diff --git a/Makefile b/Makefile index e3a4a8e85..2639b6777 100644 --- a/Makefile +++ b/Makefile @@ -35,4 +35,4 @@ deploy: build deploy-setup format: black . -l 79 - npm run fix + npm run fix \ No newline at end of file diff --git a/src/images/posts/tcja-extension.jpg b/src/images/posts/tcja-extension.jpg new file mode 100644 index 000000000..ba4e14e0c Binary files /dev/null and b/src/images/posts/tcja-extension.jpg differ diff --git a/src/posts/README.md b/src/posts/README.md index fef215618..0195541d6 100644 --- a/src/posts/README.md +++ b/src/posts/README.md @@ -1,5 +1,7 @@ # Instructions for adding posts +_This only currently works on Unix/Mac. `mediumexporter` creates corrupted files on Windows._ + 1. Publish a post to Medium (any site will do but preferably blog.policyengine.org).[^1] 2. Ensure `npm install -g mediumexporter` is installed. 3. Run `mediumexporter {url_of_post} > src/posts/articles/{slug}.md`.[^2] diff --git a/src/posts/articles/tcja-extension.md b/src/posts/articles/tcja-extension.md new file mode 100644 index 000000000..d4fdec8d1 --- /dev/null +++ b/src/posts/articles/tcja-extension.md @@ -0,0 +1,213 @@ +[In December 2017](https://www.nbcnews.com/politics/politics-news/trump-signs-tax-cut-bill-first-big-legislative-win-n832141), former President Donald Trump signed into law the [Tax Cuts and Jobs Act of 2017](https://www.congress.gov/bill/115th-congress/house-bill/1/text) (TCJA). The bill modified several components of the tax code, reducing the tax liability for most households while increasing federal deficits. Most individual provisions are set to expire at the end of 2025. At PolicyEngine, we have simulated extending the TCJA's individual tax provisions against current law to analyze its effects on both households and the broader economy. + +Key results: + +- Costs $4.2 trillion from 2026 to 2035, assuming no behavioral responses, or $3.9 trillion applying CBO elasticities. + +- Increases net income for 80.2% and reduces net income for 1.8% of Americans in 2026. + +- Reduces poverty by 4.1% and child poverty by 7.0%. + +- Increase hours worked and earnings by 0.71% and 0.78%, respectively when applying CBO elasticities. + +[_Try our personalized calculator:_](https://policyengine.org/us/household?focus=intro&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2) See how extending the TCJA would affect your household. + +## What did the TCJA change? + +The TCJA implemented key changes to the individual tax code that will expire at the end of 2025. The major reforms include: + +- Lowering five of seven tax rates, including the top rate from 39.6% to 37% + +- Adjusting tax bracket thresholds three through six + +- Doubling the standard deduction, child tax credit (CTC), and estate tax exemption[^1] + +- Eliminating personal and dependent exemptions + +- Expanding the alternative minimum tax (AMT) exemption and phase-out threshold, reducing the number of taxpayers subject to AMT + +- Modifying itemized deductions, including a $10,000 cap on the state and local tax (SALT) deduction + +- Introducing a qualified business income deduction (QBID) for pass-through entity owners + +- Permanently indexing inflation-indexed parameters to the Chained Consumer Price Index (C-CPI-U) instead of the Consumer Price Index (CPI-U). + +[^1]: The standard deduction and estate tax exemption are no longer doubled, due to the change in inflation indexing since 2017. + +Beyond these individual provisions, the TCJA permanently reduced the top corporate tax rate from 35% to 21% and made other temporary adjustments to other business and corporate taxes. We've restricted our analysis to household provisions, enumerated in Table 1 below. + +**Table 1: Temporary Individual Tax Provisions Current Law vs. TCJA Extension** + +| Individual Provisions | Current Law (2026) | TCJA Extension (2026) | +| -------------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------- | +| Tax Rates | 10%, 15%, 25%, 28%, 33%, 35% and 39.6% | 10%, 12%, 22%, 24%, 32%, 35% and 37% | +| Tax Brackets | Revert to 2017 Thresholds (indexed for inflation since 2017)\* | 2025 Thresholds (indexed for inflation for 2026)\* | +| Personal and Dependent Exemption | $5,300\* | $0 | +| CTC Base Amount | $1,000 | $2,000 | +| CTC Maximum Refundable Amount | $1,000 | $1,800\* | +| CTC Phase-in Start | $3,000 | $2,500 | +| CTC Phase-out Start | $75,000/$110,000 | $200,000/$400,000 | +| Adult Dependent Credit | $0 | $500 | +| Standard Deduction Amount | $8,300/$16,600\* | $15,500/$30,600\* | +| SALT Cap | Uncapped | $10,000 | +| Mortgage Interest Deduction Cap | $1,000,000 | $750,000 | +| Charitable Deduction AGI Limit | 50% | 60% | +| Casualty Expense Deduction | Active | Inactive | +| Itemized Deduction AGI Rate | 3% | Infinite | +| Itemized Deduction Limitation Rate | 80% | Infinite | +| Itemized Deduction Applicable Amount | $339,500/$407,400\* | Infinite | +| Estate Tax Exemption | ~$7,000,000\* | ~$14,300,000\* | +| AMT Exemption Amount | $70,500/$109,700\* | $89,925/$139,850\* | +| AMT Phase-out Start | $156,700/$209,000\* | $639,300/$1,278,575\* | +| QBID Rate | Inactive | 20% | +| Alternative QBID Rate on Business Property | Inactive | 2.5% | +| QBID Rate on W2 Wages | Inactive | 50% | +| Alternative QBID Rate on W2 Wages | Inactive | 25% | +| QBID Difference Between Threshold Amounts and Phase-in Range Amounts | Inactive | $50,000/$100,000 | +| QBID Phase-out Start | Inactive | $204,900/$408,900\* | + +_Starred parameters indexed to inflation._ + +[Our simulations](https://policyengine.org/us/policy?focus=policyOutput.policyBreakdown&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48812) include every listed provision except the mortgage interest deduction and estate tax exemption.