Wednesday, the Congressional Finances Workplace (CBO) printed its annual analysis of the distribution of American family incomes and tax burdens, this time for 2018, the yr after the Tax Cuts and Jobs Act (TCJA) was enacted. CBO information reveals that the TCJA lowered federal tax charges for households throughout each revenue stage whereas growing the share of tax paid by the highest 1 p.c. Exhibiting how the TCJA impacted family taxes is necessary to think about as policymakers debate whether or not to reverse key aspects of the 2017 tax regulation.
CBO discovered that common federal tax charges fell for households throughout the board due to the TCJA’s particular person revenue tax provisions, together with the doubled standard deduction from $12,400 to $24,800, lowered revenue tax charges, and expanded child tax credit (CTC). Excessive-earning households noticed a discount of their efficient tax charges primarily from the company tax fee dropping from 35 p.c to 21 p.c and tax reductions for pass-through corporations.
The TCJA lowered the typical federal tax fee from 20.8 p.c to 19.3 p.c for all filers. The underside 20 p.c of earners noticed their common federal tax fee fall from 1.2 p.c to just about 0 p.c. The highest 1 p.c of filers noticed a 1.5 share level decline, from 31.7 p.c in 2017 to 30.2 p.c in 2018.
CBO information additionally reveals that common tax charges remained inside their historic ranges in 2018. The highest 1 p.c’s 30.2 p.c common federal tax fee was solely barely beneath the typical for 1979 to 2017 (30.6 p.c), and the typical fee for the underside 20 p.c in 2018—about 0 p.c—is properly beneath its 1979 to 2017 common of 6.6 p.c. The close to zero fee for the underside 20 p.c is as a result of the growth in refundable tax credits over the previous 40 years has pushed down average tax rates for low-income households.
Despite the fact that the TCJA lowered family tax charges throughout the board, the highest 1 p.c of households noticed their share of federal taxes paid enhance from 25.5 p.c in 2017 to 25.9 p.c in 2018. That makes their share in 2018 the best of federal taxes paid by an revenue group since 2008 and the third-highest since 1979. In contrast, the underside 20 p.c of households noticed a discount of their share of federal taxes paid, from 13 p.c in 2017 to 12.5 p.c in 2018.
The TCJA’s individual income tax modifications had completely different impacts on households relying on their revenue stage. For instance, the discount within the statutory particular person revenue tax charges and bracket consolidation lowered the federal tax fee paid by the highest 20 p.c of households by 1.9 share factors, however lowered the federal tax fee paid by the underside 20 p.c by solely 0.01 share factors. The CTC growth, however, benefited the underside quintile of households by a bigger margin, at 0.8 share factors.
The growth of the usual deduction, elimination of taxpayer exemptions, and limitations on itemized deductions such because the $10,000 cap on state and local taxes (SALT) tended to cut back the typical federal tax fee paid by the underside 60 p.c of households, however raised the typical tax fee for the highest 40 p.c of earners. It’s because “the rise in the usual deduction was typically bigger than the impact of eradicating the taxpayer exemptions” for lower-income households, whereas higher-earning households usually tend to itemize their deductions and run into itemized deduction limits. These households are likely to have larger marginal tax rates they’re deducting in opposition to, too, which suggests they profit extra from these deductions.
Mixed, the TCJA’s particular person provisions lowered federal tax charges by 1 p.c for the underside revenue quintile and 1.3 p.c for the highest 20 p.c of households. CBO finds that the general affect of the TCJA’s particular person and company tax modifications lowered common tax charges by about 1.3 share factors in 2018. The enterprise provisions throughout the TCJA lowered the highest 20 p.c’s federal tax fee by 2.7 share factors, partially as a result of enterprise revenue tends to be earned by larger earners.
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