Key Points:

• Senator Booker’s KYPA deduction expansion costs nearly four times Senator Van Hollen’s WATCA rate cap ($5.1 trillion vs. $1.4 trillion over FY 2026–2035) because each dollar of deduction saves high-bracket filers more in taxes, a built-in feature of the deduction mechanism.

• WATCA concentrates tax cuts on filers earning roughly $50,000–$160,000 (average cut of $1,505–$1,545 in the middle and fourth quintiles), while KYPA’s largest dollar benefits flow to the 80th–90th percentile ($7,165 average) and persist at $6,265 for the top 0.1 percent.

• Each mechanism creates a distinct distortion: WATCA’s binary eligibility threshold produces a marginal-rate cliff at the cutoff, while KYPA’s doubled standard deduction would reduce itemizers from 13.3 percent to 2.3 percent, eliminating the tax incentive for charitable giving and mortgage interest for most filers.

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Background

Senators Cory Booker and Chris Van Hollen have each proposed expanding the range of income subject to zero federal income tax, but through fundamentally different mechanisms. The Keep Your Pay Act (KYPA) by Senator Booker would more than double the standard deduction, from $16,150 to $37,500 for single filers, $24,200 to $56,250 for heads of household, and $32,300 to $75,000 for married couples filing jointly.¹ The Working Americans’ Tax Cut Act (WATCA) by Senator Van Hollen would establish an alternative maximum tax: eligible filers compute their liability under both the standard rate schedule and an alternative calculation equal to 25.5 percent of AGI above a cost-of-living exemption amount, then pay whichever is lower.² WATCA eligibility is binary: only filers with AGI below 175 percent of the exemption amount qualify.

Both proposals include additional provisions beyond the zero-bracket expansion (KYPA expands the CTC and EITC; WATCA imposes a millionaire surtax). This brief sets those aside to isolate a clean comparison of the two zero-bracket mechanisms and the general lessons they illustrate about tax policy design.

The Zero-Tax Threshold

Table 1 compares the income level below which a filer owes no federal income tax under each proposal. Under KYPA, this threshold is the expanded standard deduction itself. Under WATCA, it is the cost-of-living exemption amount, the AGI at which the alternative maximum tax calculation equals zero. Both proposals raise the zero-tax threshold substantially for all filing statuses.

Why Mechanism Drives Cost

The two proposals carry dramatically different price tags. KYPA’s standard deduction expansion would reduce federal revenue by an estimated $5.1 trillion over FY 2026–2035. WATCA’s alternative maximum tax would cost $1.4 trillion, roughly a quarter as much.

The cost difference is not incidental; it is a direct consequence of how each mechanism operates. A standard deduction reduces taxable income. A taxpayer in the 10 percent bracket saves $0.10 per dollar of additional deduction; a taxpayer in the 37 percent bracket saves $0.37. Because the deduction applies to all non-itemizing filers regardless of income, the federal government forgoes the most revenue per dollar of deduction from its highest-bracket taxpayers. WATCA’s alternative maximum tax, by contrast, is available only to filers below the eligibility threshold (approximately $80,500 for single filers and $161,000 for joint filers). Filers above the cutoff receive no benefit at all, and the benefit for those below the cutoff is capped by the difference between their regular tax and the alternative calculation.

This illustrates a general principle: deductions are inherently more expensive than capped rate-based mechanisms when applied broadly, because the revenue cost of a deduction scales with the taxpayer’s marginal rate.

Who Benefits Depends on the Mechanism

Table 3 compares the distributional effects of the two provisions in 2026. Both proposals deliver no benefit to the lowest-income households, who already owe no income tax under current law.

KYPA’s standard deduction delivers benefits that grow with income in absolute dollar terms. Households in the second quintile receive an average tax cut of $445. That figure rises to $2,065 in the middle quintile, $4,705 in the fourth quintile, and peaks at $7,165 for households in the 80th–90th percentile. Benefits remain substantial even at the top: the 99th–99.9th percentile receives $6,445 and the top 0.1 percent receives $6,265. This pattern is a direct consequence of the deduction mechanism, since each additional dollar of deduction is worth more to filers facing higher marginal rates.

WATCA’s alternative maximum tax concentrates benefits in the middle of the distribution. The middle and fourth quintiles receive the largest average tax cuts ($1,505 and $1,545, respectively). Above the 80th percentile, benefits drop to zero because the eligibility threshold excludes most filers at these income levels.

The contrast highlights a second general principle: a deduction delivers benefits that rise with income in dollar terms, while a rate-based mechanism with eligibility limits can concentrate benefits on a target population, but only by accepting the distortions that eligibility limits create.

