Payroll taxes (both employer and
employee-side) are fully borne by workers. The corporate tax is borne by both capital and labor and
split evenly in the long run. To capture the dynamics of a corporate tax change over time, we phased
in labor’s share of the corporate tax from 10 percent in the first year (90 percent to capital) to 50
percent (50 percent for capital) in the fifth year.
For dynamic estimates, we distribute both the change in tax liabilities to taxpayers plus any changes
in income that arise from changes in economic output. For the most part, we distribute the tax
burden using the same method we employ for the conventional tables.
To distribute the corporate income tax on a dynamic basis, we follow the same principle we use to
distribute the corporate tax on a conventional basis. As such, the corporate tax falls on two types of
corporate profits: super-normal returns (and the returns to land) and “normal” returns to investing.
Like our conventional estimates, we distribute the portion of the corporate tax (50 percent) that
falls on super-normal returns and land to taxpayers in proportion to their reported capital gains and
dividend income.
In contrast to our conventional analysis, we do not distribute the tax on normal returns directly to
taxpayers with wage income. Rather, the extent to which the corporate tax falls on normal returns, it
impacts the incentive to invest and, thus, has an impact on the capital stock, worker productivity, and
wages. This impact of the corporate tax is taken care of naturally within the dynamic model when we
gross up taxpayer incomes due to higher output.
5
Stephen J. Entin, Huaqun Li, and Kyle Pomerleau, “Overview of the Tax Foundation’s General Equilibrium Model; April 2018 Update.”
TA X FOUNDATION | 15
For this analysis, we also accounted for the tax windfall for old capital. When the corporate income
tax rate is cut, it immediately provides a windfall gain to owners of existing capital. As such, the aftertax return on existing investment immediately increases. However, this benefit to existing capital
is temporary. The higher after-tax return on investment encourages companies to invest more. The
additional capital stock will drive down the after-tax return towards its original level and as it does,
takes back the benefit initially provided to old capital. Once the economy has fully adjusted to the
tax change, the after-tax return on physical capital has returned to its original level, implying that old
physical capital benefits from the initial corporate tax rate reduction. 6
Below is an example dynamic analysis of a 5-percentage point reduction in the corporate tax rate.
The table shows the dynamic impact of the corporate income tax rate in three pieces: 1) the tax
impact on super-normal returns, the returns on existing capital, and the returns to land, 2) the growth
effects, or the tax impact on the normal returns to investment, and 3) the total dynamic distributional
effect of the corporate rate cut. The table also includes the “split” of the tax on a dynamic basis
between capital and labor as a percent of the conventionally-measured corporate tax cut and its total
impact.
The first section of the table shows the distributional impact of a 5-percentage point reduction on
the portion of the corporate income tax attributable to super-normal returns, the returns on land,
and old capital—the portion of the corporate tax that is less sensitive to taxation and thus falls on
owners of capital.7 Due to the significantly skewed distribution of capital income, this portion of the
corporate income tax is highly progressive. As such, the benefits attributable to this income chiefly
benefit high-income taxpayers. For most of the decade, the top 20 percent of taxpayers receive a 0.9
percent increase in after-tax income compared to taxpayers in the bottom 80 percent, who receive
a 0.1 percent increase in after-tax income. The amount going to the top declines, however, in the
last year of the decade as after-tax returns are driven back closer to their original level, reducing the
benefit to owners of old capital.
The second section of the table shows the increase in after-tax income due to the reduction of taxes
on the normal return to investment, or the growth effects of the corporate tax. In the Tax Foundation
model, the growth effects of the corporate tax are distributed to the factors on production (owners
of capital and workers) based on their factor shares. Factor shares in the Tax Foundation model are
fixed at 33 percent to capital and 66 percent to labor. As the table shows, the growth effects of the
corporate tax are relatively flat across the income spectrum, showing a roughly proportional increase
in after-tax income for each income group of about 0.1 percent in the first year (2019). The size of
the impact, however, grows as corporations continue to invest and build the capital stock. By 2028,
taxpayers in all groups see an increase in after-tax income, due exclusively to growth, from between
0.8 percent and 1 percent.
The third section of the table shows the overall dynamic distributional impact of a 5 percentage-point
reduction in the corporate tax rate. It also shows the revenue impact of the corporate income tax
in terms of after-tax income, the total impact (revenue and economic impact), and the share of the
growth and revenue going to owners of capital and workers.
6
For standard, long-run Tax Foundation distributional analyses, the tax windfall for old capital is ignored.
7
This portion of the corporate tax is distributed to taxpayers in proportion to their reported capital gains and dividend income.
TA X FOUNDATION | 16
Overall, the dynamic distributional impact of the corporate tax over the decade has three main
characteristics.
First, the benefit of a corporate rate cut skews to higher-income taxpayers. Taxpayers in the top
20 percent receive a larger increase in after-tax income than taxpayers in the bottom 20 percent,
especially in the first few years. This is driven by the reduction in taxes on super-normal returns, the
returns to land, and the windfall to old capital, which is skewed toward the top.
Second, the more the corporate income tax rate cut boosts economic output, the more it boosts
wages and benefits taxpayers in the bottom 80 percent. In the first few years after a corporate rate
reduction, companies have not fully put into service new investments. As such, the boost to wages
is minor at first. By 2028, the economic effect of the corporate rate reduction has more fully phased
in. As such, the boost to the after-tax income for taxpayers in the bottom 80 percent has grown to
between 0.9 percent and 1 percent.
Third, the total benefit of the corporate rate cut in terms of increases in after-tax income exceeds
the initial size of the corporate tax cut. Theoretically, this result makes sense. To the extent that the
corporate income tax creates deadweight loss in excess of the revenue it collects, the total impact
on after-tax incomes will exceed the initial revenue impact of the tax. In the table below, we show
that between 2019 and 2028, the total impact of a 5-percentage point corporate rate cut on aftertax income, as a percent of the initial corporate tax cut, is between 111.0 percent in 2019 and 159.8
percent in 2028. This means that in 2028, after-tax incomes will be $1.59 higher for each dollar lost
by the federal government.
