This blog has been revised to reflect the Tax Policy Center’s recalculated analysis of the business tax cut proposals being debated in Congress. The original TPC analysis overestimates the loss of income from these provisions and their benefits to households.
The lame-duck Congress will spend the next few weeks arguing over the fate of several key provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) and the 2021 US bailout that have either expired or will disappear in the end of this year. A new analysis by the Tax Policy Center finds that expanding all of them would reduce federal revenue by nearly $700 billion from 2023 to 2032. But the distribution of the benefits would vary widely depending on which proposals are adopted.
The TPC considered five key elements of a possible agreement: Make the Child Tax Credit (CTC) fully refundable as it was in 2021, restore the more generous 2021 version of the Earned Income Tax Credit (EITC) for workers who do not live with their children, allowing businesses to again write off full research expenses in the year in which the expenses are incurred, extending more generous “bonus depreciation” to capital equipment, and allowing businesses more liberal rules for deducting interest expenses. TPC assumed that all of these changes would be permanent and retroactive to early 2022.
$700 billion in lost revenue
Reinstating the more generous 2021 version of the EITC and fully restoring the CTC would reduce federal revenue by roughly $200 billion over the 10 years from 2023 to 2032. These changes would almost entirely benefit low- and moderate-income households incomes.
Extending or restoring the business tax cuts alone would reduce revenue by just under $500 billion and would mostly benefit high-income households. Neither Democrats nor Republicans appear to be considering paying for any of the proposals with offsetting tax increases or spending cuts.
Of all the provisions, the biggest revenue loss will come from making bonus depreciation permanent. This would reduce revenue by an estimated $250 billion over the first 10 years. However, because spending largely results in a shift in the tax payment schedule, the revenue loss over the next 10 years (from 2033 to 2042) would drop to about $155 billion.
Who benefits the most?
If Congress agrees to all the changes, the TPC found that the biggest beneficiaries, measured as a percentage change in after-tax income, would be the lowest-income households. They would get an average tax cut of 2.1 percent in 2023, or $370. The next highest income group, those earning between about $30,000 and $60,000, would see their tax bill drop by an average of about 0.5 percent of 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, raising their after-tax income by 3.7 percent. Almost all of these benefits will result from the recovery of the fully refundable CTC.
At the other end of the income distribution, households with the highest incomes, those with about $4.4 million or more, would see their after-tax incomes rise by about 0.2 percent on average. In dollar terms, they would be the big winners, with their average income rising by about $22,000.
Note that these will not be direct tax cuts. The TPC distributes these business taxes to workers and the normal return on capital. Since these high-income households earn the highest wages and also own the most corporate stock, they would benefit enormously from the corporate tax cut through higher wages and salaries and increased stock prices. However, even low- and moderate-income households would benefit modestly from their share of corporate tax relief.
In 2027, after all TCJA personal income tax provisions expire, the overall story is about the same, although the numbers change somewhat. The TPC found that low-income households would benefit somewhat less from the fully refundable CTC and EITC expansions. They would see a total increase in average after-tax income of about 1.4 percent, or about $300.
The top 0.1 percent would see their after-tax income rise slightly more in 2027 than in 2023, about 0.3 percent of after-tax income, or about $28,000.
Because it is impossible to know which changes, if any, Congress will agree to, the TPC analyzed a representative set of provisions. After all, Congress may decide to only temporarily extend some of the business regulations, rather than continue them permanently. And it can make many different changes to the CTC, such as revising credit amounts or eligibility rules, or adjusting the refundable portion without allowing the full credit for non-working parents.
But the new TPC estimates give a rough idea of what’s at stake in last-minute legislative policy before the end of the year.