Key Points
The FY2025 House budget reconciliation includes budget reconciliation instructions calling for $1.7 trillion in net spending cuts and $4.5 trillion in net tax cuts (with room for adjustments), allowing for a $2.8 trillion increase in primary deficits over the 10-year budget window from FY2025 to FY2034. Under budget reconciliation, primary deficits after FY2034 cannot increase.
If the Trump administration’s tax proposals were adopted by the House and enacted on a permanent basis, primary deficits over a 10-year period would increase by $6 trillion. Moreover, annual primary deficits would be around $700 billion higher in the years following 2034 and growing thereafter. To satisfy budget reconciliation rules, most tax cuts would, therefore, need to sunset (expire) by December 31, 2033.
With a sunset after calendar year 2033, we estimate that the combined spending and tax proposals put forward by the Trump administration would increase 10-year primary deficits by $5.1 trillion before accounting for economic growth effects and by $4.9 trillion after growth effects.
With a sunset after calendar year 2033, GDP modestly increases by the end of the 10-year budget window, between 0.3 and 0.4 percent, depending on how the $1.7 trillion in net spending cuts are allocated. Capital formation increases by 1 percent and wages increase between 0.6 and 0.7 percent. Under permanence, the signs reverse: GDP falls between 0.3 and 0.5 percent by year 10, wages fall by 0.6 and 0.7, as does capital.
On a conventional basis in 2026, the first 80 percent of the income distribution receives about 29 percent of the total value of the proposed tax cuts while the top 10 percent of the income distribution receives about 56 percent of the value. (Under current law, the top 10 percent of the income distribution pays about 70 percent of all federal taxes). Even with economic growth, lower income households are worse off if mandatory spending cuts, still to be decided under budget reconciliation, are allocated to programs like Medicaid and SNAP.
In Appendix A, we separately estimate that a scaled-back version of the Trump administration tax proposals would increase 10-year primary deficits by $3.6 trillion before economic effects, including required cost savings. This value is closer to, but still exceeds, the required target of $2.8 trillion.
A companion brief reports a wide range of different options for raising revenue from tariffs. To the extent that tariffs are implemented using Presidential authorities, it is unlikely that the concomitant revenue would be counted as an offset for budget reconciliation.
The FY2025 House Budget reconciliation and Trump Administration Tax Proposals Budgetary, Economic, and Distributional Effects
On February 25, the House of Representatives approved a budget resolution for fiscal year (FY) 2025 that sets the stage for new tax-and-spending legislation that can bypass the Senate’s 60-vote threshold and pass with a simple majority. While the budget resolution does not include specific changes to spending and taxes, it specifies which House committees should increase or decrease deficits in reconciliation legislation and by how much. These committees are responsible for identifying specific tax and spending changes within their jurisdictions to achieve these deficit targets.
In addition, the Trump administration and House Republican leadership have put forward a number of tax proposals, which include extension and restoration of expiring provisions of the Tax Cuts and Jobs Act of 2017 (TCJA), new tax cuts for households who receive Social Security benefits, no taxes on tipped income or overtime pay, removal of the state and local tax (SALT) deduction cap, and changes to the tax treatment of carried interest.
Table 1 summarizes the reconciliation instructions in the FY2025 House budget resolution. The topline instructions allow for up to $2.8 trillion in primary deficit increases over the 2025-2034 budget window, calling for $2 trillion in mandatory spending cuts, $300 billion in mandatory spending increases, and $4.5 trillion in net tax cuts.1
| Committee | Increase or decrease (-) in deficits, 2025-2034 | |
|---|---|---|
| Decreases in Mandatory Spending | -2,002 | |
| Agriculture | -230 | |
| Education and Workforce | -330 | |
| Energy and Commerce | -880 | |
| Financial Services | -1 | |
| Natural Resources | -1 | |
| Oversight and Government Reform | -50 | |
| Transportation and Infrastructure | -10 | |
| Unspecified committee | -500 | |
| Increases in Mandatory Spending | 300 | |
| Armed Services | 100 | |
| Homeland Security | 90 | |
| Judiciary | 110 | |
| Decrease in Tax Revenues: Ways and Means | 4,500 | |
| Total allowed increase in the primary deficit | 2,798 | |
Notes: The targets for each committee are bounds; positive amounts are “maximum deficit increases” and negative amounts are “minimum deficit reductions.”
Source: House Budget Committee.
Committees with deficit reduction targets must identify specific spending cuts within their jurisdiction. These include $880 billion in cuts from the Energy and Commerce Committee, which has jurisdiction over Medicaid and other federal health programs; $330 billion from the Education and Workforce Committee, which has jurisdiction over school funding, child nutrition, and workforce development; and $230 billion from the Agriculture Committee, which has jurisdiction over the Supplemental Nutrition Assistance Program (SNAP) and farm subsidies. In addition, the instructions call for $500 billion in further cuts not assigned to a specific committee.
