Restructure the Income Tax — Three Brackets, Broader Base

This option combination restructures the individual income tax. It consolidates the current individual income tax brackets into three rates of 10, 25, and 35 percent and eliminates the home mortgage interest deduction, the charitable deduction, the individual alternative minimum tax, and the state and local tax (SALT) deduction. The current law 10 and 12 percent brackets are consolidated into a 10 percent bracket, and the 22, 24, and 32 percent brackets are consolidated into the 25 percent bracket. The 35 and 37 percent brackets are folded into the 35 percent bracket.

The rate changes lower weighted marginal tax rates for most tax filers. The elimination of the major itemized deductions, however, increase marginal tax rates and raise the tax burden on investment in homeowner-occupied housing and charitable donations. On net, the combination results in an increase in marginal tax rates overall, reducing hours worked, capital investment, and long-run economic output.

On a conventional basis, this option would decrease the primary deficit by $35.9 billion over the budget window. Long-run GDP would fall by 0.3 percent, and long-run GNP by 0.2 percent. On a dynamic basis, the primary deficit would increase by $384.5 billion from 2027 through 2036, $420.4 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 180.2 percent by 2056.

In 2036, on a conventional basis, the top quintile would see decreases in after-tax income, while the remaining income groups would see increases. On a long-run dynamic basis, all income groups would experience decreases in after-tax income, with an average decline of 0.2 percent.