The Joint Committee on Taxation (JCT) recently released distributional tables to show the impact of the Tax Cuts and Jobs Act (TCJA) on taxpayers across the income distribution.
JCT’s distributional tables reflect static snapshots of selected income groups in 2019, 2021, 2023, 2025, and 2027. For each income group in each year, JCT calculates the projected amount of taxes paid under current law – and under the TCJA. The tables also show average tax rates under current law and under TCJA for each income group.
Here are the key things that you need to know about the analysis:
Fact#1: The Tax Cuts and Jobs Act Delivers the Largest Percentage Reductions in Taxes Paid for Low- and Middle-Income Americans.
On a percent basis, low- and middle-income Americans will see the largest reductions in taxes paid under the TCJA. For example, earners in $50,000 to $75,000 range, which is the middle of the income distribution, would see a 7.9 percent reduction in taxes paid — whereas earners in the $500,000 to $1 million range would see a 4.3 percent reduction in taxes paid.
Consider the following example.
Under current law in 2017, a married couple with two kids earning $59,000 (which is the national median income) owes $1,582 in income taxes.
But under the TCJA that family will only owe $400 because the plan would cut their taxes by $1,182 – a whopping 75 percent reduction in taxes paid.
Likewise, if that same family earned $300,000 they would pay $64,680 under current law and pay $58,600 under TCJA – a tax cut of $6,080. Although that’s a bigger tax cut in dollar terms, their percentage reduction in tax liability is 9 percent.
[*Note: According to JCT, “for returns on the $10,000 to $20,000 income category, federal taxes would decrease from -$2.412 billion to -$4.848 billion.” Therefore, the percent change in taxes paid is not interpretable for the purposes of the chart. This income group is in a net refund position and would see their refund double under the TCJA.]
Fact #2: In 2019 The Tax Cuts and Jobs Act Focuses a Majority of Tax Relief on Families Earning Less than $200,000.
In 2019, the most recent year available and therefore the closest representation of the near term effects of tax reform on taxpayers, the TCJA would slash taxes for all income groups. Out of $192 billion in tax cuts for individuals and businesses in that year alone, $113.5 billion in tax cuts (59 percent) would go directly to those earning below $200,000. When the effects of corporate tax reform are removed, 73 percent of tax relief flows to those earning under $200,000.
Fact #3: Faster Economic Growth Lifts Incomes for All and Americans of all Income Groups Benefit from Tax Reform.
The purpose of tax reform isn’t just to lower taxes for struggling families – it’s also to make our economy boom again. Any distributional analysis that omits how changes in the economy affect the jobs and paychecks of hardworking Americans offers an incomplete picture of tax reform. Unfortunately, JCT’s analysis omits the economic effects of tax reform in their distributional tables. This means that the JCT analysis misses the bigger picture.
However, recent analysis by the Tax Foundation shows how faster economic growth increases wages and therefore further boosts take-home pay for all Americans.
As the following chart shows, the Tax Cuts and Jobs Act will boost take-home pay for all Americans by about 4 percent. The largest percent increases in take-home pay occur for the middle class – such as those earners below the 80th percentile of the income distribution. This raises an important point: all can benefit from higher take-home pay at the same time that the overall burden of the tax system shifts.
Fact #4: The Burden of the Federal Income Tax is Currently Highly Skewed Towards High Earners.
Any analysis that discusses changes in tax burdens should also focus on the existing tax burden. According to the Tax Foundation, in 2014, half of taxpayers paid over 97 percent of all income taxes. In addition, the top 10 percent of taxpayers paid 71 percent of all income taxes (see the chart below). For this reason, any reductions in income taxes will necessarily benefit those who share in paying income taxes, while also preserving relief for low- and middle-income families.
Fact #5: The Idea that TCJA Creates a Stealthy New 45.6% Tax Bracket for Millionaires is False.
Some have alleged that TCJA creates a stealthy new 45.6% tax bracket for millionaires. This misleading statement implies that this new provision would create a new tax bracket that goes above and beyond current law to raise taxes on the wealthy. This just isn’t true because the TCJA cuts taxes for every income group (see the chart under Fact #1).
Here’s what’s actually going on: just like other popular tax benefits targeted toward low- and middle-income families such as the Child Tax Credit or American Opportunity Tax Credit, the Tax Cuts and Jobs Act phases out the benefit of the 12-percent rate for millionaires. The phase-outs of other low- and middle-income tax benefits range from 5% (CTC) to 21% (EITC), and are never described as “stealthy new brackets.”
In addition, the Tax Reform Act of 1986 also phased out the benefit of its lowest rate for high earners – a commonsense idea to promote fiscal responsibility and distributional fairness. In fact, this provision provides much needed revenue to further lower taxes on middle-income earners.
Even with this phase-out, effective rates for earners in that income range are reduced as their earnings between $470,000 and $1,000,000 are subject to a 35% rate instead of the 39.6% rate they pay on that income today. So, even with this provision, all income groups see a significant tax reduction on both a static and dynamic basis.
More information dispelling the myth of this “stealthy new rate” can be found in this Forbes article.
From - Committee on Ways and Means Blog
I don’t understand why the powers that be boast about doubling the standard deduction but fail to mention the elimination of personal exemption. My wife and I are retired seniors with low income, high medical expenses, and the loss of the exemptions adds over $9,000 to my taxable income, causing my Federal taxes to go up 70%. How come no-one in Washington caught this. This puts an additional tax burden on that part of the population which can least afford it. Calls to Paul Ryan are not returned. I am trying to find an effective way to get the word out.
Please check what you say i Fact #1; Earners in the $50,000 to $75,000 would see a 7.9% reduction in taxes; however the same family earning over $300,000 would see a 9% reduction. Your very figures dispute the point you are trying to make.
I have read that payment of state taxes (not sure if they are income taxes or real estate taxes or both) will NOT be deductible under the new tax code. This bothers me as it appears that this is double taxation, taxing on monies paid to other taxes. Those of us owning a home pay significant money in taxes to our state and taxing this money is wrong.