AEI Tax Brief: Increasing the standard deduction

AEI Tax Briefs bring clear and balanced insights from open source models to policymakers, journalists, students and the general public. Tax reform is inherently quantitative. Policy makers must consider revenue, distribution, growth, deadweight loss, and more. In this AEI Tax Brief, Alex Brill explores increasing the standard deduction, by the numbers.

1. Current policy
Under current law, taxpayers can claim the standard deduction as an alternative to itemizing one’s deductions. In 2017, the standard deduction will be $6,350 for single filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

2. Reform options
Both the House GOP and President Trump have proposed increasing the standard deduction. Using the open source Tax-Calculator, I present results describing the effects if increasing the standard deduction by 25%, 50%, 100%, or 200%.

AEI Tax Brief
3. Comments

  • Under current law, 111.9 million taxpayers are expected to claim the standard deduction and 44.6 million are expected to itemize their deductions in 2017.
  • Expanding the standard deduction is base-narrowing, increasing the number of people paying no income tax by 31 percent when the standard deduction is tripled.
  • If the standard deduction is doubled, 84.6 million people would receive a tax cut, 40.2 million would face lower marginal tax rates, and 82.8 million taxpayers would pay zero or less in federal income tax.

4. Modeling notes

4.1 Tax calculator
Tax-Calculator is an open source microsimulation tax model that computes federal individual income taxes and Federal Insurance Contribution Act (FICA) taxes for a sample of tax filing units for years beginning with 2013. The model can be used to simulate changes to federal tax policy to conduct revenue scoring, distributional impacts, and reform analysis. As an open source model, Tax-Calculator is under constant development and improvement. Therefore, the results reported in this paper will change as imporvements are made. The model relies on data from the 2009 IRS Public Use File (PUF). These results were generated using of Tax-Calculator Version 0.8.3.

4.2 Modeling assumptions
The simulation is a partial equalibrium analysis that uses an elasticity of taxable income of 0.4. The baseline is adjusted by multiplying the standard deduction for each filing type by factors of 25 percent, 50 percent, 100 percent, and 200 percent.

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