TA X FOUNDATION | 17
Table 4. Dynamic Distributional Analysis of A 5-Percentage Point Reduction
in the Corporate Income Tax Rate
Section 1. Tax on Super-normal Returns
2019
2022
2025
2028
0% to 20%
0.1%
0.1%
0.1%
0.1%
20% to 40%
0.1%
0.1%
0.1%
0.1%
40% to 60%
0.1%
0.1%
0.1%
0.1%
60% to 80%
0.1%
0.1%
0.1%
0.1%
80% to 100%
0.9%
0.9%
0.9%
0.8%
80% to 90%
0.2%
0.2%
0.2%
0.1%
90% to 95%
0.2%
0.2%
0.2%
0.2%
95% to 99%
0.5%
0.5%
0.5%
0.4%
99% to 100%
2.3%
2.4%
2.4%
2.0%
TOTAL
0.5%
0.5%
0.6%
0.5%
Section 2. Growth Impact (Tax on Normal Returns)
2019
2022
2025
2028
0% to 20%
0.1%
0.4%
0.6%
0.9%
20% to 40%
0.1%
0.3%
0.6%
0.8%
40% to 60%
0.1%
0.4%
0.6%
0.8%
60% to 80%
0.1%
0.4%
0.6%
0.8%
80% to 100%
0.1%
0.4%
0.7%
0.9%
80% to 90%
0.1%
0.4%
0.6%
0.8%
90% to 95%
0.1%
0.4%
0.7%
0.9%
95% to 99%
0.1%
0.4%
0.7%
0.9%
99% to 100%
0.1%
0.4%
0.7%
1.0%
TOTAL
0.1%
0.4%
0.6%
0.9%
Section 3. Total Effect
2019
2022
2025
2028
0% to 20%
0.2%
0.5%
0.8%
1.0%
20% to 40%
0.2%
0.4%
0.6%
0.8%
40% to 60%
0.2%
0.4%
0.7%
0.9%
60% to 80%
0.2%
0.4%
0.7%
0.9%
80% to 100%
1.0%
1.3%
1.6%
1.7%
80% to 90%
0.3%
0.5%
0.8%
1.0%
90% to 95%
0.3%
0.6%
0.9%
1.1%
95% to 99%
0.6%
0.9%
1.2%
1.3%
99% to 100%
2.4%
2.8%
3.2%
3.0%
TOTAL
0.6%
0.9%
1.2%
1.3%
Total Size of Corporate Tax Cut (% of after-tax income)
0.6%
0.7%
0.9%
0.8%
Share to Capital
92.3%
75.0%
64.4%
55.4%
Share to Labor
18.7%
51.9%
73.9%
104.4%
Total Impact on Income as a % of Initial Corporate Tax Cut
111.0%
126.9%
138.4%
159.8%
Source: Tax Foundation Taxes and Growth Model, April 2018
TA X FOUNDATION | 18
Differences with Joint Committee on Taxation and
Uncertainty in Modeling Estimates
Late last year, the Joint Committee on Taxation (JCT) released both revenue and distributional
analyses of the Tax Cuts and Jobs Act. These estimates are similar to Tax Foundation estimates
but included a few notable differences to our revenue and distributional analyses. 8 Differences in
estimates can arise from differences in our models, baseline data, assumptions about the incidence of
different taxes, the timing of tax revenue, and how individuals respond to tax changes.
There are three primary sources of uncertainty in modeling the provisions of the Tax Cuts and Jobs
Act: the significance of deficit effects, the timing of economic effects, and expectations regarding the
extension of temporary provisions.
Some economic models assume that there is a limited amount of saving available to the United States
to fund new investment opportunities when taxes on investment are reduced, and that when the
federal budget deficit increases, the amount of available saving for private investment is “crowded
out” by government borrowing, which reduces the long-run size of the U.S. economy. While past
empirical work has found evidence of crowd-out, the estimated impact is usually small. Furthermore,
global savings remains high, which may explain why interest rates remain low despite rising budget
deficits. We assume that global saving is available to assist in the expansion of U.S. investment, and
that a modest deficit increase will not meaningfully crowd out private investment in the United
States.
We are also forced to make certain assumptions about how quickly the economy would respond to
lower tax burdens on investment. There is an inherent level of uncertainty here that could impact the
timing of revenue generation within the budget window.9
Finally, we assume that temporary tax changes will expire on schedule, and that business decisions
will be made in anticipation of this expiration. To the extent that investments are made in the
anticipation that temporary expensing provisions might be extended, economic effects could exceed
our projections.
8
The Joint Committee on Taxation, “Estimated Budget Effects Of The Conference Agreement For H.R.1, The ‘Tax Cuts And Jobs Act,’” https://www.jct.gov/
publications.html?func=startdown&id=5053, and “Distributional Effects Of The Conference Agreement For H.R.1, The ‘Tax Cuts And Jobs Act,’” https://www.
jct.gov/publications.html?func=startdown&id=5054.
9
For this analysis, we used the same assumptions we made in our previous TCJA analysis: “Preliminary Details and Analysis of the Tax Cuts and Jobs Act,” Tax
Foundation.
TA X FOUNDATION | 19
Appendix
Full Distributional Tables
Conventional and Dynamic Distributional Tables by Income Quintile, All Provisions
Conventional
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
0% to 20%
0.8%
0.8%
1.0%
0.9%
0.9%
0.8%
0.7%
0.7%
-0.2%
-0.2%
20% to 40%
1.5%
1.5%
1.6%
1.5%
1.4%
1.3%
1.1%
1.0%
-0.4%
-0.5%
40% to 60%
1.6%
1.6%
1.7%
1.7%
1.6%
1.5%
1.3%
1.3%
-0.1%
-0.1%
60% to 80%
1.6%
1.6%
1.8%
1.8%
1.7%
1.6%
1.5%
1.4%
-0.1%
-0.2%
80% to 100%
2.6%
2.4%
2.7%
2.3%
2.4%
2.1%
1.9%
1.8%
0.0%
-0.1%
80% to 90%
1.6%
1.7%
1.8%
2.0%
1.7%
1.6%
1.5%
1.4%
0.1%
0.0%
90% to 95%
1.8%
1.8%
2.0%
1.9%
1.8%
1.7%
1.5%
1.4%
0.0%
0.0%
95% to 99%
2.9%
2.8%
3.1%
2.9%
2.8%
2.5%
2.3%
2.2%
-0.2%
-0.3%
99% to 100%
3.8%
3.2%
3.7%
3.1%
2.9%
2.6%
2.3%
2.1%
0.1%
-0.1%
TOTAL
2.3%
2.2%
2.5%
2.2%
2.1%
1.9%
1.7%
1.6%
0.0%
-0.1%
0% to 20%
1.1%
1.7%
2.4%
2.9%
3.2%
3.5%
3.7%
3.9%
2.9%
2.6%
20% to 40%
1.8%
2.3%
2.8%
3.2%
3.4%
3.6%
3.7%
3.7%
2.3%
2.0%
40% to 60%
1.9%
2.4%
3.0%
3.4%
3.6%
3.9%
4.0%
4.1%
2.7%
2.5%
60% to 80%
1.9%
2.4%
3.0%
3.5%
3.7%
4.0%
4.1%
4.2%
2.7%
2.4%
80% to 100%
2.9%
3.3%
4.2%
4.3%
4.7%
4.8%
4.9%
4.9%
3.1%
2.8%
80% to 90%
1.9%
2.4%
3.1%
3.7%
3.8%
4.1%
4.2%
4.3%
2.9%
2.6%
90% to 95%
2.1%
2.6%
3.4%
3.8%
4.0%
4.3%
4.4%
4.5%
3.1%
2.8%
95% to 99%
3.3%
3.7%
4.6%
4.9%
5.1%
5.3%
5.3%
5.4%
3.1%
2.8%
99% to 100%
4.1%
4.2%
5.4%
5.5%
5.6%
5.5%
5.4%
5.4%
3.4%
3.1%
TOTAL
2.6%
3.0%
3.8%
4.1%
4.3%
4.4%
4.5%
4.6%
3.0%
2.7%
Dynamic
TA X FOUNDATION | 20
Conventional and Dynamic Distributional Tables by Income Group, All Provisions