[^2] + +[^2]: PolicyEngine's US model is currently unable to evaluate the impact of the mortgage interest deduction or estate tax. Based on external analysis, the revenue gained from limiting the mortgage interest deduction partially offsets the revenue lost from doubling the estate tax exemption, suggesting our budgetary projections remain fairly accurate. Nevertheless, including these provisions in a TCJA extension would affect the distributional analysis for households subject to either or both policies. + +## Household Impacts + +Extending the TCJA will affect households differently depending on their size, income, and other characteristics. To illustrate these effects, let's examine the impacts for a few example households—with income only from wages and no itemized deductions—for 2026. + +**Table 2: Change in Net Income Based on Household Composition** + +| Marital status | Children | Earnings | Change in Net Income | +| -------------- | -------- | ---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | +| Single | 0 | $15,000 | [$140](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48802) | +| Single | 1 | $30,000 | [$1,020](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=47295) | +| Married | 1 | $70,000 | [$1,170](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48807) | +| Married | 2 | $150,000 | [$5,055](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48809) | +| Married | 3 | $1,000,000 | [$33,053](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48812) | + +While taxes do not always decrease monotonically with income (see Appendix A), each household with a higher income net benefits more than another family with a lower income in these examples. This can be mainly attributed to the TCJA's lower income tax rates. Families with children see additional benefits from the expanded CTC, provided their income falls below the phase-out threshold. High-earning families experience the largest gains, as demonstrated in the final example, where their change in net income substantially exceeds other households shown in the table. Figure 1 displays the change in net income based on household income for the family composition in the fourth example. + +**Figure 1: Change in Net Income for a Married Couple with Two Children Based on Household Income** + +![](https://cdn-images-1.medium.com/max/2000/0*IHaa_oaR4N7qaXK0) + +## Federal Budgetary Impact + +Extending the TCJA would reduce federal revenues by [$4.2 trillion](https://policyengine.org/us/policy?focus=policyOutput.policyBreakdown&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48812) over ten years using static modeling. [When considering behavioral effects](https://policyengine.org/us/policy?focus=policyOutput.budgetaryImpact.overall&reform=69005®ion=enhanced_us&timePeriod=2026&baseline=2) (applying CBO elasticities), earnings rise 0.78%, in turn lowering the cost by 7.7% to $3.9 trillion; these effects primarily occur through the substitution effect (people working more as their marginal tax rate falls), partly offset by the income effect (people working less as they have a higher net income). The Congressional Budget Office (CBO) [currently projects](https://www.cbo.gov/publication/59710) federal deficits to total $20 trillion from 2025-2034; extending the TCJA's individual provisions, without any offsets, would thus raise deficits by roughly 20% over a decade. + +**Table 3: TCJA Federal Budgetary Impact (in billions $)** + +| Year | TCJA Static | TCJA Dynamic[^3] | +| -------- | ----------- | ---------------- | +| 2026 | -342.3 | -315.8 | +| 2027 | -359.1 | -331.3 | +| 2028 | -375.7 | -346.6 | +| 2029 | -392.8 | -362.9 | +| 2030 | -410.8 | -379.0 | +| 2031 | -427.0 | -393.9 | +| 2032 | -447.8 | -413.1 | +| 2033 | -467.1 | -430.9 | +| 2034 | -485.1 | -447.5 | +| 2035[^4] | -503.8 | -464.8 | +| 2026-35 | -4,211.5 | -3,885.5 | + +[^3]: We estimate the dynamic score for years beyond 2026 by applying the 7.7% cost reduction between static and dynamic for 2026 to the static costs for future years. + +[^4]: Currently, the PolicyEngine US model can only simulate to 2034. In order to provide a full ten-year budget window estimate, the budgetary impacts for 2035 are calculated by taking the percent growth from 2033 to 2034 and applying this growth to the 2034 