Raising Top Tax Rate: Offsetting TCJA Growth Benefits 26

Lawmakers are weighing options to generate revenue as they consider extending provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire. One proposal involves increasing the top ordinary income tax rate and bracket beyond the levels established by the TCJA to help finance this extension.

While raising the top income tax rate would generate substantial revenue, it could significantly diminish the economic growth anticipated from making the TCJA’s individual tax cuts permanent. This is because higher tax rates can reduce the incentives for individuals to work and invest.

The TCJA, as part of a broader reform of individual income tax, lowered five of the seven tax rates, including reducing the top rate from 39.6 percent to 37 percent, and adjusted the income tax bracket widths. These changes are scheduled to expire at the end of the current year.

Unless the TCJA is extended, the top tax rate is slated to revert to 39.6 percent in 2026, applying to taxable income above $546,750 for single and head of household filers and $615,100 for joint filers. Extending the TCJA would mean the 37 percent top tax bracket would apply to taxable income above $642,950 for single and head of household filers and $771,550 for joint filers.

Policymakers are reportedly considering two modifications to a TCJA extension regarding rates and brackets: either allowing the top rate and bracket to return to their pre-TCJA structure or introducing a 40 percent tax bracket for incomes exceeding $1 million.

Allowing the TCJA’s top rate and bracket to expire as scheduled would not generate new revenue compared to the current legal framework, but it would decrease the overall cost of extending the TCJA’s individual provisions.

Analysis indicates that extending all individual TCJA provisions would cost approximately $4 trillion on a conventional basis and $3.47 trillion when accounting for macroeconomic effects (dynamic basis) over ten years. Permitting the top rate and bracket changes to expire would reduce these costs by $409 billion (conventional) and $187.5 billion (dynamic) over the same period. However, this increase in the top rate would offset some of the economic benefits of making the full TCJA individual provisions permanent.

Implementing a new 40 percent top tax rate on incomes above $1 million for all filers, while keeping the TCJA’s 37 percent rate and bracket, would lower the cost of extending the TCJA’s individual components by $274.8 billion (conventional) and $114.9 billion (dynamic) over ten years.

Note: Estimates are stacked after making individual TCJA provisions permanent. The 40 percent tax rate option begins at $1 million in taxable income for all filing statuses. Tax brackets are indexed for inflation over the budget window. Source: Tax Foundation General Equilibrium Model, April 2025.

Compared to fully extending the TCJA’s individual provisions, options that do not extend the top rate or that increase it further are projected to result in a smaller increase in economic output due to reduced incentives for work and investment. While making all individual TCJA provisions permanent is estimated to boost long-run GDP by 0.4 percent, not extending the top rate and bracket would lead to a GDP increase of only 0.1 percent. This suggests that the majority of the economic growth expected from extending the TCJA’s individual provisions stems from the reduction in the top marginal income tax rate, with the remaining provisions having a less significant impact on GDP.

Note: Items may not sum due to rounding. Estimates are stacked after making individual TCJA provisions permanent. The 40 percent tax rate option begins at $1 million in taxable income for all filing statuses. Tax brackets are indexed for inflation over the budget window. Source: Tax Foundation General Equilibrium Model, April 2025.

Introducing a narrower 40 percent top tax bracket on ordinary incomes above $1 million is projected to offset approximately half of the economic benefits of making the TCJA’s individual provisions permanent. The economic impact of this top tax rate increase on million-dollar incomes is only slightly less detrimental than reverting the entire top rate and bracket, reducing long-run GDP and American incomes by 0.2 percent.

While only a small fraction of taxpayers (0.5 percent in 2022) reported adjusted gross income above $1 million, they accounted for a significant portion (around 18.4 percent) of total income. Furthermore, pass-through business owners with total income of $1 million or more in 2022 earned about 34.7 percent of all pass-through business income.

Note: Items may not sum due to rounding. Estimates are stacked after making individual TCJA provisions permanent. The 40 percent tax rate option begins at $1 million in taxable income for all filing statuses. Tax brackets are indexed for inflation over the budget window. Source: Tax Foundation General Equilibrium Model, April 2025.

From a distributional perspective, proposals to raise the top ordinary income tax rate would decrease after-tax incomes for the top 5 percent of tax filers under conventional analysis. For instance, compared to extending the TCJA, reverting to the pre-TCJA top rate and bracket is projected to reduce after-tax incomes for the top 1 percent by 1.4 percent in 2026, while having no impact on the bottom 95 percent of tax filers.

Note: Market income includes adjusted gross income (AGI) plus 1) tax-exempt interest, 2) non-taxable social security income, 3) the employer share of payroll taxes, 4) imputed corporate tax liability, 5) employer-sponsored health insurance and other fringe benefits, 6) taxpayers’ imputed contributions to defined-contribution pension plans. Market income levels are adjusted for the number of exemptions reported on each return to make tax units more comparable. After-tax income is market income less: individual income tax, corporate income tax, payroll taxes, estate and gift tax, custom duties, and excise taxes. The 2026 income break points by percentile are: 20%-$17,735; 40%-$38,572; 60%-$73,905; 80%-$130,661; 90%-$188,849; 95%-$266,968; 99%-$611,194. Tax Units with negative market income and non-filers are excluded from the percentile groups but included in the totals. Estimates are stacked after making individual TCJA provisions permanent. Source: Tax Foundation General Equilibrium Model, April 2025.

Introducing a 40 percent bracket for million-dollar earners, relative to making the TCJA permanent, would reduce after-tax incomes of the top 1 percent by 1.0 percent.