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This blog post is part of a series dedicated to analyzing the impact of the Tax Cuts and Jobs Act. Click here to see all of the blogs in the #TCJANowWhat series.
As a complement to this discussion on the Tax Cuts and Jobs Act (TCJA), this page will highlight different aspects of the law visually. I use Tax-Calculator, a micro-simulation model developed by AEI’s Open Source Policy Center to model the TCJA’s individual income tax provisions. In other words, I estimate the tax liabilities in 2019 and compare them to what they would have looked like in a non-TCJA world. Tax-Calculator allows us to answer a vast array of complex questions about how the TCJA affected American taxpayers and to present this data in a way that makes tax reform understandable to all.
Figure 1. Change in after-tax income by percentile
Here we see how the TCJA affected filers across the income distribution.
Source: Author’s calculations using Tax-Calculator release 2.5.0, https://github.com/PSLmodels/Tax-Calculator.
Figure 2. Percentage of tax filers per income group with a tax cut due to the TCJA pass-through provisions
In William Gale’s blog, he discusses the changes to the pass-through business income (Section 199A). He cites data from the Joint Committee on Taxation showing that 44 percent of the benefits from the pass-through deduction reforms go to households with incomes of $1 million or greater in 2018. However, that does not mean all filers with incomes above $1 million see a tax cut. So, how exactly are the benefits of these provisions distributed? Using Tax-Calculator, we can answer this. Here we see the percentage of total households per income group that benefit from the pass-through provisions. Interestingly, 8.9 percent of all tax filers receive a tax cut, but nearly half of all filers with more than $1 million in after-tax income see a tax savings from the pass-through provisions.
Source: Author’s calculations using Tax-Calculator release 2.5.0, https://github.com/PSLmodels/Tax-Calculator.
About the model
Tax-Calculator uses the 2011 IRS-SOI Public Use File and a recent Census Current Population Survey to compute federal income taxes and Federal Insurance Contribution Act (FICA) taxes for a sample of filing units, beginning in 2013. The model then creates a micro data set that closely reproduces the multivariate distribution of income, deduction, and credit items in 2009, and it extrapolates to 2015–29 levels in accordance with Congressional Budget Office forecasts released in the spring of 2016. Additional information on non-filers is taken from the March 2013 Current Population Survey. All estimates in this blog use 2019 dollars. After-tax income, as used in these analyses, is the sum of wage and salary income net of certain items[1] minus all federal tax liability (individual and payroll). All distributional changes in after-tax income are static estimations.
What do you want to see?
Curious about how a certain aspect of the tax reform affected American taxpayers? Want it visualized? Let us know! We encourage engagement and want to analyze what our readers want to know most about.
Erin Melly is a research associate at AEI and holds a BA in economics from Columbia University. Reach her at erin.melly@aei.org and on Twitter @erinmelly2.
[1] Items netted out of wage and salary income include defined-contribution pension contributions, tax-advantaged defined-contribution pension contributions for the taxpayer and spouse, taxable and nontaxable interest income, dividends, state and local income tax refunds, alimony received, Sch. C business net income/loss, capital gain distributions not reported on Sch. D, Form 4797 other net gain/loss, taxable IRA distributions, total pension and annuity income (including defined-benefit-plan benefits), Sch. E total rental, partnership, S-Corporation income/loss, Sch. F farm net income/loss, Sch. D net short-term capital gain/loss, Sch. D net long-term capital gain/loss, other Additional Marginal Tax taxable income items from Form 6251, and half of the employer share of FICA taxes on wages/salaries.
As a complement to this discussion on the Tax Cuts and Jobs Act (TCJA), this page will highlight different aspects of the law visually.
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