Features
Exploring Alternatives to the Tax Cuts and Jobs Act
March 26, 2019

The Tax Cuts and Jobs Act of 2017 (TCJA) brought about the biggest change to federal tax policy in decades. Signed into law less than two months after its formal introduction in Congress, the TCJA made many substantial changes to tax policy. During that time, the public didn’t have the opportunity to see a wide range of alternative plans, and tax experts’ ability to quickly analyze the effects of so many changes was limited.

But now, the Tax Policy Center can run our microsimulation model on thousands of separate tax plans, allowing us to rapidly analyze the TCJA’s trade-offs and alternatives. We analyzed over 9,000 plans—each with different changes to several core individual income tax law elements affected by the TCJA—to calculate the change in revenue for the federal government and the change in taxpayers’ after-tax income.

Below, we walk through how changing these provisions of the tax code affects revenue and after-tax income for people in different income groups in 2018. The Explore section at the bottom of the page allows you to make your own changes to these tax plan parameters and see how those changes affect taxpayers and revenue.

First, let’s compare the TCJA with prior law.In 2018, the TCJA produced a 2.2 percent increase in average after-tax income for people of all income groups and a $243 billion decrease in federal revenue. The vertical dashed yellow line shows the TCJA’s effects on revenue, and the horizontal dashed yellow line shows its effects on after-tax income. The black axes represent pre-TCJA law.

Now we’re looking at over 9,000 alternatives to the TCJA with certain parameters changed in each one (see all eight parameters in the Explore section).

The overall pattern shows that more after-tax income for taxpayers means less revenue for the federal government. The relationship between incomes and revenue is not a perfectly straight line because, depending on people’s behavior, some plans may produce the same change in after-tax income but change revenue more or less.

The effect of changing one parameter can vary widely depending on people’s income and filing status. What tax policy changes have the greatest effect on different ends of the income spectrum?

Let’s start by looking just at taxpayers in the bottom 20 percent (or first quintile) of the income distribution.Of the tax policy parameters we analyzed, four have the biggest impact on after-tax income for this group: the refundable portion of the child tax credit (CTC), the CTC earnings threshold for refundability, the standard deduction, and the personal exemption.

Jump to the Explore section at the bottom to see how other tax policy parameters affect this group.

Let’s dive into why the CTC plays such a big role in after-tax income for low-income people.This circled area shows the plans that lead to the most revenue. Plans further to the right leave people with more after-tax income because they increase the CTC’s refundable portion and lower the earnings threshold for refundability to zero. No other tax parameters change. Increasing the refundable portion and lowering the earnings threshold expands the CTC to more households and leaves people with more after-tax income.

The effects of changing elements of the CTC are even more distinct for married taxpayers with kids.The other tax parameters we change have almost no effect on the after-tax income of low-income people with kids because most of these people have no income tax liability.

Here, the dots are divided into the three CTC maximum refundable portion levels in relation to the TCJA’s CTC amount of $2,000: 50 percent, 70 percent (the TCJA value), and 100 percent. When the maximum refundable portion is higher, taxpayers have more after-tax income.

Within these three groups, we also see distinct patterns when we change the CTC earnings threshold for refundability.Lower thresholds allow people to start accessing the credit at lower incomes, thereby increasing their after-tax income.

This group represents plans with a CTC earnings threshold of $2,500 (the TCJA value),

this group represents a CTC earnings threshold of $1,250,

and this group represents a CTC earnings threshold of $0.

Now let’s zoom out to look again at all taxpayers in the first quintile of the income distribution and explore the effect of changing just the personal exemption.The personal exemption is an amount that all taxpayers, regardless of filing status, can deduct for themselves and their dependents.

In this chart, the dark blue and light blue dots show the effect of raising the personal exemption from $0 to $2,050 (midway between the TCJA value and the pre-TCJA value of $4,150). This increase in the personal exemption shifts the dots down because it leads to less revenue for the federal government. But it also shifts the dots to the right because it produces more after-tax income for taxpayers in the bottom 20 percent of incomes.

