Daniel Bunn President and CEO at Tax Foundation | Twitter Website
The Tax Foundation has announced enhancements to its Taxes and Growth model, which assesses the economic, revenue, and distributional impacts of changes to the federal tax code. The improvements have been in development for several years and will be detailed in an upcoming methodology update.
The first enhancement involves updating baseline data using the Congressional Budget Office's January 2025 baseline. This new data reflects larger tax and economic variables compared to last year’s figures, impacting revenue estimates while retaining the ability to simulate policy changes within the 2025-2034 budget window.
Additionally, a matched database has been implemented by statistically integrating data from the Current Population Survey. This expansion includes demographic information such as age and gender, as well as income splits for joint filers. It enhances both payroll tax modeling and individual income tax simulation capabilities.
The Foundation also improved its distribution table methodology by measuring simulated tax changes over an expanded definition of income rather than adjusted gross income (AGI). The new tables are formatted based on market income percentiles with specific after-tax income percentages provided.
Furthermore, adjustments have been made to the user cost of capital formula, distinguishing between required rates of return for businesses and individual savers. "Tax Foundation continues to model the US as a small open economy," states their report. This approach assumes foreign capital inflows continue financing investments despite domestic saving reductions due to increased taxes on savings or budget deficits.
Finally, a more detailed corporate federal tax liabilities model has been constructed using representative firms' data from sources like the Internal Revenue Service. This allows capturing elements such as profit shifting responses and simulating provisions like corporate alternative minimum taxes enacted in 2022.
"Even with more details on the corporate model," notes Tax Foundation's report, "modeling economic effects of policies that impact cross-border investment remains subject to high uncertainty."
The Tax Foundation aims to continue illustrating trade-offs among different types of taxes through these updates while informing ongoing debates surrounding US federal tax code changes.
