The Joint Committee on Taxation (JCT) recently published a series of documents tied to the Tax Cuts and Jobs Act. One of the documents receiving a great deal of attention is the “Distributional Effects of Public Law 115-97.” The document provides distributional tables and analysis of the Tax Cuts and Jobs Act (TCJA) relative to the rules and regulations in place prior to the TCJA.
Distributional analysis focuses on how a tax system’s aggregate costs and economic burdens are shared by taxpayers. This analysis takes into account different income levels, consumption habits, and other behaviors of taxpayers. Such analysis is generally used to determine how tax legislation impacts horizontal and vertical equity. Horizontal equity focuses on the equal tax treatment of equals. Vertical equity focuses on whether individuals are taxed according to their ability to pay.
Distribution tables prepared by the JCT staff convey how the TCJA changes the distribution of tax liabilities and tax burdens among taxpayers of different incomes relative to prior law. The distribution tables classify taxpayers by filing unit, which is closely related to households.
The aggregate distributional effect of the TCJA is covered in Table 1. Table 1 replicates the distributional effects published in December 2017 to accompany the Conference Agreement. This table shows aggregate tax liability reductions in each income category. To provide information on vertical equity, the table also includes columns presenting estimates of the average tax rate under the law in effect when the table was originally published in December 2017 (Present Law) and the TCJA Conference Agreement (Proposal).The columns show that as income increases the average tax rate reduction increases.
In Table 2, the JCT provides information on the distribution of tax changes within income category by grouping filing units into five categories. This type of analysis provides information on horizontal equity to the extent that taxpayers in the same income categories are considered to be similarly situated. The five categories are as follows:
- Tax decreases of greater than $500
- Tax decreases of $100-$500
- Tax changes of less than $100
- Tax increases of $100-500
- Tax increases greater than $500
Table 2 shows that, while the majority of tax filers are projected to have reductions in tax liability, some tax filers in each income category are projected to experience tax increases. The table also shows that, in general, as income increases, an increasing percentage of tax filers have tax decreases. However, filing units with economic income of $1 million or more have the highest percentage (13.8%) of tax increases of greater than $500.
Changes to business taxes are summarized on Table 3. This table illustrates the split between provisions on the individual income tax side and the business income tax side. The deduction for pass through income is included on the individual income tax side and embedded in the individual income tax column.
Both the individual and business sides reduce tax liability in each income category. The average tax liability reduction increases with income on both the individual and business sides. The reduction in tax liability is more concentrated towards the upper end of the income distribution for the business side relative to the individual side.
The JCT report also includes tables for select individual provisions (e.g., Tables 4-7). These tables focus on vertical equity by showing how tax filers across the income distribution are impacted by specific individual income tax provisions or groups of individual income tax provisions.
Horizontal equity is also a consideration with respect to the interactions of individual income tax provisions. The JCT report provides an example of two families with the same economic income that differs on other dimensions, such as the number of children, size of the mortgage, state and local taxes paid, and the number of charitable contributions. If one family chooses to itemize deductions and the other choose the standard deduction, a change back to prior law may decrease the tax liability of one family because of more generous itemized deductions and increase the tax liability of others by reducing the standard deduction.
The analysis and discussion of the interactions of individual income tax provisions illustrate some of the considerations related to the fairness of the tax system. For now, the analysis provided in the JCT report provides policymakers with quantitative data that can be used to evaluate the trade-off between measures of fairness and economic efficiency. How policymakers will utilize this information moving forward remains to be seen.
Learn more about federal tax after the Tax Cuts and Jobs Act in our CPE On-Demand course Individual Taxes – Income & Deductions (Impact of Tax Cuts and Jobs Act), taught by Tara Fisher.