The instructions also provide for up to $300 billion in new spending from committees with jurisdiction over defense, border security, and law enforcement. We assume that increased spending on the border and national security is concentrated in the first two years of the budget window.
Under the reconciliation instructions, the Ways and Means Committee – which has jurisdiction over taxes – is allowed net deficit increases totaling $4.5 trillion over the 2025-2034 budget window, so long as other committees attain the target $2 trillion in spending cuts. If savings from those other committees are less than $2 trillion, the target for Ways and Means is adjusted down by the difference (if the savings exceed $2 trillion, the target maximum for Ways and Means is adjusted up). In our analysis below, we assume that the deficit-reducing committees do reach their $2 trillion target.
To comply with reconciliation rules for passage in the Senate with a simple majority, the cost of tax policy changes must satisfy two conditions:2
The total cost over the 2025-2034 budget window must not exceed the $4.5 trillion maximum allowed to the Ways and Means Committee in the reconciliation instructions.
The changes must not increase deficits in any year beyond the budget window – that is, in fiscal year 2035 or any subsequent fiscal year.
Given the second constraint, we show below that it is generally not possible to enact net tax cuts on a permanent basis through reconciliation; any tax policy changes that increase the deficit must sunset (expire) before the end of the budget window. For the FY2025 budget reconciliation, this means all tax cuts must sunset after calendar year 2033 to ensure there is no increase in deficits beyond fiscal year 2034.3
While House Republican leaders have not released a specific tax plan — as described above, budget reconciliation simply creates a framework for such a plan. However, the Trump administration has put forward several tax proposals it expects will be included in future House reconciliation legislation. Below, we describe the components and relevant parameters for each proposal, including key assumptions made where insufficient information was available from the administration or various House committees.
Extend TCJA individual and estate tax provisions: For individuals, extending the TCJA would keep the current seven ordinary tax brackets with TCJA thresholds and rates. The top rate would be kept at 37 percent (versus 39.6% pre TCJA) and the exemption and exemption phaseout threshold from the Alternative Minimum Tax (AMT) would remain elevated. The standard deduction would remain roughly twice as high as before the TCJA and personal exemptions would remain eliminated. For households who itemize deductions, the cap on the Mortgage Interest Deduction would remain at $750,000 in mortgage debt. This estimate includes the $10,000 State and Local Tax (SALT) deduction cap included in the 2017 law — we consider the proposal to eliminate the SALT cap separately (see “Repeal the SALT deduction cap” below). The Child Tax Credit (CTC) would remain at $2,000, the refundable amount at $1,400 (in 2017 dollars) and begin to phase out at $400,000 of income. The Other Dependent Credit, which provides a $500 nonrefundable credit for dependents that do not qualify for the CTC, would remain in effect. Married filers would be able to deduct 20 percent of the first $315,000 ($157,500 for other filers, all in 2017 dollars) in income from pass-through businesses, subject to limitations. Estate tax exemptions would remain at their higher post TCJA levels. See our previous analysis of TCJA extension for additional information.
Restore TCJA business and international tax provisions: The Trump administration would restore the 100 percent bonus depreciation deduction available for the first five years after the TCJA's enactment, restoring businesses' ability to immediately deduct all research and experimentation costs (instead of amortizing them over five years), and returning the limit on net interest expense to 30 percent of income before interest, taxes, depreciation, and amortization (as opposed to the less generous current limit based on income before interest and taxes). They would also maintain the deduction and effective tax rates on Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) at their current levels; these are set to rise in 2026 under current law.
Eliminate income taxes on Social Security benefits: The Trump administration has proposed eliminating income taxes on Social Security benefits. Currently, beneficiaries with combined income below $25,000 ($32,000 for joint filers) pay no taxes on their benefits. Above that income level, the share of benefits subject to tax phases in with income. Beneficiaries with combined income greater than or equal to $34,000 ($44,000 for joint filers) are taxed on up to 85 percent of their benefits, the maximum share of benefits subject to tax under current law. No specific details about this policy have been provided, so we estimate this policy change as a full removal of benefits taxation for all beneficiaries starting in 2026. See our recent standalone analysis of eliminating income taxes on Social Security benefits for additional background on the taxation of Social Security benefits.