This pattern of lower revenue but more after-tax income continues when we increase the personal exemption to $4,150 (the value it would have been had the TCJA not been enacted) and $5,500 (an increase from prior law).

Altering the standard deduction also has a significant effect on after-tax income for low-income people.The standard deduction changes depending on people’s filing status (single, married filing jointly, married filing separately, or head of household).

This chart shows the effects of changing only the standard deductions for single filers. These four standard deduction values are $6,500 (the pre-TCJA value), $9,250 (midway between the pre-TCJA and the TCJA values), $12,000 (the TCJA value), and $13,200 (higher than the TCJA value). As the standard deduction increases, taxpayers in the bottom 20 percent of the income distribution have more after-tax income, but revenue decreases.

Now let’s turn to people in the top 1 percent of the income distribution.Of the parameters we analyzed, tax rates are the most important factor affecting after-tax income for these high-income people.

Rate brackets vary depending on people’s adjusted gross income. For the top bracket, we look at four different tax rates: 37 percent (the TCJA rate), 38.5 percent (about midway between the pre-TCJA and TCJA rates), 39.6 percent (the pre-TCJA rate), and 40.7 percent (10 percent higher than the TCJA rate).

The groups in the chart are clustered around these four rates, which move from highest on the left to lowest on the right. The lower tax rates lead to more after-tax income for people in the top 1 percent and less revenue for the federal government. Other tax parameters don’t have nearly as much effect on after-tax income for these high-income taxpayers.

Jump to the Explore section at the bottom to see how other tax policy parameters affect this group.

So what does this all show about the TCJA’s trade-offs? Compared with prior law, many plans would have generated more revenue than the TCJA while also increasing after-tax income for people in the first quintile.

But many fewer plans would accomplish this for people in the top 1 percent of the income distribution.

Let’s look again at plans that increase after-tax income for lower-income people (those in the first quintile).

Among tax plans that don’t lose any more revenue than the TCJA, plenty of plans increase after-tax income for people in more than one quintile.Here we’re looking at the overlap between plans that increase the first quintile’s after-tax income and plans that increase after-tax income for the next-highest income group (the second quintile);

between plans that increase the first, second, and third quintiles’ after-tax income;

and between plans that increase the first, second, third, and fourth quintiles’ after-tax income.

This pattern can’t continue when we get to the highest-income taxpayers (the fifth quintile), because the revenue to benefit the bottom 80 percent of earners would need to come from the top 20 percent. This shows that trade-offs among groups of tax filers must be made whenever we consider revenue-neutral changes in tax policy.

Relative to the TCJA, however, we see an interesting trend.Among plans that don’t lose more revenue than the TCJA, there is no overlap among plans that increase after-tax income for the fifth quintile and those that do so for any of the other quintiles.

Here, we see that among plans that lose less revenue than the TCJA, no plans increasing after-tax income for the first quintile overlap with those increasing after-tax income for the fifth quintile.

The same is true that no plans that lose less revenue than the TCJA increase after-tax income for the second quintile and the fifth quintile,

for the third and fifth quintiles,

or for the fourth and fifth quintiles.

In other words, among tax plans we consider that don’t lose more revenue than the TCJA, many would increase after-tax income for several of the bottom four quintiles. But none of them would increase after-tax income for the highest-income taxpayers while also increasing after-tax income for any of the other four income groups.

All tax plans come with trade-offs for certain groups. Understanding these trade-offs, both in terms of federal revenue and people’s after-tax income, is critical to creating sound, evidence-based tax policy. In our report, we look at a few alternative plans that would lose less revenue than the TCJA and more evenly distribute after-tax income.

Below, see for yourself how changing tax policy parameters—including parameters not discussed in the narrative above—affects revenue and after-tax income for different groups.

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