Static
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
0 – 5,000
0.6%
0.7%
0.9%
0.9%
0.8%
0.7%
0.5%
0.5%
0.4%
0.3%
5,000 – 10,000
0.7%
0.7%
0.9%
0.9%
0.9%
0.8%
0.7%
0.7%
0.1%
0.1%
10,000 – 20,000
0.9%
1.0%
1.1%
1.1%
1.0%
1.0%
0.9%
0.8%
-0.2%
-0.3%
20,000 – 30,000
1.3%
1.4%
1.5%
1.4%
1.4%
1.3%
1.1%
1.1%
-0.4%
-0.5%
30,000 – 40,000
1.7%
1.7%
1.8%
1.8%
1.7%
1.6%
1.4%
1.4%
-0.3%
-0.4%
40,000 – 50,000
1.7%
1.8%
1.9%
1.9%
1.8%
1.7%
1.6%
1.5%
-0.2%
-0.2%
50,000 – 75,000
1.7%
1.7%
1.8%
1.8%
1.7%
1.6%
1.5%
1.4%
-0.2%
-0.2%
75,000 – 100,000
1.8%
1.8%
1.9%
1.9%
1.8%
1.7%
1.6%
1.5%
-0.1%
-0.2%
100,000 – 150,000
1.5%
1.6%
1.7%
1.6%
1.6%
1.4%
1.3%
1.2%
-0.3%
-0.4%
150,000 – 200,000
1.9%
1.8%
2.0%
1.9%
1.8%
1.7%
1.5%
1.4%
0.0%
-0.1%
200,000 – 250,000
2.1%
2.1%
2.3%
2.1%
2.0%
1.8%
1.6%
1.5%
-0.1%
-0.1%
250,000 – 500,000
4.1%
3.9%
4.2%
3.9%
3.7%
3.5%
3.2%
3.1%
-0.2%
-0.3%
500,000 – 1,000,000
3.9%
3.5%
4.0%
3.5%
3.3%
3.0%
2.6%
2.5%
0.6%
0.4%
> 1,000,000
3.6%
3.1%
3.7%
3.0%
2.8%
2.4%
2.1%
1.9%
0.5%
0.2%
TOTAL FOR ALL
2.3%
2.2%
2.5%
2.2%
2.1%
1.9%
1.7%
1.6%
0.0%
-0.1%
0 – 5,000
1.1%
1.9%
3.0%
3.6%
4.0%
4.5%
4.8%
5.0%
4.8%
4.4%
5,000 – 10,000
1.0%
1.6%
2.4%
3.0%
3.3%
3.6%
3.9%
4.0%
3.5%
3.1%
10,000 – 20,000
1.2%
1.8%
2.4%
2.9%
3.2%
3.4%
3.6%
3.7%
2.8%
2.5%
20,000 – 30,000
1.6%
2.1%
2.7%
3.1%
3.3%
3.6%
3.7%
3.8%
2.5%
2.2%
30,000 – 40,000
2.0%
2.5%
3.1%
3.5%
3.7%
3.9%
4.1%
4.1%
2.6%
2.4%
40,000 – 50,000
2.0%
2.5%
3.2%
3.6%
3.8%
4.1%
4.3%
4.3%
2.8%
2.5%
50,000 – 75,000
2.0%
2.5%
3.1%
3.5%
3.8%
4.0%
4.2%
4.3%
2.8%
2.5%
75,000 – 100,000
2.0%
2.6%
3.2%
3.7%
3.9%
4.1%
4.3%
4.4%
2.8%
2.6%
100,000 – 150,000
1.8%
2.3%
3.0%
3.4%
3.7%
3.9%
4.0%
4.1%
2.7%
2.4%
150,000 – 200,000
2.2%
2.7%
3.4%
3.8%
4.1%
4.3%
4.4%
4.5%
3.1%
2.8%
200,000 – 250,000
2.5%
2.9%
3.8%
4.1%
4.3%
4.5%
4.6%
4.7%
3.1%
2.8%
250,000 – 500,000
4.4%
4.8%
5.7%
5.9%
6.1%
6.2%
6.2%
6.2%
3.0%
2.7%
500,000 – 1,000,000
4.2%
4.5%
5.7%
5.7%
5.9%
5.9%
5.8%
5.8%
3.9%
3.5%
> 1,000,000
4.0%
4.1%
5.5%
5.4%
5.6%
5.5%
5.4%
5.4%
3.5%
3.2%
TOTAL FOR ALL
2.6%
3.0%
3.8%
4.1%
4.3%
4.4%
4.5%
4.6%
3.0%
2.7%
Dynamic
TA X FOUNDATION | 21
Conventional Distributional Tables by Income Quintile, Individual and Corporate
Provisions
Individual
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
0% to 20%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.5%
0.5%
-0.4%
-0.4%
20% to 40%
1.4%
1.3%
1.2%
1.2%
1.1%
1.0%
0.9%
0.9%
-0.7%
-0.7%
40% to 60%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
1.1%
1.1%
-0.3%
-0.4%
60% to 80%
1.4%
1.4%
1.3%
1.3%
1.3%
1.3%
1.2%
1.2%
-0.4%
-0.4%
80% to 100%
1.7%
1.6%
1.7%
1.5%
1.7%
1.6%
1.6%
1.5%
-0.5%
-0.5%
80% to 90%
1.4%
1.3%
1.3%
1.5%
1.3%
1.3%
1.2%
1.2%
-0.3%
-0.3%
90% to 95%
1.4%
1.4%
1.3%
1.3%
1.3%
1.3%
1.3%
1.2%
-0.3%
-0.3%
95% to 99%
2.3%
2.2%
2.2%
2.1%
2.1%
2.1%
2.0%
1.9%
-0.6%
-0.6%
99% to 100%
1.9%
1.7%
1.8%
1.7%
1.9%
1.8%
1.7%
1.6%
-0.7%
-0.7%
TOTAL
1.6%
1.5%
1.5%
1.4%
1.5%
1.4%
1.4%
1.3%
-0.5%
-0.5%
Corporate
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
0% to 20%
0.2%
0.2%
0.4%
0.4%
0.3%
0.3%
0.2%
0.2%
0.2%
0.2%
20% to 40%
0.2%
0.2%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.3%
0.2%
40% to 60%
0.2%
0.2%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.3%
0.2%
60% to 80%
0.2%
0.2%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.3%
0.3%
80% to 100%
0.9%
0.8%
1.1%
0.9%
0.7%
0.5%
0.4%
0.3%
0.5%
0.4%
80% to 90%
0.3%
0.3%
0.5%
0.5%
0.5%
0.3%
0.2%
0.2%
0.3%
0.3%
90% to 95%
0.4%
0.4%
0.6%
0.6%
0.5%
0.4%
0.3%
0.2%
0.4%
0.3%
95% to 99%
0.7%
0.6%
0.9%
0.8%
0.6%
0.5%
0.3%
0.3%
0.4%
0.4%
99% to 100%
1.8%
1.5%
1.9%
1.4%
1.0%
0.8%
0.5%
0.4%
0.7%
0.6%
TOTAL
0.7%
0.7%
1.0%
0.8%
0.7%
0.5%
0.3%
0.3%
0.5%
0.4%
TA X FOUNDATION | 22
Conventional Distributional Tables by Income Group, Individual and Corporate
Provisions
Individual
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
0 – 5,000
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.1%
0.1%
5,000 – 10,000
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.6%
0.0%
0.0%
10,000 – 20,000
0.8%
0.8%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
-0.4%
-0.4%
20,000 – 30,000
1.2%
1.2%
1.1%
1.1%
1.0%
1.0%
1.0%
0.9%
-0.5%
-0.5%
30,000 – 40,000
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
-0.4%
-0.4%
40,000 – 50,000
1.6%
1.5%
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
-0.3%
-0.3%
50,000 – 75,000
1.5%
1.4%
1.4%
1.4%
1.3%
1.3%
1.3%
1.2%
-0.3%
-0.3%
75,000 – 100,000
1.5%
1.5%
1.5%
1.4%
1.4%
1.4%
1.3%
1.3%
-0.3%
-0.3%
100,000 – 150,000
1.2%
1.2%
1.1%
1.1%
1.1%
1.1%
1.0%
1.0%
-0.5%
-0.5%
150,000 – 200,000
1.4%
1.4%
1.3%
1.3%
1.3%
1.2%
1.2%
1.2%
-0.3%
-0.3%
200,000 – 250,000
1.6%
1.5%
1.5%
1.4%
1.4%
1.4%
1.3%
1.3%
-0.5%
-0.5%
250,000 – 500,000
3.1%
3.0%
3.0%
2.9%
3.0%
2.9%
2.8%
2.8%
-0.8%
-0.9%
500,000 – 1,000,000
2.4%
2.2%
2.3%
2.2%
2.3%
2.2%
2.1%
2.0%
-0.4%
-0.4%
> 1,000,000
1.7%
1.5%
1.6%
1.5%
1.7%
1.6%
1.5%
1.5%
-0.7%
-0.8%
TOTAL FOR ALL
1.6%
1.5%
1.5%
1.4%
1.5%
1.4%
1.4%
1.3%
-0.5%
-0.5%
Corporate
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
0 – 5,000
0.5%
0.5%
0.7%
0.7%
0.6%
0.4%
0.3%
0.2%
0.3%
0.3%
5,000 – 10,000
0.2%
0.2%
0.4%
0.4%
0.3%
0.3%
0.2%
0.1%
0.1%
0.1%
10,000 – 20,000
0.2%
0.2%
0.4%
0.4%
0.3%
0.3%
0.2%
0.1%
0.1%
0.1%
20,000 – 30,000
0.1%
0.2%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.1%
0.1%
30,000 – 40,000
0.2%
0.2%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.1%
0.1%
40,000 – 50,000
0.2%
0.2%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.1%
0.1%
50,000 – 75,000
0.2%
0.3%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.1%
0.1%
75,000 – 100,000
0.2%
0.3%
0.5%
0.5%
0.4%
0.3%
0.2%
0.2%
0.2%
0.1%
100,000 – 150,000
0.3%
0.4%
0.6%
0.5%
0.5%
0.4%
0.3%
0.2%
0.2%
0.2%
150,000 – 200,000
0.5%