Eliminate income taxes on tips: The Trump administration has proposed ending income taxes on tips. Current law requires workers that receive tips to report their tips as income.4 Under current law, payroll and individual income taxes are paid on income from tips like any other earned income. As no additional information has been provided about this proposal, we interpret this policy proposal to mean providing an above-the-line deduction for employee tips from adjusted gross income (AGI) starting in 2026. This policy would leave payroll taxation of tips unchanged, meaning that reported tips would still be subject to Social Security and other payroll taxes. Our cost estimate for this provision does not incorporate potential behavioral changes that could substantially increase the cost of this provision, thereby assuming that very strict guardrails will be enforced in future legislation.5
Eliminate income taxes on overtime pay: The Trump administration has proposed ending income taxes on overtime pay. Under current law, overtime pay is subject to income and payroll tax like other wage income. As no additional information has been provided about this proposal, we interpret this policy proposal to mean providing an above-the-line deduction for all Fair Labor Standards Act (FLSA) eligible overtime pay from AGI starting in 2026.6 This would leave payroll taxation of overtime pay unchanged, meaning that overtime would still be subject to Social Security and other payroll taxes.
Repeal the SALT deduction cap: In the 2017 TCJA, the previously unlimited individual SALT deduction was capped at $10,000, meaning itemizers could only claim a maximum of $10,000 of their state and local tax liability as a deduction.7 Under current law, this provision, along with other individual provisions of the TCJA, is set to expire on December 31st, 2025. The Trump administration has proposed removing this cap from their extension of the expiring provisions of the TCJA. Under this policy, itemizers would once again be able to deduct the entirety of their state and local tax liability starting in 2026. For more information about the SALT cap and its interaction with TCJA extension, see our previous analysis.
Treat carried interest as ordinary income: Managers of private equity funds, hedge funds, and investment funds typically receive a share of the fund’s profits as compensation for their management, called carried interest. When those profits derive from the sale of long-term assets, the manager’s carried interest is taxed at the reduced tax rate on long-term capital gains rather than the higher tax rates typically applied to compensation. The Trump administration has proposed eliminating that special treatment, such that fund managers’ compensation would be taxed labor income. We assume that this new tax treatment would apply to carried interest starting in 2026.
Our analysis does not include a proposed tax cut for “Made in America products” because the Trump administration has not provided sufficient information about this proposal to model it. However, cancelling the rise in the effective tax rate on FDII (see “Restore TCJA business and international tax provisions” above) accomplishes similar objectives to this new potential proposal and may be viewed as an alternative approach to the same goals. Our analysis also excludes a proposal to end “special tax breaks for billionaire sports team owners” because the Trump administration has not provided sufficient information about this proposal to model it.
Table 2 shows the estimated revenue effects of the tax provisions outlined above. On a conventional basis (excluding economic feedback effects), PWBM projects that the Trump administration’s tax proposals would reduce revenues by $6.8 trillion over the 2025-2034 budget window. Extending the individual, estate, and business provisions of the TCJA for eight years (from 2026 to 2033) accounts for $4 trillion of this revenue loss. Eliminating taxes on Social Security benefits and eliminating the SALT deduction cap through 2033 would each cost more than $1 trillion over the budget window.8 The deduction for overtime pay would cost around $600 billion and the deduction for tips around $70 billion; ending the special treatment of carried interest income offsets less than $10 billion of these costs.
| Provision | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | Total, 2025-2034 budget window |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Extend TCJA individual & estate tax provisions | 0 | -349 | -392 | -401 | -400 | -396 | -404 | -415 | -427 | -24 | 0 | -3,207 |
| Restore TCJA business and international tax provisions | 0 | -112 | -149 | -132 | -110 | -97 | -93 | -87 | -88 | 81 | 105 | -788 |
| Eliminate income taxes on Social Security benefits | 0 | -72 | -123 | -130 | -137 | -144 | -151 | -157 | -165 | -65 | 0 | -1,143 |
| Eliminate income taxes on tips | 0 | -7 | -8 | -8 | -8 | -9 | -9 | -9 | -10 | -1 | 0 | -69 |
| Eliminate income taxes on overtime pay | 0 | -55 | -70 | -72 | -74 | -76 | -78 | -80 | -83 | -17 | 0 | -604 |
| Repeal the SALT deduction cap | 0 | -53 | -112 | -117 | -121 | -126 | -131 | -137 | -142 | -77 | 0 | -1,015 |
| Treat carried interest as ordinary income | 0 | * | 1 | 1 | 1 | 1 | 1 | 1 | 1 | * | 0 | 8 |
| Total change in revenues | 0 | -646 | -853 | -858 | -849 | -847 | -865 | -884 | -912 | -103 | 105 | -6,817 |
* = less than $500 million.
Note: A tax "sunset" refers to the planned expiration of tax law changes after a certain date, meaning those tax changes would be in effect only temporarily.