budgetary impact. + +The CBO, using estimates from the Joint Committee on Taxation, projects costs 0.2% lower than our projection. Table 4 compares to other notable scorekeepers. + +**Table 4: Federal Budgetary Comparison Across Organizations (in billions $) [^5] [^6]** + +| Organization | TCJA Baseline | % difference to PolicyEngine dynamic | +| ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ------------------------------------ | +| PolicyEngine (Static) | -4,221.5 | - | +| PolicyEngine (Dynamic) | -3,885.5 | - | +| [CBO/JCT](https://www.cbo.gov/publication/60114) | -3,877.6 | 0.2% | +| [CRFB](https://www.crfb.org/blogs/tcja-extension-could-add-4-5-trillion-deficits) | -3,830.0 | 1.4% | +| [AEI](https://www.aei.org/research-products/report/making-the-tax-cuts-and-jobs-act-permanent-two-revenue-neutral-pro-growth-options-for-tax-reform/) | -3,012.1 | 22.5% | +| [Tax Foundation](https://taxfoundation.org/research/all/federal/donald-trump-tax-plan-2024/) | -3,841.1 | 1.1% | +| [Yale Budget Lab](https://budgetlab.yale.edu/research/tcja-extension-simulator) | -3,937.2 | -1.3% | + +[^5]: Some of the organizations in the comparison included some miscellaneous provisions such as extending the pass-through loss deduction limitation and expanding opportunity zones in their estimates. As we did not include these provisions and others in our own estimates, we removed them, when possible, from each organization's projection to obtain a closer comparison. + +[^6]: The CBO, Tax Foundation, and Yale Budget Lab only project the cost of extending the TCJA through 2034. In order to compare its estimate with ours, we utilized the same process to obtain our 2035 projection by taking the percent growth from each organization's 2033 to 2034 scores and multiplying this growth to each estimate in 2034. + +## Income Distribution 2026 + +Extending the TCJA would [benefit 80% of the U.S. population](https://policyengine.org/us/policy?focus=policyOutput.winnersAndLosers.incomeDecile&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48809) while reducing the net income for 2% of Americans. More households in the top half of the income distribution would benefit than in the bottom half. + +![](https://cdn-images-1.medium.com/max/2000/0*wUuFzDjWkuLS3FRf) + +In 2026, the [average household benefit](https://policyengine.org/us/policy?focus=policyOutput.distributionalImpact.incomeDecile.average&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2) when extending the TCJA is $2,338. However, the top two income deciles would receive a larger benefit as their net income would rise by $5,063 and $9,194, respectively. Conversely, on average, the bottom two deciles would see their taxes reduced by $311 or less. + +![](https://cdn-images-1.medium.com/max/2000/0*vb67YpfvKS_YoCf7) + +Extending the TCJA would also [reduce the Supplemental Poverty Measure](https://policyengine.org/us/policy?focus=policyOutput.povertyImpact.regular.byAge&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=48809) by 4.1% and the Supplemental Child Poverty Measure by 7.0%. + +![](https://cdn-images-1.medium.com/max/2000/0*ThsBUfxd5XSPzEqa) + +## Conclusion + +Extending the individual provisions of the TCJA would reduce federal revenues by $4.2 trillion (static) or $3.9 trillion (dynamic) over the next decade, absent offsetting measures. The reform would increase the net income of 80% of Americans while lowering it for 2%. The majority of benefits (54%) would flow to the top income quintile, while the bottom quintile would receive just 2%. + +As policymakers evaluate options for addressing these expiring provisions, analytical tools like PolicyEngine offer critical insights into the impacts on diverse household compositions and the broader economy. + +We invite you to explore our [additional analyses](https://policyengine.org/us/research) and use [PolicyEngine](https://policyengine.org/us) to calculate your own tax benefits or design custom policy reforms. + +## Appendix A: Explanation for non-monotonic impacts for a joint filer with two children + +For most filers and income ranges, the benefit of TCJA rises with income. However, for a married couple with two children (as an example), the benefit of extending the TCJA declines in at least two earnings ranges for 2026: + +1. $34,600 to $37,800 + +2. $54,500 to $62,000 + +Both ranges occur for similar reasons, namely the interaction between standard deductions, personal exemptions, and the CTC. + +### $34,600 to $37,800 + +To illustrate this nonmonotonicity, we calculate the effect at both ends of the range. + +[At $34,600:](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=49119) + +Under a TCJA extension, the household has $4,000 in taxable income ($34,600 of earnings - $30,600 of their standard deduction). This translates to a $400 tax liability as their taxable income falls into the 10% tax bracket. The household's tax liability is fully offset by CTC as they receive their household maximum of $4,000. $400 is used to offset their tax liability