0.5%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.3%
0.3%
200,000 – 250,000
0.6%
0.6%
0.8%
0.7%
0.6%
0.5%
0.3%
0.3%
0.4%
0.3%
250,000 – 500,000
0.9%
0.9%
1.2%
0.9%
0.7%
0.6%
0.4%
0.3%
0.6%
0.5%
500,000 – 1,000,000
1.5%
1.4%
1.7%
1.3%
1.0%
0.8%
0.5%
0.4%
1.0%
0.8%
> 1,000,000
1.9%
1.6%
2.0%
1.5%
1.1%
0.8%
0.6%
0.5%
1.2%
1.0%
TOTAL FOR ALL
0.7%
0.7%
1.0%
0.8%
0.7%
0.5%
0.3%
0.3%
0.5%
0.4%
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE
AGREEMENT FOR THE TAX CUTS AND JOBS ACT
TPC Staff
December 18, 2017
The Tax Policy Center has released distributional estimates of the conference agreement for the Tax
Cuts and Jobs Act as filed on December 15, 2017. We find the bill would reduce taxes on average for all
income groups in both 2018 and 2025. In general, higher income households receive larger average tax
cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers
in the 95th to 99th percentiles of the income distribution. On average, in 2027 taxes would change little
for lower- and middle-income groups and decrease for higher-income groups. Compared to current law,
5 percent of taxpayers would pay more tax in 2018, 9 percent in 2025, and 53 percent in 2027.
T
he conference agreement for the Tax Cuts and Jobs Act that was filed on December 15, 2017 would make
major changes to the individual and corporate income taxes, estate and gift taxes, and certain federal excise
taxes.1 The bill would also repeal the Affordable Care Act’s (ACA) individual mandate, but the distributional
estimates presented here do not include the effects of that provision.2
The Tax Policy Center has released distributional estimates of this legislation. We find the following:
•
Compared to current law, taxes would fall for all income groups on average in 2018, increasing overall
average after-tax income by 2.2 percent. In general, tax cuts as a percentage of after-tax income would be
larger for higher-income groups, with the largest cuts as a share of income going to taxpayers in the 95 th to
99th percentiles of the income distribution.
1 This analysis is based on the conference report for the Tax Cuts and Jobs Act as filed on December 15, 2017. The text and descriptions of the
bill and estimated revenue effects are available at https://rules.house.gov/conference-report/hr-1.
2 The effects of this provision are not included because only a portion of the $314 billion change in the federal budget deficit over the 2018-
2027 period is due to a change in tax receipts. A recent report from the Congressional Budget Office of the tax and non-tax effects of repealing
the ACA’s individual mandate is available at https://www.cbo.gov/publication/53300.
TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION
1
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
•
The pattern of tax changes across income groups would be similar in 2025 (the last year before nearly all the
individual provisions sunset) although the magnitude of average tax decreases would be slightly smaller for
most income groups.
•
In 2027, the overall tax reduction would be just 0.2 percent of after-tax income. On average, relative to
current law, low- and middle-income taxpayers would see little change and taxpayers in the top 1 percent
would receive an average tax cut of 0.9 percent of after-tax income.
•
Some taxpayers would pay more in taxes under the proposal in 2018 and 2025 than under current law:
about 5 percent of taxpayers in 2018 and 9 percent in 2025. In 2027, however, taxes would increase for 53
percent of taxpayers compared with current law.
DISTRIBUTIONAL EFFECTS
The conference agreement would have different effects on the distribution of tax burdens in different years, so we
present results for 2018, 2025, and 2027 (figure 1).
TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION
2
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
2018
In 2018, taxes would be reduced by about $1,600 on average, increasing after-tax incomes 2.2 percent (table 1). Taxes
would decline on average across all income groups. Taxpayers in the bottom quintile (those with income less than
$25,000) would see an average tax cut of $60, or 0.4 percent of after-tax income. Taxpayers in the middle income
quintile (those with income between about $49,000 and $86,000) would receive an average tax cut of about $900, or
1.6 percent of after-tax income. Taxpayers in the 95th to 99th income percentiles (those with income between about
$308,000 and $733,000) would benefit the most as a share of after-tax income, with an average tax cut of about
$13,500 or 4.1 percent of after-tax income. Taxpayers in the top 1 percent of the income distribution (those with
income more than $733,000) would receive an average cut of $51,000, or 3.4 percent of after-tax income.
TABLE 1
Distribution of Federal Tax Change of the Conference Agreement
for the Tax Cuts and Jobs Act
By expanded cash income percentile, 2018a
Expanded cash
income percentile
b
Percent change
in after-tax
income c
Share of total
federal tax change
(%)
Average federal
tax change
(dollars)
Average federal
tax rate d
Change
Under the proposal
(% points)
(%)
Lowest quintile
Second quintile
Middle quintile
Fourth quintile
Top quintile
All
0.4
1.2
1.6
1.9
2.9
2.2
1.0
5.2
11.2
18.4
65.3
100.0
-60
-380
-930
-1,810
-7,640
-1,610
-0.4
-1.1
-1.4
-1.6
-2.2
-1.8
3.7
7.6
12.4
15.8
23.3
18.1
Addendum
80-90
90-95
95-99
Top 1 percent
Top 0.1 percent
2.0
2.2
4.1
3.4
2.7
13.1
9.6
22.1
20.5
7.9
-2,970
-4,550
-13,480
-51,140
-193,380
-1.6
-1.8
-3.1
-2.3
-1.8
18.5
20.2
22.2
30.3
31.6
Sour ce: Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1)
Not es : Number of Alternative Minimum Tax (AMT) taxpayers (millions): Baseline: 5.2; Proposal: 0.2. Itemizers (millions): Baseline: 46.5, Proposal: 19.3.