Source: Penn Wharton Budget Model
| Provision | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | Total, 2025-2034 budget window |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Extend TCJA individual & estate tax provisions | 0 | -349 | -392 | -401 | -400 | -396 | -404 | -415 | -427 | -437 | -447 | -3,620 |
| Restore TCJA business and international tax provisions | 0 | -112 | -149 | -132 | -110 | -97 | -93 | -87 | -88 | -91 | -93 | -960 |
| Eliminate income taxes on Social Security benefits | 0 | -72 | -123 | -130 | -137 | -144 | -151 | -157 | -165 | -172 | -180 | -1,250 |
| Eliminate income taxes on tips | 0 | -7 | -8 | -8 | -8 | -9 | -9 | -9 | -10 | -10 | -10 | -78 |
| Eliminate income taxes on overtime pay | 0 | -55 | -70 | -72 | -74 | -76 | -78 | -80 | -83 | -85 | -88 | -673 |
| Repeal the SALT deduction cap | 0 | -53 | -112 | -117 | -121 | -126 | -131 | -137 | -142 | -148 | -154 | -1,086 |
| Treat carried interest as ordinary income | 0 | * | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 10 |
| Total change in revenues | 0 | -646 | -853 | -858 | -849 | -847 | -865 | -884 | -912 | -942 | -970 | -7,656 |
* = less than $500 million.
Source: Penn Wharton Budget Model
These estimates assume all tax provisions sunset after 2033 to comply with budget reconciliation rules disallowing deficit increases after fiscal year 2034, the tenth year of the budget window. The second panel of Table 2 shows changes in revenue if all provisions were instead enacted permanently, as some Senate Republicans have demanded (click the “Permanent” tab above Table 2 to switch panels). Under this scenario, total revenue losses reach $7.7 trillion within the budget window and rise rapidly thereafter. PWBM projects that revenues would be almost $1 trillion lower in 2035 than under current law, with the gap growing over time.
The preceding revenue estimates are based on the most straightforward interpretation of the Trump administration’s statements about its tax proposals, which at this moment lack precision and are open to alternative interpretations. Appendix A, therefore, analyzes a set of alternative versions of the tax changes in Table 2 that scales back some proposals to more limited (less costly) versions. In Appendix A, we find that these scaled back tax proposals still exceed the $4.5 trillion limit on net revenue losses in the House budget reconciliation by $800 billion.
Table 3 shows how primary deficits would change over the next decade if the House adopted the Trump administration’s tax proposals in reconciliation legislation. If House committees meet their targets for $2 trillion in mandatory spending reductions and $300 billion in spending increases (see Table 1), total outlays would be reduced by $1.7 trillion over the budget window relative to current law. Combined with the $6.8 trillion cost of the Trump administration tax proposals, this means 10-year total primary deficits would rise by $5.1 trillion relative to current law, exceeding the $2.8 trillion primary deficit increase allowed in the House reconciliation instructions by more than 80 percent.
| 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | Total, 2025-2034 budget window | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outlays | 69 | 29 | -156 | -177 | -199 | -222 | -240 | -256 | -270 | -282 | -291 | -1,702 |
| Revenues | 0 | -646 | -853 | -858 | -849 | -847 | -865 | -884 | -912 | -103 | 105 | -6,817 |
| Primary Deficit | 69 | 675 | 697 | 681 | 651 | 625 | 625 | 628 | 643 | -179 | -396 | 5,115 |
| Memorandum: | ||||||||||||
| Increase or decrease (-) in primary deficit with dynamic effects, Unallocated spending | 79 | 682 | 700 | 677 | 636 | 598 | 583 | 571 | 582 | -234 | -458 | 4,875 |
| Increase or decrease (-) in primary deficit with dynamic effects, Allocated spending | 62 | 662 | 679 | 654 | 612 | 574 | 560 | 550 | 557 | -262 | -489 | 4,647 |
Note: A tax "sunset" refers to the planned expiration of tax law changes after a certain date, meaning those tax changes would be in effect only temporarily.
Source: Penn Wharton Budget Model
Conventional estimates do not account for economic feedback effects. The Memorandum lines to Table 3 indicate the change in primary deficits with dynamic effects discussed in the next session. These dynamic effects are calculated in two different ways, depending on whether spending cuts are allocated or not across households, as discussed next.
The conventional analysis above distributes cuts in mandatory outlays based on the distribution of spending under each committee’s jurisdiction. For modeling the impact on the tax cuts within budget reconciliation, a decision must be made about how cuts in mandatory spending are distributed within each committee’s jurisdiction at the actual program level. We consider two approaches:
Unallocated: Because the House has not yet taken specific positions on the distribution of spending within each committee at the program level, we assume that spending is unallocated at the program level. All spending reductions, therefore, are modeled as cuts in “wasteful” government spending that has no impact other than to reduce the deficit by the amount of the spending cuts. The unallocated assumption, however, is hypothetical and serves purely as a comparison point until reconciliation legislation is introduced.
