Increase Standard Deduction by 25 Percent and Raise Top Rate to 50 Percent

This option combination increases the value of the standard deduction for all filers by 25 percent and raises the top ordinary individual tax rate from 37 percent to 50 percent. The standard deduction is adjusted for inflation annually.

A higher standard deduction pushes some taxpayers into lower marginal tax brackets, reducing marginal tax rates on income. At the same time, some taxpayers are induced to switch from itemizing their deductions to taking the standard deduction, increasing marginal tax rates on certain types of activity, including charitable giving and housing.

Raising the top marginal tax rate from 37 percent to 50 percent increases the tax burden on labor income and on pass-through business income, reducing incentives to work and invest. On net, the combination increases marginal tax rates on work and investment, leading to a reduction in long-run economic output.

On a conventional basis, this option would reduce the primary deficit by $243.9 billion over the budget window. Long-run GDP would fall by 1.2 percent, while long-run GNP would fall by 1.3 percent. On a dynamic basis, the primary deficit would increase by $807.6 billion from 2027 through 2036, $1,051.5 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 185.7 percent by 2056.

On average, taxpayers would see a decline in their after-tax incomes of 0.2 percent in 2027 on a conventional basis, 0.1 percent by 2036, and 1.1 percent in the long run on a dynamic basis. Conventionally, average after-tax incomes rise for taxpayers below the top 1 percent, while the top 1 percent sees a decrease in after-tax incomes due to the higher top ordinary tax rate. On a dynamic basis, taxpayers in the bottom and top 20 percent see a net decrease in after-tax incomes.