(a) Calendar year. Baseline is current law. Proposal includes provisions contained in the conference agreement for the Tax Cuts and Jobs Act as filed on
12/15/2017. Excludes the effects of repealing the Affordable Care Act’s Individual Shared Responsibility Payment (i.e., “individual mandate”).
(b) Percentiles include both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative adjusted gross income
are excluded from their respective income class but are included in the totals. The income percentile classes used in this table are based on the income
distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2017 dollars): 20% $25,000; 40% $48,600; 60%
$86,100; 80% $149,400; 90% $216,800; 95% $307,900; 99% $732,800; 99.9% $3,439,900. For a description of expanded cash income, see
http://www.taxpolicycenter.org/TaxModel/income.cfm
(c) After-tax income is expanded cash income less: individual income tax net of refundable credits; corporate income tax; payroll taxes (Social Security and
Medicare); estate tax; and excise taxes.
(d) Average federal tax (includes individual and corporate income tax, payroll taxes for Social Security and Medicare, the estate tax, and excise taxes) as a
percentage of average expanded cash income.
TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION
3
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
2025
In 2025, the average tax cut would be almost $1,600, or 1.7 percent of after-tax income (table 2). The magnitude of
the average tax cut as a share of after-tax income would be smaller in 2025 than in 2018 for most income groups,
mainly because the tax system would be indexed to the slower-growing chain-weighted consumer price index and
due to the phase-out of certain business tax cuts, and phase-in of certain business tax increases.
Taxpayers in the bottom quintile would see an average tax cut of $70, or 0.4 percent of after-tax income. Taxpayers in
the middle income quintile would receive an average tax cut of about $900, or 1.3 percent of after-tax income.
Taxpayers in the 95th to 99th income percentiles would benefit the most as a share of after-tax income, with an average
tax cut of almost $13,000, or 3.2 percent of after-tax income. Taxpayers in the top 1 percent of the income distribution
would receive an average cut of about $61,000, or 2.9 percent of after-tax income.
TABLE 2
Distribution of Federal Tax Change of the Conference Agreement
for the Tax Cuts and Jobs Act
By expanded cash income percentile, 2025a
Expanded cash
income percentile
b
Percent change
in after-tax
income c
Share of total
federal tax change
(%)
Average federal
tax change
(dollars)
Average federal
tax rate d
Change
Under the proposal
(% points)
(%)
Lowest quintile
Second quintile
Middle quintile
Fourth quintile
Top quintile
All
0.4
0.9
1.3
1.4
2.3
1.7
1.3
5.6
11.4
17.4
65.8
100.0
-70
-390
-910
-1,680
-7,460
-1,570
-0.4
-0.8
-1.1
-1.2
-1.7
-1.4
3.9
7.8
12.8
15.8
24.4
18.7
Addendum
80-90
90-95
95-99
Top 1 percent
Top 0.1 percent
1.4
1.5
3.2
2.9
2.7
11.0
7.9
21.6
25.3
10.5
-2,410
-3,670
-12,860
-61,090
-252,300
-1.1
-1.2
-2.4
-1.9
-1.8
18.7
20.8
23.1
31.4
32.1
Sour ce: Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1)
Not es : Number of Alternative Minimum Tax (AMT) taxpayers (millions): Baseline: 5.7; Proposal: 0.2. Itemizers (millions): Baseline: 54.9, Proposal: 26.4.
(a) Calendar year. Baseline is current law. Proposal includes provisions contained in the conference agreement for the Tax Cuts and Jobs Act as filed on
12/15/2017. Excludes the effects of repealing the Affordable Care Act’s Individual Shared Responsibility Payment (i.e., “individual mandate”).
(b) Percentiles include both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative adjusted gross income
are excluded from their respective income class but are included in the totals. The income percentile classes used in this table are based on the income
distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2017 dollars): 20% $27,300; 40% $53,400; 60%
$91,700; 80% $153,800; 90% $224,400; 95% $308,900; 99% $837,800; 99.9% $4,704,600. For a description of expanded cash income, see
http://www.taxpolicycenter.org/TaxModel/income.cfm
(c) After-tax income is expanded cash income less: individual income tax net of refundable credits; corporate income tax; payroll taxes (Social Security and
Medicare); estate tax; and excise taxes.
(d) Average federal tax (includes individual and corporate income tax, payroll taxes for Social Security and Medicare, the estate tax, and excise taxes) as a
percentage of average expanded cash income.
TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION
4
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
2027
In 2027, the overall average tax cut would be $160, or 0.2 percent of after-tax income (table 3), largely because almost
all individual income tax provisions would sunset after 2025.
On average, taxes would be little changed for taxpayers in the bottom 95 percent of the income distribution. Taxpayers
in the bottom two quintiles of the income distribution would face an average tax increase of 0.1 percent of after-tax
income; taxpayers in the middle income quintile would see no material change on average; and taxpayers in the 95th to
99th income percentiles would receive an average tax cut of 0.2 percent of after-tax income. Taxpayers in the top 1
percent of the income distribution would receive an average tax cut of 0.9 percent of after-tax income, accounting for
83 percent of the total benefit for that year.
TABLE 3
Distribution of Federal Tax Change of the Conference Agreement
for the Tax Cuts and Jobs Act
By expanded cash income percentile, 2027a
Expanded cash
income percentile
b
Percent change
in after-tax
income c
Share of total
federal tax change
(%)
Average federal
tax change
(dollars)
Average federal
tax rate d
Change
Under the proposal
(% points)
(%)
Lowest quintile
Second quintile
Middle quintile
Fourth quintile
Top quintile
All
-0.1
-0.1
0.0
0.0
0.4
0.2
-4.6
-5.4
-2.1
2.9
107.3
100.0
30
40
20
-30
-1,260
-160
0.1
0.1
0.0
0.0
-0.3
-0.1
4.4
8.9
13.8
16.9
26.0
20.0
Addendum
80-90
90-95
95-99
Top 1 percent
Top 0.1 percent
0.1
0.1
0.2
0.9
1.4
4.4
3.9
16.4
82.8
59.8
-100
-190
-1,010
-20,660
-148,260
0.0
-0.1
-0.2
-0.6
-0.9
19.7
21.8
25.4
32.9
32.9
Sour ce: Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1)
Not es : Number of Alternative Minimum Tax (AMT) taxpayers (millions): Baseline: 5.6; Proposal: 6.0. Itemizers (millions): Baseline: 56.8, Proposal: 57.4.
(a) Calendar year. Baseline is current law. Proposal includes provisions contained in the conference agreement for the Tax Cuts and Jobs Act as filed on
12/15/2017. Excludes the effects of repealing the Affordable Care Act’s Individual Shared Responsibility Payment (i.e., “individual mandate”).
(b) Percentiles include both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative adjusted gross income
are excluded from their respective income class but are included in the totals. The income percentile classes used in this table are based on the income
distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2017 dollars): 20% $28,100; 40% $54,700; 60%
$93,200; 80% $154,900; 90% $225,400; 95% $304,600; 99% $912,100; 99.9% $5,088,900. For a description of expanded cash income, see
http://www.taxpolicycenter.org/TaxModel/income.cfm
(c) After-tax income is expanded cash income less: individual income tax net of refundable credits; corporate income tax; payroll taxes (Social Security and
Medicare); estate tax; and excise taxes.