while the remaining $3,600 is refunded to the household. + +Under current law, the household has no taxable income (household earnings of $34,600 is below the combined standard deduction and exemptions of $37,800). The household would receive a refund of $2,000 from the CTC. + +Therefore the net benefit of extending the TCJA for this household would be $1,600 ($3,600-$2,000). + +[At $37,800:](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=49120) + +Under a TCJA extension, the household would have $7,200 in taxable income ($37,800 of earnings - $30,600 of their standard deduction). This results in a $720 tax liability as their taxable income is solely in the 10% tax bracket. The tax liability is fully offset by CTC as they receive the maximum of $4,000. $720 is used to offset their tax liability while the remaining $3,280 is refunded to the household. + +Under current law, the household also has no taxable income (household earnings of $37,800 are completely offset by the combined standard deduction and exemptions of $37,800). The household would receive a refund of $2,000 from the CTC. + +Therefore the net benefit of extending the TCJA for this household would be $1,280 ($3,280-$2,000). + +The declining benefit ($1,600 -> $1,280) occurs because the TCJA's standard deduction ($30,600) is lower than the combination of standard deduction and exemptions ($37,800) under current law. This results in a household developing taxable income sooner, thus creating a higher tax liability and reducing the TCJA's advantage over this range. + +### $54,850 to $62,050 + +At this income range, we see another decline in TCJA benefits due to the interaction between tax brackets and the CTC. + +[At $54,850:](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=49121) + +Under a TCJA extension, the household has $24,250 in taxable income ($54,850 of earnings - $30,600 standard deduction). This results in a $2,425 tax liability as their taxable income falls entirely in the 10% tax bracket. The household's tax liability is fully offset by CTC as they receive their household maximum of $4,000. $2,425 is used to offset their tax liability while the remaining $1,575 is refunded to the household. + +Under current law, the household has $17,050 in taxable income ($54,850 of earnings - $37,800 combined standard deduction and exemptions). This results in a $1,705 tax liability as their taxable income is solely in the 10% tax bracket. $1,705 of their $2,000 CTC is used to offset the tax liability, with the remaining $295 refunded to the household. + +Therefore the net benefit of extending the TCJA for this household would be $1,280 ($1,575-$295). + +[At $62,050:](https://policyengine.org/us/household?focus=householdOutput.netIncome&reform=69001®ion=enhanced_us&timePeriod=2026&baseline=2&household=49127) + +Under a TCJA extension, the household has $31,450 in taxable income ($62,050 of earnings - $30,600 standard deduction). This results in a $3,289 tax liability, with the first $24,250 taxed at 10% ($2,425) and the next $7,200 taxed at 12% ($864). The household's tax liability is fully offset by CTC as they receive their household maximum of $4,000. $3,289 is used to offset their tax liability while the remaining $711 is refunded to the household. + +Under current law, the household has $24,250 in taxable income ($62,050 of earnings - $37,800 combined standard deduction and exemptions). This results in a $2,425 tax liability as their taxable income is solely in the 10% tax bracket. $2,000 of CTC partially offsets the household's tax liability, leaving $425 in taxes owed. + +Therefore the net benefit of extending the TCJA for this household would be $1,136 ($711 - (-$425)). + +The declining benefit ($1,280 -> $1,136) occurs because once the household earns more than $54,850, they are pushed into the 12% tax bracket under a TCJA extension. Under current law, they would remain in the 10% bracket until their earnings reach $62,050. This higher marginal rate reduces the TCJA's advantage versus current law. + +In addition to these two ranges, the net benefit of a TCJA extension falls during other points as household income rises. These can also be attributed to the interactions of the standard deduction, exemptions, CTC, and adjustments to income tax bracket thresholds. diff --git a/src/posts/posts.json b/src/posts/posts.json index ee2fb1eff..2029c34c0 100644 --- a/src/posts/posts.json +++ b/src/posts/posts.json @@ -862,5 +862,14 @@ "authors": ["nikhil-woodruff"], "filename": "autumn-budget-2024-employer-nic-pension-contributions.md", "image": "autumn-budget-2024-employer-nic-pension-contributions.png" + }, + { + "title": "Extending the Tax Cuts and Jobs Act", + "date": "2024-10-28 00:00:01", + "authors": ["david-trimmer"], + "tags": ["us", "2024-election", "featured"], + "description": "PolicyEngine projects extending the TCJA individual tax provisions would cost $3.9 trillion over a ten-year budget window.", + "filename": "tcja-extension.md", + "image": "tcja-extension.jpg" } ]