This blog has been revised to reflect the Tax Policy Center’s recalculation analysis of the business tax reduction proposals being discussed in Congress. TPC’s preliminary analysis overestimated the income loss of these provisions and their benefits to households.
The lame-duck Congress will spend the next few weeks debating the fate of several key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and the 2021 American rescue package, which have either expired or will expire by the end of the year. disappear. Extending them all would reduce federal revenue by nearly $700 billion from 2023 to 2032, a new Tax Policy Center analysis finds. But the distribution of benefits will vary widely, depending on which proposals are enacted.
The TPC examined five key elements of a possible deal: Make the Child Tax Credit (CTC) fully refundable as in 2021, restore a more generous 2021 version of the Earned Income Tax Credit (EITC) for workers not living with their parents ) their children, allowing businesses to write off the full cost of research again in the year the expense is incurred, expanding more generous “bonus depreciation” for capital equipment, and allowing looser rules for companies to deduct interest costs. TPC assumes all of these changes are permanent and retroactive to early 2022.
$700 billion in lost revenue
Restoring the more generous 2021 version of the EITC and the full refundability of the CTC would reduce federal revenue by about $200 billion over 10 years from 2023 to 2032. These changes have almost exclusively favored low- and middle-income families.
Just extending or reinstating the business tax cut would reduce revenue by just under $500 billion and benefit mostly high-income households. Neither Democrats nor Republicans appear to have considered offsetting tax increases or spending cuts to pay for any proposals.
Of all the terms, the greatest loss of revenue will come from making bonus devaluation permanent. This would reduce revenues by about $250 billion over the first 10 years. However, the lost revenue over the next 10 years (from 2033 to 2042) would drop to about $155 billion due to expenditures primarily resulting in changes in tax timing.
Who benefits the most?
If Congress agrees to all the changes, TPC found that the biggest beneficiaries, measured as a percentage change in after-tax income, would be the lowest-income households. They will get an average tax cut of 2.1%, or $370, in 2023. The next highest earning group, those earning between $30,000 and $60,000, would see their tax bill drop by an average of about 0.5% of their after-tax income, or about $200.
Not surprisingly, low-income families with children would benefit the most. They would see an average tax cut of about $1,000, boosting their after-tax income by 3.7%. Almost all of these benefits will come from the restoration of fully refundable CTCs.
At the other end of the income distribution, the top-earning households, those earning about $4.4 million or more a year, saw their after-tax income rise an average of about 0.2 percent. In dollar terms, they would be the big winners, adding about $22,000 to their average earnings.
Remember, these will not be direct tax cuts. TPC distributes these sales taxes between workers and normal returns to capital. Since these high-income households earn the highest wages and own the most corporate shares, they stand to benefit greatly from corporate tax cuts through higher wages and salaries, as well as higher stock prices. However, even low- and middle-income households benefit modestly from their share of the corporate tax cut.
In 2027, after all of the individual income tax provisions of the TCJA expire, the overall situation is more or less the same, only the numbers change. TPC found that low-income households would receive slightly less benefit from fully refundable CTC and EITC extensions. They would see an overall increase in average after-tax income of about 1.4% or about $300.
The after-tax income of the top 0.1% will increase slightly more in 2027 than in 2023, by about 0.3% of after-tax income, or about $28,000.
Because it is impossible to know which changes, if any, Congress will agree to, TPC analyzed a representative set of provisions. Ultimately, Congress may decide to extend only some of the commercial provisions temporarily, rather than perpetuate them. It could make many different changes to the CTC, such as modifying the credit amount or eligibility rules, or adjusting the refundable portion instead of allowing non-working parents to get the full credit.
But the new TPC estimates do provide a rough idea of what is at stake among lawmakers in a last-minute policy scramble before the end of the year.