(d) Average federal tax (includes individual and corporate income tax, payroll taxes for Social Security and Medicare, the estate tax, and excise taxes) as a
percentage of average expanded cash income.
TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION
5
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
WINNERS AND LOSERS
The impact of the proposal on individual taxpayers differs depending on their income sources, demographic and family
statuses, and other characteristics that affect eligibility for certain tax benefits. Our estimates of the number of
taxpayers who would pay more tax or less tax than under current law exclude certain minor provisions (listed in tables 4,
5, and 6), for which it is difficult to assign the tax changes to specific taxpayers. 3
In 2018, 80 percent of taxpayers would receive a tax cut from the included provisions–averaging about $2,100–and
about 5 percent would face an average tax increase of about $2,800 (table 4).4 In the bottom income quintile, 54
percent would receive a tax cut and 1 percent would face a tax increase. In the middle income quintile, 91 percent
would receive a tax cut and 7 percent would face a tax increase. In the top 1 percent of the income distribution, 91
percent would receive a tax cut and 9 percent would face a tax increase.
TABLE 4
Tax Units with a Tax Change from Major Provisions of the Conference
Agreement for the Tax Cuts and Jobs Act
By expanded cash income percentile, 2018a
Average federal
tax change
Tax units with tax cut or increase c
Expanded cash income
percentile b
With tax cut
Percent of
tax units
With tax increase
Average
tax cut
Percent of
tax units
Average
tax increase
All Provisions
Major Provisions
included here
Lowest quintile
Second quintile
Middle quintile
Fourth quintile
Top quintile
All
53.9
86.8
91.3
92.5
93.7
80.4
-130
-480
-1,090
-2,070
-8,510
-2,140
1.2
4.6
7.3
7.3
6.2
4.8
810
740
910
1,360
8,800
2,770
-60
-380
-930
-1,810
-7,640
-1,610
-60
-380
-930
-1,810
-7,430
-1,590
Addendum
80-90
90-95
95-99
Top 1 percent
Top 0.1 percent
92.3
94.4
97.3
90.7
83.7
-3,370
-4,910
-13,890
-61,940
-285,490
7.6
5.5
2.7
9.3
16.2
1,800
1,890
8,260
93,910
387,610
-2,970
-4,550
-13,480
-51,140
-193,380
-2,970
-4,530
-13,280
-47,550
-176,070
Sour ce: Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1)
Not es : Number of Alternative Minimum Tax (AMT) taxpayers (millions): Baseline: 5.2; Proposal: 0.2. Itemizers (millions): Baseline: 46.5, Proposal: 19.3.
(a) Calendar year. Baseline is current law. Proposal includes provisions contained in the conference agreement for the Tax Cuts and Jobs Act as filed on 12/15/2017.
Excludes the effects of repealing the Affordable Care Act’s Individual Shared Responsibility Payment (i.e., “individual mandate”). Due to data limitations, also excludes the
following provisions: repeal of exclusion for employer-provided qualified moving expense reimbursements; repeal of deduction for moving expenses (other than members
of the Armed Forces); retirement plan and casualty loss relief for certain disaster areas; repeal of deduction for alimony payments and corresponding inclusion in income;
simplified accounting for small business; modify treatment of S corporation conversions into C corporations; limitation and repeal of deduction by employers of expenses
for certain fringe benefits; modification of limitation on excessive employee remuneration; tax gain on the sale of a partnership interest on look-thru basis; craft beverage
modernization and tax reform; and individual income tax portion of certain business provisions.
(b) Percentiles include both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative adjusted gross income are
excluded from their respective income class but are included in the totals. The income percentile classes used in this table are based on the income distribution for the
entire population and contain an equal number of people, not tax units. The breaks are (in 2017 dollars): 20% $25,000; 40% $48,600; 60% $86,100; 80% $149,400; 90%
$216,800; 95% $307,900; 99% $732,800; 99.9% $3,439,900. For a description of expanded cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm
(c) Includes tax units with a change in federal tax burden of $10 or more in absolute value.
3 We do include the average effect of these provisions by income group in tables 1-3, but their effects vary substantially within each group and
we do not have the information necessary to assign the tax changes to specific individuals or households.
4 The remaining 15 percent of taxpayers would see no material change in their tax burden.
TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION
6
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
In 2025, 76 percent of taxpayers would experience a tax cut from the included provisions averaging about $2,500, and 9
percent would face an average tax increase of almost $2,500 (table 5). In the bottom income quintile, 50 percent would
receive a tax cut and 5 percent would face a tax increase. In the middle income quintile, 87 percent would receive a tax
cut and 11 percent would face a tax increase. In the top 1 percent of the income distribution, 85 percent would receive
a tax cut and 15 percent would face a tax increase.
TABLE 5
Tax Units with a Tax Change from Major Provisions of the Conference
Agreement for the Tax Cuts and Jobs Act
By expanded cash income percentile, 2025a
Average federal
tax change
Tax units with tax cut or increase c
Expanded cash income
percentile b
With tax cut
Percent of
tax units
With tax increase
Average
tax cut
Percent of
tax units
Average
tax increase
All Provisions
Major Provisions
included here
Lowest quintile
Second quintile
Middle quintile
Fourth quintile
Top quintile
All
49.8
80.7
87.4
87.2
86.8
75.5
-200
-570
-1,220
-2,240
-10,370
-2,530
5.1
7.0
10.9
12.4
13.1
8.9
280
680
1,040
1,590
6,890
2,460
-70
-390
-910
-1,680
-7,460
-1,570
-80
-420
-950
-1,760
-8,100
-1,690
Addendum
80-90
90-95
95-99
Top 1 percent
Top 0.1 percent
84.9
85.6
94.2
84.9
83.6
-3,410
-4,940
-14,900
-95,290
-432,730
15.0
14.3
5.7
15.1
16.3
2,140
2,050
8,440
80,680
462,630
-2,410
-3,670
-12,860
-61,090
-252,300
-2,570
-3,940
-13,560
-68,730
-286,280
Sour ce: Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1)
Not es : Number of Alternative Minimum Tax (AMT) taxpayers (millions): Baseline: 5.7; Proposal: 0.2. Itemizers (millions): Baseline: 54.9, Proposal: 26.4.
(a) Calendar year. Baseline is current law. Proposal includes provisions contained in the conference agreement for the Tax Cuts and Jobs Act as filed on 12/15/2017.
Excludes the effects of repealing the Affordable Care Act’s Individual Shared Responsibility Payment (i.e., “individual mandate”). Due to data limitations, also excludes the
following provisions: repeal of exclusion for employer-provided qualified moving expense reimbursements; repeal of deduction for moving expenses (other than members
of the Armed Forces); retirement plan and casualty loss relief for certain disaster areas; repeal of deduction for alimony payments and corresponding inclusion in income;
simplified accounting for small business; modify treatment of S corporation conversions into C corporations; limitation and repeal of deduction by employers of expenses
for certain fringe benefits; modification of limitation on excessive employee remuneration; tax gain on the sale of a partnership interest on look-thru basis; craft beverage
modernization and tax reform; and individual income tax portion of certain business provisions.
