The Tax Cuts and Jobs Act (TCJA), enacted in 2017, reformed the federal tax code by changing individual and business taxes. The act was intended to be pro-growth, reducing marginal tax rates and the cost of capital. It is estimated that the TCJA decreased federal revenue by $1.47 trillion over a decade before considering economic growth.
In terms of individual taxation, the TCJA lowered most income tax rates, including reducing the top marginal rate from 39.6% to 37%. While maintaining a seven-bracket rate structure, it updated income thresholds and increased the standard deduction to $12,400 for single filers and $24,800 for married filers as of tax year 2020. This was an increase from $6,500 (single) and $9,550 (married) under prior law. The legislation eliminated personal exemptions and limited various itemized deductions such as state and local taxes (SALT), mortgage interest deductions (MID), and charitable contributions. Additionally, it increased the Child Tax Credit from $1,000 to $2,000 with up to $1,400 refundable.
Most changes related to individuals will expire on December 31, 2025; however, some provisions like chained CPI adoption and ACA individual mandate repeal were made permanent.
For businesses, TCJA reduced the corporate income tax rate from 35% to 21% starting in 2018. It allowed full expensing of short-lived capital investments for five years and raised the section 179 expensing cap from $500,000 to $1 million. The act also curtailed certain business taxes like net interest deductibility and removed carrybacks for net operating losses while eliminating the corporate alternative minimum tax (AMT). Furthermore, it shifted U.S. taxation towards a territorial system with measures against base erosion.
The Tax Foundation’s Taxes and Growth Model suggests that TCJA would boost the long-term size of the U.S. economy by 1.7%, lead to a 4.8% larger capital stock with higher wages by 1.5%, resulting in approximately 339,000 additional full-time equivalent jobs.
According to this model: "The larger economy and higher wages are mostly due to lower cost of capital encouraging greater investment that leads to greater productivity and higher output."
