AEI Tax Brief: Repealing the personal exemption

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 repealing the personal exemption, by the numbers.

1. Current policy
Under current law, taxpayers can claim a personal exemption for themselves, their spouse, and each qualified dependent. The personal exemption amount will be $4,050 in 2017. The actual benefit depends on the taxpayer’s marginal tax rate and gross income. Taxpayer’s can also claim a 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
Using the open-source Tax-Calculator, I present the results of two modifications to current law: (1) repeal all itemized deductions (IDs) except mortgage interest deduction and charitable deduction and double standard deduction (SD), or (2) repeal these deductions, double standard deduction, and repeal the personal exemption (PE). These reforms implemented in each iteration of the model.

AEI Tax Brief chart

  • The budgetary difference between those two options is 1.53 trillion over 10 years.
  • 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.
  • When all itemized deductions are repealed, the standard deduction is doubled, and the personal exemption is kept in place the number of itemizers decreases from 44.6 million to 1.3 million, and 49.0 million taxpayers face a lower marginal rate.
  • If in addition the personal exemption is eliminated, 27.7 million fewer taxpayers receive a tax cut and 20.7 million fewer will face a lower rate.

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 following itemized deductions are repealed as part of the reforms: medical expenses, state and local taxes, real estate, interest, and charity (as labelled in Tax-Calculator).

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