(b) Percentiles include both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative adjusted gross income are
excluded from their respective income class but are included in the totals. The income percentile classes used in this table are based on the income distribution for the
entire population and contain an equal number of people, not tax units. The breaks are (in 2017 dollars): 20% $27,300; 40% $53,400; 60% $91,700; 80% $153,800; 90%
$224,400; 95% $308,900; 99% $837,800; 99.9% $4,704,600. For a description of expanded cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm
(c) Includes tax units with a change in federal tax burden of $10 or more in absolute value.
TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION
7
DISTRIBUTIONAL ANALYSIS OF THE CONFERENCE AGREEMENT FOR THE TCJA
In 2027, 25 percent of taxpayers would experience a tax cut from the included provisions, averaging about $1,500, and
53 percent would face an average tax increase of $180 (table 6). In the bottom income quintile, 11 percent would
receive a tax cut and 33 percent would face a tax increase. In the middle income quintile, 24 percent would receive a
tax cut and 70 percent would face a tax increase. In the top 1 percent of the income distribution, 76 percent would
receive a tax cut and 24 percent would face a tax increase.
TABLE 6
Tax Units with a Tax Change from Major Provisions of the Conference
Agreement for the Tax Cuts and Jobs Act
By expanded cash income percentile, 2027a
Average federal
tax change
Tax units with tax cut or increase c
Expanded cash income
percentile b
With tax cut
Percent of
tax units
With tax increase
Average
tax cut
Percent of
tax units
Average
tax increase
All Provisions
Major Provisions
included here
Lowest quintile
Second quintile
Middle quintile
Fourth quintile
Top quintile
All
11.1
23.3
24.4
33.2
46.7
25.2
-120
-280
-520
-680
-4,710
-1,540
32.6
57.7
69.7
64.2
52.3
53.4
90
140
150
190
420
180
30
40
20
-30
-1,260
-160
20
20
-30
-110
-1,980
-290
Addendum
80-90
90-95
95-99
Top 1 percent
Top 0.1 percent
38.1
50.2
58.0
75.9
91.9
-1,150
-1,320
-3,510
-39,690
-206,280
60.5
48.7
41.5
23.8
8.0
300
450
740
1,250
3,200
-100
-190
-1,010
-20,660
-148,260
-260
-450
-1,730
-29,820
-189,360
Sour ce: Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1)
Not es : Number of Alternative Minimum Tax (AMT) taxpayers (millions): Baseline: 5.6; Proposal: 6.0. Itemizers (millions): Baseline: 56.8, Proposal: 57.4.
(a) Calendar year. Baseline is current law. Proposal includes provisions contained in the conference agreement for the Tax Cuts and Jobs Act as filed on 12/15/2017.
Excludes the effects of repealing the Affordable Care Act’s Individual Shared Responsibility Payment (i.e., “individual mandate”). Due to data limitations, also excludes the
following provisions: repeal of exclusion for employer-provided qualified moving expense reimbursements; repeal of deduction for moving expenses (other than members
of the Armed Forces); retirement plan and casualty loss relief for certain disaster areas; repeal of deduction for alimony payments and corresponding inclusion in income;
simplified accounting for small business; modify treatment of S corporation conversions into C corporations; limitation and repeal of deduction by employers of expenses
for certain fringe benefits; modification of limitation on excessive employee remuneration; tax gain on the sale of a partnership interest on look-thru basis; craft beverage
modernization and tax reform; and individual income tax portion of certain business provisions.
(b) Percentiles include both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative adjusted gross income are
excluded from their respective income class but are included in the totals. The income percentile classes used in this table are based on the income distribution for the
entire population and contain an equal number of people, not tax units. The breaks are (in 2017 dollars): 20% $28,100; 40% $54,700; 60% $93,200; 80% $154,900; 90%
$225,400; 95% $304,600; 99% $912,100; 99.9% $5,088,900. For a description of expanded cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm
(c) Includes tax units with a change in federal tax burden of $10 or more in absolute value.
The views expressed are those of the authors and should not be attributed to the Urban Institute, the Brookings
Institution, their trustees, or their funders. The Tax Policy Center is a joint venture of the Urban Institute and
Brookings Institution. For more information, visit taxpolicycenter.org or e-mail info@taxpolicycenter.org.
Copyright © December 2017 Tax Policy Center. All rights reserved. Permission is granted for reproduction of this file, with attribution to the Urban-Brookings
Tax Policy Center.
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8
Evolution of Tax Models (1750-1960)
From tariffs to the income tax
Distribution models and tax burden
I.
Struggle to define the tax system
 Essentially a political dispute about the best method to
distribute the tax burden.
 What model?
Constitutional Authority:
Apportionment as the Tax Distribution Model
“The Fly in the Ointment”
 Article 1, Section 8 gave Congress the power to lay taxes
directly on people, transactions, or property without going
through the states, and gave the broad power to choose the
tax base.
 Article I, Section 2 requires that direct taxes be
apportioned among the states by population. The Founders
defined “direct tax” broadly, usually using the term as a
synonym for “internal tax” and encompassing all taxes
except for customs duties.
What does apportionment mean?
 To be apportioned any tax would have to be adjusted so
that the amount collected in any political jurisdiction
would be proportional to the number of people who
live in that jurisdiction, regardless of wealth.
Reasons for Apportionment
 Apportionment was a product of the requisition system
under the Articles of Confederation to finance the
revolutionary war. Intended as a uniform tax rate among
the states
 Brought over from the Articles into the Constitution solely
to help settle a dispute as to the power of the slave states in
Congress.
 With the abandonment of the requisition system and
abolition of slavery: undercut the original policy reasons for
apportionment as the tax distribution model.
 Still remains the distribution model.
Problem with Apportionment
 If one state has twice the population of another, twice the
amount of direct tax must be collected from within the more
populous state. The system is an inequitable distribution tool
when the tax base is uneven per capita among the states.
States with more people pay more tax regardless of actual
consumption or productivity in the economy.
 The assumption is also based on equal wealth for each person.
Tax rates are necessarily higher in poorer states where relative
wealth per capita is less than in other states. Where the tax
base is especially thin, the tax rates are prohibitive. A 2% tax
on 1 million is less onerous than a 2% tax on $1000.
Partial Constitutional Fix
 Apportionment was and is viewed as a constitutional
blunder!
 The Sixteenth Amendment, adopted in 1913, allows
Congress to lay “income taxes” without apportionment
among the states. Only applies to income tax.
 Court solution: Because only “direct taxes” needed to
be apportioned, a court can avoid apportionment by
defining “income tax” broadly enough to cover the tax
at issue, or by defining “direct tax” narrowly enough to
exclude the tax at issue.
Apportionment is still a problem in
creating tax policy
 Consumption tax: an apportioned consumption tax would
be constitutional as a direct tax, but the tax rate would
have to be higher in the poorer states because a poorer
state has a smaller per capita tax base over which to
spread its quota. Only a direct tax on goods might work.
 Can’t tax unrealized appreciation: Sixteenth Amendment
allows an “income” tax without apportionment, but
unrealized appreciation in the market value of
investments is considered “capital” and not “income,”
apportionment would apply.
II. Struggle to fund the government
 Relationship between “taxing and spending” defines
the optimal level of revenues and the optimal level of
expenditures
 Country based on decentralized notion of federalism
 Framers did not want to give the federal government
unlimited powers to tax or to deprive states of revenue
collection.
