In December 2017, the United States passed the Tax Cuts and Jobs Act (TCJA)—a major overhaul of the U.S. corporate and individual income tax system. On the individual income tax side, the TCJA featured broad tax rate cuts, the curbing or elimination of several tax deductions, and the expansion of some tax credits. Some of the most prominent changes are as follows:
- Individual income tax rates were reduced from 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent to 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent, respectively.
- The widths of individual income tax brackets were adjusted.
- The standard deduction was doubled to $12,700, $25,400 for married taxpayers.
- The personal exemption was eliminated.
- The Child Tax Credit (CTC) was doubled to $2,000 per child.
- Both the state and local tax deduction (SALT) and the home mortgage interest deduction were capped.
On net, these changes reduced taxes for low-, middle-, and upper-income households. Additionally, they resulted in lower tax rates on labor, increasing the long-run size of the economy.
However, most of the individual provisions are scheduled to expire at the end of 2025. The only significant individual income tax change that will remain is the use of chained-CPI to adjust tax parameters for inflation. Lawmakers may want to extend the individual tax cuts. However, doing so would reduce federal revenue significantly. Some lawmakers may worry about the impact of the reduced revenues on the federal deficit and will want to look for offsetting sources of revenue.
One such option for generating revenue offsets is a carbon tax. This paper shows that revenue from a newly introduced federal carbon tax could offset the cost of making the TCJA’s individual provisions permanent. According to the Tax Foundation’s model, making the individual provisions permanent would reduce federal tax receipts by $256 billion in 2030 ($176 billion in a 2021 economy) and increase the long-run size of the economy by 1.4 percent.