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Middle-Bracket Rate Cut

Summary: We estimate the budgetary, distributional, and economic effects (relative to current law) of lowering the marginal tax rate for the current 22 percent individual income tax bracket to 15 percent, beginning in tax year 2020. We consider a scenario in which this rate is permanently lowered and a scenario in which it is allowed to revert to 25 percent beginning in tax year 2026, as scheduled under current law.

Table 1. Conventional Budget Estimate, FY2020-2029

Billions of Dollars, Change from Current-Law Baseline

Policy 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Budget window
Temporary -98 -130 -135 -140 -145 -151 -35 0 0 0 -834
Permanent -98 -130 -135 -140 -145 -151 -127 -123 -129 -133 -1,311

Table 2a. Dynamic Macroeconomic Effects of Temporary Rate Reduction

Percent Change from Baseline

Year GDP Capital stock Labor income Hours worked Consumption
2030 0.1% 0.6% 0.1% -0.1% 0.4%
2040 0.1% 0.3% 0.1% -0.1% 0.3%
2050 -0.1% -0.1% -0.1% -0.1% 0.1%

Note: Consistent with empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners.

Table 2b. Dynamic Macroeconomic Effects of Permanent Rate Reduction

Percent Change from Baseline

Year GDP Capital stock Labor income Hours worked Consumption
2030 0.4% 0.6% 0.4% 0.4% 1.5%
2040 0.4% 0.8% 0.4% 0.4% 1.7%
2050 0.4% 1.0% 0.4% 0.3% 1.2%

Note: Consistent with empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners.

Table 3. Distribution of Policy Change by Annual Income Categories in 2020, Relative to Current-Law Baseline



Corporate, individual income and payroll taxes
Income group Average tax change Tax units with a tax cut Tax units with a tax increase Percent change in after-tax income Share of tax change Share of federal taxes paid
Share Average tax cut Share Average tax increase Share under polcy Change from baseline (percentage points)
Bottom quintile $0 0.0% - 0.0% - 0.0% 0.0% -0.3% 0.0%
Second quintile $0 0.0% - 0.0% - 0.0% 0.0% 0.7% 0.0%
Middle quintile -$60 12.9% -$475 0.0% - 0.1% 1.8% 8.6% 0.3%
Fourth quintile -$755 49.4% -$1,525 0.0% - 0.9% 19.4% 17.3% -0.1%
80-90% -$2,500 95.2% -$2,625 0.0% - 1.9% 26.4% 13.5% -0.6%
90-95% -$5,100 96.8% -$5,270 0.0% - 2.8% 25.4% 10.2% -0.8%
95-99% -$5,410 94.1% -$5,750 0.0% - 1.8% 21.8% 17.5% -0.2%
99-99.9% -$5,245 88.9% -$5,900 0.0% - 0.6% 4.7% 15.3% 0.5%
Top 0.1% -$4,710 81.4% -$5,790 0.0% - 0.1% 0.5% 17.0% 0.8%
Individual income and payroll taxes only
Income group Average tax change Tax units with a tax cut Tax units with a tax increase Percent change in after-tax income Share of tax change Share of federal taxes paid
Share Average tax cut Share Average tax increase Share under polcy Change from baseline (percentage points)
Bottom quintile $0 0.0% - 0.0% - 0.0% 0.0% -0.4% 0.0%
Second quintile $0 0.0% - 0.0% - 0.0% 0.0% 0.4% 0.0%
Middle quintile -$60 12.9% -$475 0.0% - 0.1% 1.8% 8.8% 0.4%
Fourth quintile -$750 49.3% -$1,525 0.0% - 0.9% 19.4% 17.8% -0.1%
80-90% -$2,495 95.5% -$2,615 0.0% - 1.9% 26.3% 13.8% -0.7%
90-95% -$5,085 96.6% -$5,260 0.0% - 2.8% 25.3% 10.4% -0.8%
95-99% -$5,480 94.9% -$5,775 0.0% - 1.8% 22.0% 17.7% -0.2%
99-99.9% -$5,315 89.8% -$5,915 0.0% - 0.6% 4.7% 15.4% 0.6%
Top 0.1% -$4,795 82.8% -$5,795 0.0% - 0.1% 0.5% 15.9% 0.8%

Note: “Income” is defined as AGI plus: above-the-line deductions, nontaxable interest income, nontaxable Social Security benefits, nontaxable pensions and annuities, employer-side payroll taxes, and corporate tax liability. Seventy-five percent of the corporate income tax burden is assumed to be borne by the owners of capital income; the rest is assumed to fall on wages. Federal taxes included are individual income, payroll, and corporate income taxes.