Early Federal Budgets
 Early federal budgets were minimal; consider the
nature of the expenditures of the federal government
 States had the burden of building infrastructure
 Used tariffs and excise taxes because these were not
direct taxes that required apportionment
 Tariff based sytem
Types of taxes
 Tariffs
 Excise Taxes
 Direct Taxes (or internal tax)
 Income Taxes
 Consumption taxes
 Progressive rates
 Regressive rates
Basic Definitions
 Tariff: A tax imposed on imported goods and services.
 Excise tax: Paid when purchases are made on a specific
good, such as gasoline or whiskey and are often included in
the price of the product. Also paid on activities, such as on
wagering or on highway usage by trucks. Whiskey
Rebellion!!
 Direct taxes or “internal tax:” all taxes except taxes on
imports and exports; excludes excise taxes.
 Income tax: annual charge on both earned (wages, salaries,
commissions)and unearned income (dividends interest and
rents) §61 Income from whatever source derived.
Definitions continued
 Consumption tax: A tax on goods or services. Two forms:
1) sales taxes, tariffs, excise and other taxes on consumed
goods and services; or 2) a taxing system as a whole where
people are taxed based on how much they consume rather
than how much they add to the economy.
 Progressive rates: means that the average tax rate goes up
with increases in income
 Regressive rates: A tax that takes a larger percentage from
low-income people than from high-income people. A
regressive tax is generally a tax that is applied uniformly.
Impact harder on lower-income individuals harder.
System of Tariffs and Excise Taxes
1776-1812
“Balanced Budget Principal” became the prescription for
limited government.
High tariffs used for trade protectionism between the
North and the South. (Slavery was not the only problem).
Tariffs and excise taxes are regressive taxes.
The Precursor to the Income Tax:
The War of 1812 and The Civil War 1861
 The Civil War left a $2.7 billion dollar debt
 Tax policy still driving spending policies; during 1870-1890
federal spending was flat.
 Tariff Act of 1894
 Declared unconstitutional in Pollack: direct taxation in
violation of apportionment requirements of the constitution.
 Recognition that the federal government had to fund
infrastructure.
 New spending policy used to expand the power of the
federal government (social programs).
World War I:
The Federal Income Tax (1913)
 1909: Income Tax imposed on corporations
 1913: amendment to the constitution
 Reversed tax policy driver of spending policy
 Huge costs of WWI transformed federal tax policy:
departure from tariff system of taxation to one almost
entirely supported by the income tax.
 Progressivity rates: central income tax purpose was to
establish fair distribution based upon “the ability to
pay.”
1913-1940
 Debate focused on partisan divisions over fairness, over the economic and
revenue effects of high tax rates; and the size and role of government to be
funded by taxation.
 Tariff Act of 1922/Smoot Hawley Tariff Act of 1930
 Repeal of Prohibition
 Progressivity rates: central income tax purpose was to establish fair
distribution based upon “combating an unjust concentration of wealth and
economic power.” The new concept of fairness in wealth distribution.
 New Deal: the use of deficit financing to create fiscal stimulation
“deliberate use of government fund and government credit to energize
private enterprise;” the connection between balanced budgets and limited
government eliminated. Social spending expanded: creation of Social
Security.
Truman-Eisenhower Period 1945-60
 Tax policy is subordinated to spending policy based upon the
recognition of a need for fiscal policy during economic
downturns.
 Cold War key tax initiatives: massive military spending
 Truman opposed to tax cut stimulus-fuel to inflation; Congress
demanding spending cuts
 Korean War put a stop to the fiscal policy goals of either side
 Revenue levels, rather than equity or economic growth, were
the central priorities
 IRC 1954
What is good tax policy?
 Should the tax code be used for revenue raising,
economic or social policy purposes?
 Traditional argument: broad tax base and low rates?
 Income tax, consumption tax or some combination of
the two?
 Which theory: Keynesian; supply side; pro-capital
formation?
 Lower taxes on capital gains and estates?
Theories
 Consumption tax theorists: tax equally those with equal
consumption rather than those with equal incomes.
 Compromise between income tax and consumption tax:
VAT (value added tax)
 Keynesians: use tax cuts to stimulate the economy
 Supply side: lower tax rates to boost capital and labor
 Capital Formation Reformers: accelerated depreciation
allowance and investment tax credits (capital
incentives)
 Capital Gains Advocates: pay reduced taxes when
capital assets are sold (continuous attempt to convert
ordinary income to capital gains)
 The Progressives: support use of the tax code for social
policy. Tax increases should not increase taxes on the
poor and tax cuts should give lower and middle
income taxpayers higher after tax income.
Modern Tax Policy:
A Retreat from the Four Maxims
 Tax bills are often enacted through a process of random
reactions to pressures from interest groups and
lobbyists.
 Tax code riddled with social and individual
expenditures that promote unequal and inequitable
treatment of equals, distort investment and
consumption choices and increase administrative and
enforcement costs.
Why the U.S. Economy Will Collapse
 Current tax entitlements are unsustainable
 “The Wake-Up Tour”
Patrick Henry’s Resolutions Against the Stamp Act
May 29-30, 1765
Although celebrated for his “Liberty or Death” speech at St. John’s Church in Richmond on
March 23, 1775, Patrick Henry probably regarded his Stamp Act Resolutions as a greater
contribution to American independence. In the Parson’s Cause of 1763, Henry’s address to the
jury had foreshadowed his emergence as a popular defender of the rights of colonial Americans.
Two years later, by his vigorous opposition to the Stamp Act, Henry had extended his influence
beyond Virginia as a powerful voice against Britain’s attempt to impose taxation on the
American colonies. Attacking the Stamp Act in the heated debates of the House of Burgesses in
1765, Henry hurled defiance at Parliament. Timid souls blanched as he compared George III to
Julius Caesar and Charles I, but Henry responded that the king might “profit by their example.”
Patrick Henry had written seven resolutions, each more radical than the next. He introduced five
resolutions during the debate in the House of Burgesses. The fifth was adopted by a margin of
only one vote. The next day, under pressure from governor and the Council, the House rescinded
Henry’s fifth resolution and had it erased from the official journal. Virginia’s royal governor,
Francis Fauquier, even prevented the publication of the four resolutions in the Virginia Gazette.
Despite the attempt to suppress news of the legislature’s denunciation of the Stamp Act, within a
few weeks versions of all seven of Henry’s resolutions were published in other colonies. As
printed in Maryland, Rhode Island, Massachusetts, and other colonies, Henry’s resolves
articulated the principles of American rejection of Parliamentary authority. As a result, Henry’s
contemporaries in recognized him as “the man who gave the first impulse to the ball of
revolution.” The importance that Henry attached to his Stamp Act Resolutions is evident from
the message he left for posterity along with his last will and testament: “The alarm spread
throughout America with astonishing quickness, and . . . the great point of resistance to British
taxation was universally established in the colonies,” Henry wrote. “This brought on the war
which finally separated the two countries and gave independence to ours.”
One: Patrick Henry’s Resolutions Against the Stamp Act
From the Journals of the House of Burgesses
Resolved, That the first Adventurers and Settlers of this his Majesties Colony and Dominion of
Virginia brought with them, and transmitted to their Posterity, and all other his Majesty’s
Subjects since inhabiting in this his Majesty’s said Colony, all the Liberties, Priviledges,
Franchises, and Immunities, that have at any Time been held, enjoyed, and possessed, by the
People of Great Britain.
Resolved, That by two royal Charters, granted by King James the First, the Colonists aforesaid
are declared entitled to all the Liberties, Priviledges, and Immunities of Denizens and natural
Subjects, as if they had been abiding and born within the Realm of England.
Resolved, That the Taxation of the People by…