Allocated: Based on information from media reports, this analysis assumes that nearly all deficit reductions from the Energy and Commerce Committee would come from reduced spending on Medicaid, with about $100 billion of the $880 billion coming from cuts to spending on energy, the environment, and other areas. We assume that the Agriculture Committee cuts would fall primarily on SNAP, while the Education and Workforce Committee cuts would take the form of reduced investment in education and workforce development. To be clear, the current House budget reconciliation does not make these specific recommendations. Rather, this version is again a comparison point until reconciliation legislation is introduced.
Like the unallocated version, the allocated version reduces the deficit by the amount of the spending cuts. However, unlike the unallocated version, spending cuts in the allocated version are largely focused on lower-income households who have a higher marginal propensity to consume from income as well as heterogenous labor supply responses.
Table 4 presents the economic effects of the proposed policy changes. The reader can choose between two main cases: (i) Trump tax proposals that sunset on December 31, 2033, and (ii) permanence (no sunset). Recall that case (ii) is inconsistent with the requirement that primary deficits do not increase in 2034. For both cases, we present the unallocated and allocated versions outlined above.
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | 0.3 | 0.4 | 0.4 | 0.4 | 0.5 |
| Capital stock | 1.1 | 1.2 | 1.2 | 1.2 | 1.2 |
| Hours worked | -0.3 | -0.3 | -0.3 | -0.2 | -0.2 |
| Average wage | 0.7 | 0.6 | 0.6 | 0.6 | 0.6 |
| Consumption | 1.4 | 1.3 | 1.3 | 1.3 | 1.4 |
| Debt held by the public | 10.4 | 6.1 | 3.2 | 1.1 | -0.5 |
Note: Cuts to government spending are not allocated to specific programs and are treated as a decrease in wasteful government spending.
Source: Penn Wharton Budget Model
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | 0.4 | 0.5 | 0.4 | 0.3 | 0.2 |
| Capital stock | 1.2 | 1.1 | 1.0 | 0.8 | 0.7 |
| Hours worked | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 |
| Average wage | 0.6 | 0.5 | 0.4 | 0.3 | 0.2 |
| Consumption | 0.8 | 0.7 | 0.6 | 0.5 | 0.5 |
| Debt held by the public | 10.4 | 6.4 | 3.7 | 1.7 | 0.1 |
Note: Cuts to government spending shift a greater share of Medicaid costs to the states, reduce SNAP payments to low-income households, and decrease public infrastructure investments.
Source: Penn Wharton Budget Model
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.5 | -0.7 | -0.9 | -1.1 | -1.6 |
| Capital stock | -1.2 | -1.4 | -1.7 | -2.3 | -3.2 |
| Hours worked | 0.3 | 0.1 | 0.0 | 0.0 | -0.1 |
| Average wage | -0.6 | -0.6 | -0.8 | -1.0 | -1.4 |
| Consumption | 2.7 | 2.9 | 3.0 | 3.0 | 2.8 |
| Debt held by the public | 12.8 | 15.7 | 17.6 | 18.8 | 19.7 |
Note: Cuts to government spending are not allocated to specific programs and are treated as a decrease in wasteful government spending.
Source: Penn Wharton Budget Model
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.3 | -0.5 | -0.8 | -1.2 | -1.7 |
| Capital stock | -1.1 | -1.3 | -1.8 | -2.6 | -3.6 |
| Hours worked | 1.0 | 0.9 | 0.7 | 0.7 | 0.6 |
| Average wage | -0.7 | -0.7 | -0.9 | -1.3 | -1.8 |
| Consumption | 2.2 | 2.3 | 2.3 | 2.2 | 1.9 |
| Debt held by the public | 12.9 | 16.1 | 18.1 | 19.4 | 20.3 |
Note: Cuts to government spending shift a greater share of Medicaid costs to the states, reduce SNAP payments to low-income households, and decrease public infrastructure investments.
Source: Penn Wharton Budget Model
Notice two key takeaways:
First, sunsetting the Trump tax proposals after 2033 leads to smaller long-term debt effects and more short-term economic growth relative to the case of permanence. To be sure, temporary enhanced depreciation allowances often cause inefficient intertemporal substitution with negligible long-run economic impact. However, the larger federal debt in the case of permanence discourages investment even more.
Second, the allocated version stimulates GDP more in the short run compared to the unallocated version but by less in the long run. In the short run, lower income households must replace their loss in benefits in the allocated version by working more hours. However, the rise in the wage rate is smaller relative to the unallocated version because capital increases about the same in both versions while labor hours grow in the allocated version, making labor less scarce.
