The full extension of the 2017 tax cuts would cost the federal government $4.2 trillion between 2026 and 2035, with the associated tax savings concentrated among the highest earners.
An analysis published Friday by the U.S. Treasury shows that taxes would be cut by an average of 2.2% of after-tax income for all families, but the largest tax cuts would go to the highest-income families.
“Families between the 95th and 99th percentiles would receive a tax cut of 3.0 percent of after-tax income,” the report states. “Families in the top 1 percent but not the top 0.1 percent would receive a tax cut of 3.6 percent of after-tax income, and families in the top 0.1 percent would receive a tax cut of 4.2 percent of after-tax income.”
Extending additional business tax cuts that are set to phase out and reversing several business tax increases enacted as part of the overhaul legislation — as some Republican lawmakers have called for — would cost an additional $1.3 trillion.
What About a Partial Extension?
The Treasury report also considers the prospect of Congress reversing the 2017 tax cuts for those with incomes higher than $400,000 and allowing the business and estate tax cuts to expire as scheduled.
This approach would reduce the cost of extending expiring provisions to $1.8 trillion — less than half the cost of extending all of the individual and estate tax cuts and about a third of the total cost including the business provisions.
This scenario would cut taxes by an average of 1% of after-tax income for all families.
“Families between the 40th and 50th income percentiles would get an average tax cut of $524,” the report suggests. “Families between the 80th and 90th income percentiles would get an average tax cut of $2,606.”
The average tax cut would range between 1% and 2% of after-tax income for all earners between the 10th and 90th percentiles. The scenario would actually increase taxes by about 1.5% of after-tax income for families in the top 1%, primarily because it would extend provisions that increase taxes while sunsetting provisions that decrease taxes.
Tax Cut Extension Debate Kicks Off
The Treasury report comes ahead of a hearing scheduled for next week by the House Ways and Means Committee at which witnesses will debate the potential extension of the 2017 legislation.
The general consensus in Washington is that the GOP election sweep in November will ease President-elect Donald Trump’s attempts at tax reform in 2025 — but the process still won’t be easy.
Complicating factors include the price tag of a wholesale extension of the legislation and the narrow Republican majorities in the House and Senate. The slim congressional margin could prove challenging given divisions of opinion among GOP lawmakers around certain policies, especially lifting the cap on state and local tax deductions.
Credit: Bloomberg
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