Economic Effects
Tax Foundation estimates this option would have the following long-run economic effects relative to TCJA expiring (i.e., current law):
Table 3. Reform Option Would Grow the Economy Relative to TCJA Rate Cuts Expiring
| GDP | 0.9% |
| Gross National Product | 0.9% |
| Capital Stock | 0.9% |
| Wages | Less than -0.05% |
| Full-time Equivalent Jobs | 1,073,000 |
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Source: Tax Foundation
Note: Tax Foundation’s estimates of economic and distributional effects include both the rate/threshold adjustments in this option and the effects of repealing head of household filing status. The revenue score above only includes the effects of the rate/threshold adjustments. Tax Foundation estimates that repealing head-of-household filing status raises $83 billion over 10 years. |
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Distributional Effects
According to Tax Foundation’s estimates, this option would increase after-tax income for most taxpayers, with small drops in after-tax income for some taxpayers in the bottom quintiles due to interactions with another offset option, the repeal of Head of Household filing status. Adjustments to the Child Tax Credit (CTC) for these households could mitigate the negative distributional effects of repealing Head of Household filing status. Child Tax Credit (CTC) for these households could mitigate the negative distributional effects of repealing Head of Household filing status.
Table 4. This Option Would Increase After-Tax Income for Most Americans, and for All Americans on a Dynamic Basis
| Conventional, 2026 | Conventional, 2034 | |
| 0% – 20.0% | Less than -0.05% | -0.1% |
| 20.0% – 40.0% | -0.2% | -0.2% |
| 40.0% – 60.0% | 0.7% | 0.8% |
| 60.0% – 80.0% | 1.6% | 1.8% |
| 80.0% – 100% | 1.5% | 1.6% |
| Within Top Quintile | ||
| 80.0% – 90.0% | 2.1% | 2.2% |
| 90.0% – 95.0% | 1.9% | 2.0% |
| 95.0% – 99.0% | 1.1% | 1.3% |
| 99.0% – 100% | 0.9% | 1.0% |
| TOTAL FOR ALL | 1.3% | 1.5% |
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Source: Tax Foundation
Note: Tax Foundation’s estimates of economic and distributional effects include both the rate/threshold adjustments in this option and the effects of repealing head of household filing status. The revenue score above only includes the effects of the rate/threshold adjustments. Tax Foundation estimates that repealing head-of-household filing status raises $83 billion over 10 years. |
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Potential Drawbacks
By raising tax rates relative to current policy (i.e., relative to extending TCJA’s across-the-board rate cuts) for single taxpayers making above $100,000 and married couples making above $200,000, this option would reduce the after-tax return to work for those taxpayers, which could in turn reduce their hours worked. This option would increase the after-tax return to work for single taxpayers making under $200,000 and married couples making under $400,000 relative to a current law baseline (i.e., relative to TCJA expiring).
Another drawback is that this option retains a seven-bracket structure that some stakeholders have called for reforming and simplifying.
Alternatives
Lawmakers could extend all of the lower individual rates, which would minimize some economic damage but would increase deficits more than this option. Those higher deficits would dent broader economic growth, offsetting the positive effects of extending lower rates. Another option would be to extend lower rates for the bottom six brackets but allow the top rate to go back up—Congress has pursued this approach in prior tax negotiations.
Rather than allow some of the rates to rise from TCJA levels, a more politically palatable course could be to offset some of the revenue loss by adjusting thresholds, subjecting more dollars to higher thresholds than under current policy (or even current law). Lawmakers could also freeze thresholds for a time (e.g., five years) instead of allowing them to rise with inflation.
Finally, Congress could more fundamentally reform and simplify income tax rates and thresholds. The Tax Reform Act of 2014—sometimes called the “Camp draft” after its author, then House Ways and Means Committee Chair Dave Camp (R-MI)—envisioned just two individual income tax rates: 10% and 25%. Such an effort would simplify the rate structure and further reward work for millions of American workers and households. It would in tandem require significant broadening of the individual income tax base (through limits to or elimination of credits, deductions, exemptions, and exclusions) to offset the cost of lower tax rates across the board.
Conclusion
Although extending some of TCJA’s lower rates reduces revenues on a current law baseline, allowing some of those lower rates to expire reduces the overall cost of extending the tax cuts. Lower individual tax rates were a cornerstone of TCJA, but there are ways to modify the rates and brackets that would make an extension less expensive.
Read the full set of offset options here and find all of BPC’s tax policy work at
