Restore the Personal Exemption

Before the Tax Cuts and Jobs Act of 2017, personal and dependent exemptions provided an adjustment for household size by allowing taxpayers to exempt $4,050 in income per person. The exemptions phased out for higher-income taxpayers. The exemption was temporarily repealed in the Tax Cuts and Jobs Act of 2017 and permanently repealed in the One Big Beautiful Bill Act of 2025.

This option restores personal and dependent exemptions at $5,400 per person in 2027, inflation-adjusted moving forward. A higher personal exemption would drop some taxpayers into lower tax brackets, reducing marginal tax rates on both labor and capital income. However, this option also restores the personal exemption phaseout, which would increase marginal tax rates for some higher-income taxpayers.

On a conventional basis, this option would increase the primary deficit by $2,622.7 billion over the budget window. Long-run GDP would rise by 0.3 percent, while long-run GNP would fall slightly as the larger budget deficit would increase federal government borrowing, and more interest payments would flow to foreigners. On a dynamic basis, the primary deficit would increase by $2,370.8 billion from 2027 through 2036, $251.9 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 194.4 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of 1.3 percent. The middle quintile would experience the largest increase of 1.9 percent, while the top quintile of taxpayers, limited by the phaseout, would experience a 0.9 percent increase, and the bottom quintile, already with little to no tax liability, would experience a 0.1 percent increase. On a long-run dynamic basis, taxpayers would see a 1.5 percent increase on average.