Table 5 reports the conventional effects of the Trump tax proposals across the income distribution. It includes individual changes in tax liability and credits as well as the distributed effects of changes to corporate taxation. Consistent with standard conventional analysis, it does not include cuts to government spending, such Medicaid and SNAP, discussed in the allocated version above. Including those spending cuts would negatively impact households at the lower end of the income distribution.
| Income group | 2026 | 2033 | ||||
|---|---|---|---|---|---|---|
| Lower cutoff for income group | Average change in after-tax income | Percent change in after-tax income | Lower cutoff for income group | Average change in after-tax income | Percent change in after-tax income | |
| First quintile | $0 | $330 | 1.4% | $0 | $460 | 1.7% |
| Second quintile | $35,000 | $1,015 | 2.0% | $41,000 | $1,155 | 2.0% |
| Middle quintile | $64,000 | $2,195 | 2.6% | $75,000 | $2,635 | 2.7% |
| Fourth quintile | $107,000 | $4,955 | 3.5% | $124,000 | $5,890 | 3.5% |
| 80-90% | $183,000 | $8,280 | 3.8% | $212,000 | $9,335 | 3.6% |
| 90-95% | $277,000 | $13,135 | 3.9% | $321,000 | $15,310 | 3.9% |
| 95-99% | $407,000 | $31,555 | 5.3% | $477,000 | $35,525 | 5.1% |
| 99-99.9% | $1,048,000 | $77,545 | 4.3% | $1,236,000 | $82,075 | 3.9% |
| Top 0.1% | $4,694,000 | $619,270 | 4.4% | $5,586,000 | $513,555 | 3.5% |
Note: These tables do not incorporate the impact of proposed government spending cuts, including cuts to Medicaid and SNAP. Income cutoff values rounded to nearest thousand
In both 2026 and 2033, the largest increases in after-tax income go to the top income quintile, in both relative and absolute terms. The rest of the distribution experiences much more modest increases in after-tax income.
Conventional distributional analysis does not classify these households based on lifetime (or “lifecycle”) incomes. Conventional distributional analysis also does not include any effects of economic growth. We address these shortcomings with dynamic distributional analysis.
Dynamic distributional analysis considers how a policy affects households across the income and age distribution, including the unborn (represented by a negative age index at the time of the reform). It asks how much, on average, households in each (income, age) bucket value the proposed policy change over their entire lifetime, represented as a one-time transfer at the time of the policy change. Dynamic distributional analysis is the standard in academic research, where conventional analysis is rarely used due to several key limitations that dynamic analysis addresses.
Note: Cuts to government spending are not allocated to specific programs and are treated as a decrease in wasteful government spending; "Gross Income" refers to each household's income in the year of the policy change. We categorize households not yet in the labor force (ages 20 and younger) by their gross income in the year they enter the labor force.
Source: Penn Wharton Budget Model
Note: Cuts to government spending shift a greater share of Medicaid costs to the states, reduce SNAP payments to low-income households, and decrease public infrastructure investments; "Gross Income" refers to each household's income in the year of the policy change. We categorize households not yet in the labor force (ages 20 and younger) by their gross income in the year they enter the labor force.
Source: Penn Wharton Budget Model
Note: Cuts to government spending are not allocated to specific programs and are treated as a decrease in wasteful government spending; "Gross Income" refers to each household's income in the year of the policy change. We categorize households not yet in the labor force (ages 20 and younger) by their gross income in the year they enter the labor force.
Source: Penn Wharton Budget Model
Note: Cuts to government spending shift a greater share of Medicaid costs to the states, reduce SNAP payments to low-income households, and decrease public infrastructure investments; "Gross Income" refers to each household's income in the year of the policy change. We categorize households not yet in the labor force (ages 20 and younger) by their gross income in the year they enter the labor force.
Source: Penn Wharton Budget Model
Table 6 reports policy “equivalent variations” for the same cases and versions reported in Table 4. A positive equivalent variation means that the person would be better off under the policy reform; a negative equivalent variation means that the person would be worse off under the policy reform. For example, as shown in Table 6a, a household aged 60 at the time of the policy change, and with a gross income in the highest 20th percent of the income distribution, receives $62,900 of value from this policy bundle. Put differently, this household is indifferent between the adoption of this policy bundle and receiving a one-time payment of $62,900 without this policy change. However, in Table 6b, a household aged 30 in the bottom 20th percentile of income loses the equivalent of $16,400, as shown by the negative value. This household would be indifferent between this policy bundle and a one-time payment of $16,400 to avoid adopting this bundle.
