The 2025 Tax Debate: Who Benefits from Tax Cuts?

When Congress is preparing to vote on tax legislation, lawmakers want to know how it will impact their constituents—who will receive a tax cut or increase. Distributional analyses can help answer these questions, and they will be an important component in this year’s debate surrounding the expiring Tax Cuts and Jobs Act (TCJA) provisions.

What is a distributional analysis?

A distributional analysis is a research product used to understand how Americans of different incomes will see their taxes or take-home pay change due to tax legislation. It’s important for lawmakers to know who may receive a tax cut or increase from changes to tax law, which can change behaviors and incentives.

The Joint Committee on Taxation (JCT) produces distributional analyses requested by Congress. Non-governmental organizations like Tax Foundation, Tax Policy Center, and Penn Wharton Budget Model (PWBM) also produce distributional analyses.

Distributional analyses can paint an incomplete picture. When tax cuts aren’t fully offset by spending cuts or tax increases, the Treasury must borrow more to finance them. That extra debt raises the cost of borrowing and goods throughout the economy.

How are distributional effects measured?

There are several ways to measure distributional effects, including:

• Change in Overall Taxes Paid: The difference in total taxes paid across an income quintile or group due to changes in federal law. For example, a distributional analysis could estimate that taxpayers making $40,000 to $50,000 would pay $1.5 billion or 2% less in taxes under a proposal than under current law.
• Change in Average After-Tax Income: The difference in post-tax income due to changes in federal law. For example, an analysis could estimate that after-tax income for taxpayers making $100,000 to $200,000 would increase an average of 1.5% under a proposal.
• Change in Average Tax Rate: The difference in federal taxes paid as a percentage of income under current law vs. the proposal. For example, an analysis could estimate that taxpayers making $75,000 to $100,000 pay a 16% average tax rate under current law vs. 15% under a proposal.
• Change in Average Taxes: The difference in average federal taxes paid due to changes in federal law. For example, a distributional analysis could estimate that taxpayers making $40,000 to $50,000 would pay an average of $300 less under a proposal than under current law.
• Share of Overall Tax Burden: How much a particular income category contributes to overall federal taxes under current law vs. the proposal. For example, an analysis could estimate that taxpayers making over $1 million pay 19% of federal taxes under current law and 20% under a proposal.
• Share of Tax Change: How much a particular income group shares in an overall tax change. For example, an analysis could estimate that taxpayers making over $1 million pay 30% of a $100 billion tax increase.
• Share of Taxpayers with a Tax Increase or Decrease: The proportion of taxpayers that see a tax increase under a proposal, tax decrease, or no change. This metric can show the diversity of tax outcomes within certain income ranges. For example, an analysis could estimate that 25% of taxpayers making $50,000 to $75,000 would receive a tax cut, 10% would receive an increase, and 65% would receive no change.

Each option can be estimated by income quintile (e.g., the bottom 20% of earners vs. the top 20% of earners) or income group (e.g., taxpayers earning less than $10,000 vs. those earning $100,000 to $200,000). Distributional effects can be estimated in a particular year or over several years. Measures of tax burden often include not only the federal income tax but federal payroll, excise, and a share of corporate income taxes.

What were some of the distributional effects of TCJA?

While high-income taxpayers received a larger share of overall tax cut dollars from TCJA than middle- or low-income taxpayers, TCJA did not only benefit the wealthy. JCT projected in December 2017 that average households across all income categories would experience a sizeable reduction in overall taxes paid and their average tax rate due to TCJA.

Different distributional analyses tell different stories about the law; for example, in 2019 JCT found that 76% of the reduction in federal taxes from TCJA would go to households making above $100,000. However, several distributional analyses also estimated that a significant share of low- and middle-income Americans received tax cuts from TCJA. For example, 82% of taxpayers making $50,000 to $75,000 and 88% of taxpayers making $75,000 to $100,000 received a tax cut.

Did TCJA only benefit wealthy Americans?

No. Some policymakers have argued that TCJA primarily benefitted wealthy Americans. As noted above, several distributional analyses showed that low- and middle-income Americans would receive tax cuts from TCJA. Those taxpayers generally benefitted the most from the doubled standard deduction, doubled Child Tax Credit, and lower individual tax rates, while high-income taxpayers benefitted from lower rates, the limits on the alternative minimum tax, and business tax cuts.

While the TCJA delivered larger benefits to high-income taxpayers in terms of dollars and percent-change in after-tax income, the federal income tax remained progressive. The table below demonstrates that taxpayers with six-figure income and above make a majority of taxable income and pay the vast majority of federal income taxes. When accounting for payroll taxes, which are borne more evenly across income groups, the entire federal tax system is still progressive.

Table 1. Taxpayers Making Above $100,000 Are a Minority of Households, But Make the Majority of Income and Pay the Majority of Federal Income Taxes

Source: IRS Statistics of Income, Table 1.1

TCJA also included tax cuts that benefitted large and small businesses, whether organized as a C corporation or a so-called “pass-through” business. Pass-through businesses include sole proprietorships, S corporations, partnerships, and limited liability companies (LLCs).

TCJA cut the top tax rate paid by C corporations from 35% to 21% (in addition to reforming the treatment of foreign-source income of U.S. multinationals). It also created a 20% deduction for pass-through business owners. While the bulk of these deduction dollars claimed (76%) went to taxpayers earning more than $200,000 per year in 2022, 19.5 million taxpayers earning less than $200,000 claimed an average 199A deduction of $2,909.