Redistribution — Expand Credits, Tighten Deductions

This option combination redistributes after-tax income toward lower-income taxpayers by expanding refundable credits while broadening the base at the top. It tightens the itemized deduction limitation, doubles the earned income tax credit for workers without qualifying children, and makes the child tax credit fully refundable.

Reducing the value of itemized deductions would impact economic output through two channels. First, it would increase how much income is subject to tax, raising marginal tax rates on labor and pass-through business income. Second, it would increase the tax burden on economic activity that benefits from itemized deductions, including charitable giving and investment in owner-occupied housing. The resulting reductions in hours worked and the capital stock would shrink economic output. The changes to credits would decrease marginal tax rates on taxpayers in the phase-in ranges but increase marginal tax rates on taxpayers in the phaseout ranges. On net, the option increases marginal tax rates on individual income.

On a conventional basis, this option would increase the primary deficit by $460.6 billion over the budget window. Long-run GDP and long-run GNP would fall by 0.1 percent. On a dynamic basis, the primary deficit would increase by $553.8 billion from 2027 through 2036, $93.2 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 178.2 percent by 2056.

The bottom three quintiles would see increases in after-tax income, with the largest increases for the lowest-income filers. The top quintile would experience decreases in after-tax income. On average, taxpayers would see an increase in their after-tax incomes of 0.1 percent in 2027 on a conventional basis, 0.1 percent by 2036, and 0.1 percent in the long run on a dynamic basis. The middle quintile distributional effect flips to negative on a dynamic basis.