The impact of the policy bundle on lifetime well-being depends significantly on the specific policy construction. Consider first the case where the tax proposals sunset after 2033, as would be required under budget reconciliation to prevent increasing primary deficits in 2034. If spending cuts are not allocated to specific programs like SNAP and Medicaid, households across almost all ages and income brackets are better off when accounting for economic growth (Table 6a). However, unallocated spending cuts are a hypothetical comparison that does not correspond to any actual policy. Allocating these spending cuts to programs like SNAP and Medicaid leaves low-income households worse off, whether they are alive today or born in the future (Table 6b). Congress still needs to make an actual decision on the allocation of the spending cuts.
Now consider the case where the Trump tax proposals are made permanent. Here, the negative economic effects associated with growing debt dominate. Most households in the first 60 percent of the income distribution are worse off (Table 6c), especially if spending cuts are allocated to programs like SNAP and Medicaid (Table 6d). All future households, including those in the higher income brackets, are worse off regardless of whether the spending cuts are allocated or not.
The revenue estimates in the main body of this brief are based on the most straightforward interpretation of the Trump administration’s statements about its tax proposals, which at this moment lack precision and are open to alternative interpretations. This appendix analyzes a set of alternative versions of the tax changes outlined in the main body of this brief that are scaled back to be more limited (less costly). Table A1 shows the potential savings from adopting these more limited alternative policy designs, relative to the estimates in Table 2a. We describe how each policy is scaled back in this exercise to reduce revenue loss below.
Allow scheduled increases in tax rates on GILTI and FDII: Under current law, the effective statutory tax rates on GILTI and FDII are set to rise in 2026 from the levels in effect since the TCJA created these provisions. Full restoration of TCJA’s original business and international parameters would cancel this increase. Allowing it to proceed as scheduled would reduce revenue losses by $364 billion over the budget window.
Limit Social Security tax exemption to filers with $100,000 ($150,000 for joint filers) or less in income: Rather than eliminate all income taxes on Social Security benefits outright, this alternative raises the income exemption before Social Security benefits are subject to tax. Currently, beneficiaries with combined income below $25,000 ($32,000 for joint filers) pay no taxes on their benefits. This policy would raise the exemption threshold to $100,000 ($150,000 for joint filers), and leave all other parameters of current law in place.9 This means that beneficiaries with combined income below the applicable threshold would owe no tax on their benefits, while the share of benefits subject to tax would still phase in with income to a maximum of 85 percent over the next $9,000 of combined income ($12,000 for joint filers). This alternative would reduce revenue losses by $489 billion over the budget window.
Limit tax deduction for tips to workers in certain industries: Under this alternative policy, eligibility for the above-the-line deduction for tips would be limited to employees in specific industries: food service, entertainment, hospitality, taxi and courier services, and personal care services.10 Workers in other industries would not be eligible for the deduction. This alternative would reduce revenue losses by $21 billion over the budget window.
Limit tax deduction for overtime to first $25,000 ($50,000 for joint filers) of overtime pay: This alternative institutes an annual cap of $25,000 ($50,000 for joint filers) on the above the line deduction for FLSA eligible overtime pay.11 Overtime pay in excess of this amount would be subject to tax as regular wage income. This alternative would reduce revenue losses by $187 billion over the budget window.
Set the SALT deduction cap to $50,000 ($100,000 for joint filers): Rather than eliminate the SALT deduction cap entirely, this proposal sets the cap at $50,000 ($100,000 for joint filers) beginning in 2026.12 This is higher than the $10,000 SALT cap in the 2017 TCJA, and corrects for the SALT cap “marriage penalty” in the 2017 TCJA by providing a larger threshold for joint filers. See our previous brief on the SALT cap for more information about the marriage penalty. This alternative would reduce revenue losses by $460 billion over the budget window.
| Provision | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | Total, 2025-2034 budget window |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Allow scheduled increases in tax rates on GILTI and FDII | 0 | 25 | 37 | 39 | 40 | 41 | 44 | 45 | 46 | 48 | 364 |
| Limit Social Security tax exemption to filers with $100,000 ($150,000 joint) or less in income | 0 | 29 | 49 | 53 | 57 | 61 | 65 | 70 | 75 | 30 | 489 |
| Limit tax deduction for tips to workers in certain industries* | 0 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 1 | 21 |
| Limit tax deduction for overtime to first $25,000 ($50,000 joint) in overtime pay | 0 | 16 | 21 | 21 | 23 | 24 | 25 | 26 | 27 | 5 | 187 |
| Set the SALT deduction cap to $50,000 ($100,000 joint) | 0 | 34 | 50 | 53 | 55 | 57 | 60 | 63 | 66 | 22 | 460 |
| Total potential change in revenues | 0 | 106 | 159 | 168 | 177 | 186 | 197 | 206 | 217 | 105 | 1,521 |
Note: These estimates assume that all tax provisions sunset after 2033, except for the increase in statutory effective tax rates on GILTI and FDII scheduled under current law.
