Understanding Middle-Class Tax Cuts

Middle-class tax relief has widespread support across the political spectrum, but the consequences of different strategies for achieving this goal are not well understood. Either doubling the standard deduction or expanding the brackets for the 10 or 15 percent tax rates results in lower EMTRs for taxpayers in the middle class, but that these policies have quite different effects both within the middle class and across the aggregate economy.

Expanding the standard deduction simplifies the tax code, lowers tax burdens for a broad spectrum of middle-class taxpayers, and mitigates the distortions induced by itemized deductions. Doubling the standard deduction modestly lowers EMTRs for nearly 36 million households.

Expanding the 10 percent bracket does little to simplify the tax code but has a similar effect as the standard deduction doubling with regard to the number of taxpayers that would receive a tax break and the number of taxpayers that would face a reduced marginal tax rate.

Expanding the 15 percent bracket also has virtually no effect on taxpayers’ decision to itemize deductions and impacts a narrower and better-off pool of taxpayers. However, this policy would have the most positive impact with respect to the percent change in after-tax income at the margin, the greatest potential impact on taxpayers’ labor supply, and the largest macroeconomic benefit.

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