On a yearly basis the Internal Revenue Service (IRS) adjusts more than 60 tax provisions for inflation to prevent what is called “bracket creep.” Bracket creep occurs when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any increase in real income.
The IRS used to use the Consumer Price Index (CPI) as a measure of inflation prior to 2018. However, with the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.
The new inflation adjustments are for tax year 2023, for which taxpayers will file tax returns in early 2024. Note that the Tax Foundation is a 501(c)(3) educational nonprofit and cannot answer specific questions about your tax situation or assist in the tax filing process.
In 2019, taxpayers filed 148.3 million tax returns, reported earning nearly $11.9 trillion in adjusted gross income, and paid $1.6 trillion in individual income taxes.
The top 1 percent of taxpayers paid a 25.6 percent average individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).
The share of reported income earned by the top 1 percent of taxpayers fell to 20.1 percent from 20.9 percent in 2018. The top 1 percent’s share of federal individual income taxes paid fell to 38.8 percent from 40.1 percent.
The top 50 percent of all taxpayers paid 97 percent of all individual income taxes, while the bottom 50 percent paid the remaining 3 percent.
The top 1 percent paid a greater share of individual income taxes (38.8 percent) than the bottom 90 percent combined (29.2 percent).
The Tax Cuts and Jobs Act reduced average tax rates across income groups.
Did it work? In a new paper with my Tax Policy Center colleague Claire Haldeman, we conclude that, consistent with these goals, TCJA reduced marginal effective tax rates (METRs) on new investment and reduced the differences in METRs across asset types, financing methods, and organizational forms.
But it had little impact on business investment through 2019 (where we stopped the analysis, to avoid confounding TCJA effects with those of the COVID-related shutdowns that ensued). Investment growth increased after 2017, but several factors suggest that this was not a reaction to the TCJA’s changes in effective tax rates.
Three years after the passage of the 2017 Tax Cuts and Jobs Act, partisan mischaracterizations have left the law deeply misunderstood. The tax cuts benefited typical American workers through direct tax cuts and higher wages. The changes did not raise taxes on the middle class, did not devastate home prices, and did not reduce charitable giving. Businesses have created domestic jobs, and the new 21 percent corporate tax rate still leaves American employers paying rates higher than most competitors. As the law begins to expire in the coming years, lawmakers will be better able to assess the merits of keeping the tax cuts if they understand 12 common myths.
If you’re a U.S. firm that does business abroad, the TCJA essentially gives you an easy — but perverse — choice: You can move your foreign profits and operations to America, where the corporate tax rate is 21%, or you can keep them anywhere else in the world, where the U.S. will charge you around half that. It’s not a hard call, especially because the minimum tax is calculated based on a firm’s total global profits rather than looking at what the company earns in each different country. With no one looking at individual jurisdictions, corporations can shift and book profits wherever they can get the lowest tax bill. The TCJA also makes the first 10% of returns earned by foreign assets tax exempt, a powerful incentive for companies to offshore factories and jobs. It isn’t an overstatement to say that today most firms would prefer to earn income anywhere but America.
The U.S. isn’t the only loser in this race to the bottom. So are our corporations. The global competition for low rates allows American firms to pay less taxes — or none at all — but they still pay a significant cost. Over the next 10 years, more than $2 trillion of the U.S. corporate tax base will flow out of the country because of the broken system I’ve described. Our tax revenues are already at their lowest level in generations, and as they continue to drop, the country will have less money to invest in airports, roads, bridges, broadband, job training, and research and development.
As a spending bill, the ARP’s impact cannot be overstated. It is the mirror opposite of the Trump tax cuts, targeting most of its benefits to the bottom end of the income ladder, rather than the top. It will send stimulus checks up to $1,400 to an estimated 280 million Americans, continue additional $300 weekly unemployment benefits until the end of August, and distribute up $3,600 to families per child through monthly payments over one year beginning on July 1.
These three measures are expected to increase the incomes of the poorest 20 percent of Americans by an average of 33 percent, while the poorest 60 percent could see their incomes increase by an average of 11 percent, according to estimates from the Institute on Taxation and Economic Policy. One estimate suggests that the legislation will slash child poverty in half.