A Single Filer Illustrates the Tradeoff

To make the mechanisms concrete, consider a single filer with only wage income who takes the standard deduction and no tax credits. Figure 1 plots the reduction in income taxes for this filer under each proposal relative to current law.

Both lines start at zero, since at low incomes, the filer already owes nothing under current law. As income rises above the current-law standard deduction ($16,150), both proposals begin reducing taxes. Under WATCA, the tax reduction equals the filer’s entire regular-law tax liability for income up to the $46,000 exemption amount, since the alternative maximum tax is zero in that range. Above $46,000, the filer begins paying 25.5 percent on income above the exemption, so the savings narrow as the alternative tax approaches the regular tax. At the $80,500 eligibility cutoff, the benefit disappears entirely. The result is a hump-shaped benefit that peaks at the $46,000 exemption amount and falls to zero.

Under KYPA, the savings rise at the same rate initially; both proposals zero out the same low tax brackets. But the KYPA benefit continues growing as the filer moves into higher marginal rate brackets. Because the additional $21,350 of standard deduction eliminates whichever income would otherwise be taxed at the filer’s highest marginal rate, the benefit grows in steps at each bracket transition, reaching $5,124 in the 24 percent bracket, $6,832 in the 32 percent bracket, and $7,900 in the top 37 percent bracket (not shown in Figure 1).

Marginal Rate Effects

The two mechanisms reshape the marginal tax rate schedule in fundamentally different ways. Figure 2 plots the change in the marginal tax rate on the next $1,000 in wages for the same single filer relative to current law.

KYPA shifts all bracket thresholds rightward by the amount of the additional standard deduction. The existing graduated rate structure is preserved: the same sequence of 10, 12, 22, 24, 32, 35, and 37 percent rates applies, just starting at a higher income level. The negative dips at each bracket boundary reflect ranges where the KYPA filer is in a lower bracket than the current-law filer. No filer faces a higher marginal rate under KYPA than under current law.

WATCA replaces the graduated rate structure with a flat 25.5 percent rate for eligible filers with income above the exemption amount. Below the $46,000 exemption, the effective marginal rate is zero, eliminating the 10 and 12 percent rates that apply in that range under current law. Above the exemption, the 25.5 percent rate exceeds the 12 percent statutory rate that applies to much of that income range, pushing marginal rates above current law. Figure 3 shows the resulting marginal tax rate levels.

The binary eligibility threshold creates a cliff at the cutoff. A single filer earning $80,000 saves $84 under the alternative maximum tax. A filer earning $81,000 loses eligibility entirely and reverts to the regular tax schedule, losing the full benefit. The marginal tax rate at the cutoff spikes to about 30 percent, well above the 22 percent statutory rate, combining the statutory rate with the abrupt loss of the alternative maximum tax benefit. This notch effect is a common distortion associated with hard eligibility cutoffs in the tax code, and it highlights a tension in rate-cap designs: the sharper the targeting, the more abrupt the phase-out, and the larger the distortion at the boundary.

A third general principle: deduction-based approaches preserve the existing rate structure, while rate-cap approaches replace it. Rate caps can lower average tax liability for a target population but may raise marginal rates for some filers within that population and create discontinuities at the eligibility boundary.

Impact on Itemization

KYPA’s deduction expansion produces a consequential side effect: it renders itemizing unattractive for most filers. A taxpayer itemizes only when their total itemized deductions exceed the standard deduction. By raising the standard deduction to $37,500 for single filers and $75,000 for joint filers, KYPA would push the vast majority of current itemizers below the threshold. The share of filers electing to itemize would fall from 13.3 percent under current law to 2.3 percent, a reduction of approximately 18.5 million filers.

WATCA’s alternative maximum tax does not alter the standard deduction and leaves the itemization calculus unchanged at 13.3 percent.

The remaining itemizers under KYPA would be filers with unusually large stocks of deductible expenses, by definition at least $37,500 for single filers or $75,000 for joint filers. For the 18.5 million filers who stop itemizing, the tax incentive for charitable contributions, mortgage interest, and state and local tax payments would be eliminated. Whether this is a cost or a benefit depends on one’s view of whether the tax code should subsidize these activities, but it is an unavoidable consequence of a large standard deduction increase. A deduction-based zero-bracket expansion has cascading effects on the broader tax incentive structure that a rate-based mechanism does not.

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This analysis was produced by Brendan Novak under the direction of Alex Arnon.

Footnotes

1. Our full analysis of all Keep Your Pay Act provisions is available here. ↩

2. Our full analysis of all Working Americans’ Tax Cut Act provisions is available here. ↩