All estimates assume an extension of the expiring individual and estate tax provisions of the TCJA, and the "stacking order" from Table 2a is maintained.
* Included industries are food service, entertainment, hospitality, taxi and courier services, and personal care services.
Source: Penn Wharton Budget Model
Table A1 shows that, taken together, these alternative policy designs could reduce the 10-year cost of the administration’s tax proposals by $1.5 trillion on a conventional basis (assuming all tax provisions sunset after 2033). Subtracted from the $6.8 trillion total in Table 2a, this yields a total revenue loss of $5.3 trillion in the 2025-2034 budget window. Even with the scaled back versions of these provisions, the cost of the administration’s tax proposals still exceeds the $4.5 trillion limit on net revenue losses in the House budget reconciliation by $800 billion.
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These amounts are upper or lower bounds on the change in deficits allowed under the instructions: deficit increases are specified as “maximum deficit increase” and deficit reductions are specified as “minimum deficit reduction.” ↩
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There are several other conditions that must be satisfied for passage under reconciliation, which we assume would be met; see here for more information. ↩
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Due to the timing of tax payments, the tax code in calendar year 2034 affects revenues in fiscal year 2035. ↩
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Some workers with income above the federal filing threshold may not currently report their tips to the IRS. Our analysis does not account for potential changes to reporting behavior. ↩
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Eliminating income taxes on tips would create strong incentives for workers and employers to reclassify earnings and otherwise modify their behavior to take advantage of the tax break. This is especially true for tips from self-employment jobs, which we assume would not qualify for the deduction and exclude from our analysis. Consistent with standard practice, our conventional estimates do not incorporate behavioral responses. Depending on policy design, these responses could significantly increase the magnitude of the revenue effects. ↩
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Eliminating income taxes on overtime would create incentives for workers and employers to modify their behavior. Consistent with standard practice, our conventional estimates do not incorporate behavioral responses. Depending on policy design, these responses could significantly increase the magnitude of revenue effects. ↩
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The cap for married individuals filing separately is $5,000 under the 2017 TCJA, $10,000 for all other filers. ↩
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The cost of eliminating the SALT deduction cap is estimated relative to extension of the TCJA’s $10,000 cap. ↩
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These figures are nominal and are not adjusted annually for inflation. ↩
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Personal care services include barbers, salons, etc. ↩
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These figures are nominal and are not adjusted annually for inflation. ↩
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These figures are nominal and are not adjusted annually for inflation. ↩
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 22600 40000 40200 47100 51600 -10 16700 27400 13200 28000 23200 0 11400 16300 16200 15100 8700 10 7600 9600 10000 8500 3900 20 3800 10500 11800 19000 28200 30 2700 4200 9600 16600 24900 40 5500 9100 11500 15000 30900 50 3600 7000 13400 20700 44800 60 5400 9900 18000 26700 62900 70 500 2600 11100 33300 109500
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 -11400 19800 19800 23700 21900 -10 -15000 7500 2200 5400 -1000 0 -20800 -1200 -1200 -2200 -3800 10 -20400 -3700 -3600 -3700 -4100 20 -22000 -1400 -900 4800 12200 30 -16400 -11200 -3200 5500 13600 40 -23000 -13000 300 5300 22900 50 -30100 -9500 2600 13700 40000 60 -49300 -9200 6100 21700 61000 70 -72600 1600 11500 34700 113900
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 -11800 -16000 -16100 -9900 -5000 -10 -11100 -14800 -6400 -8700 -4000 0 -8000 -5900 -5400 -500 14100 10 -4000 2300 3300 16900 41400 20 -700 10200 12100 29200 57700 30 -2100 -600 8600 24800 52600 40 -5400 -4500 7700 15100 60000 50 -4300 -2100 5300 16400 63700 60 -6200 -4800 2100 12500 61600 70 3600 7700 25900 69300 229800
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 -45700 -31400 -31600 -21000 -13400 -10 -44200 -29700 -13700 -19300 -12000 0 -40300 -19400 -18100 -9700 -3200 10 -31900 -9200 -8200 -800 19300 20 -26000 -2300 -1500 13600 40500 30 -21500 -17100 -5700 12400 40100 40 -31800 -23400 -4600 4300 50800 50 -38800 -18600 -5500 9000 58000 60 -61600 -23800 -10000 7200 59400 70 -71500 6700 26200 70800 234300