Despite Major Changes from the OBBBA, the U.S. Federal Tax System Remains Highly Progressive 507

 in Blog / News  tagged Federal Tax System / OBBBA by (updated 28 days ago)

The One Big Beautiful Bill Act (OBBBA) represents the most extensive federal tax overhaul in almost a decade, affecting future government revenue, economic growth, and how the tax burden is distributed. While the law substantially adjusts the federal tax system’s impact, the system as a whole—especially the federal income tax—remains highly progressive.

Overview of the OBBBA’s Impact

The OBBBA is projected to reduce federal revenue by over $5 trillion over 10 years on a conventional basis. Key provisions include:

  • Permanence: Making the individual tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA) permanent.
  • Pro-Growth Policies: Reviving favorable business policies such as research and development (R&D) expensing and 100% bonus depreciation.
  • New Tax Cuts: Introducing additional cuts and changes, including new deductions for overtime, tipped income, auto loan interest payments, and seniors.

Distributional Effects: Boosts to After-Tax Income

Taxpayers across all income levels will see an increase in after-tax income due to the OBBBA, averaging a 2.9% boost in 2025 and a 5.4% increase in 2026. The larger increase in 2026 reflects the value of making the TCJA individual cuts permanent, which were scheduled to expire at the end of 2025.

The size of the net tax cuts generally rises with income up to the fourth quintile. However, the top quintile (highest 20% of earners) sees a slightly limited new benefit because:

  • New individual tax deductions in the OBBBA phase out at higher incomes.
  • High earners face new gross tax hikes, such as the itemized deduction haircut, the limit on State and Local Tax (SALT) deductions, and the repeal of green energy credits.
Market Income Percentile 2025 (Conventional) 2026 (Conventional) 2034 (Conventional) 2034 (Dynamic)
0% – 20.0% 1.5% 2.6% -0.4% 0.5%
20.0% – 40.0% 3.1% 5.2% 1.9% 2.7%
40.0% – 60.0% 3.6% 5.7% 2.7% 3.5%
60.0% – 80.0% 3.9% 6.3% 2.8% 3.5%
80.0% – 100% 2.3% 5.0% 2.9% 3.8%
Total 2.9% 5.4% 2.8% 3.6%

Table 1. Distributional Effects of Major Provisions in One Big Beautiful Bill Act (Percent Change in After-Tax income)

Long-Term Impact

By 2034, after certain temporary cuts expire, the bottom quintile is projected to see a minor decrease of 0.4% in after-tax incomes on a conventional basis due to new limits on claiming the Child Tax Credit, the Affordable Care Act Premium Tax Credit, and the Earned Income Tax Credit. However, when incorporating the positive economic benefits (Dynamic) of the law, the bottom quintile sees an average increase of 0.5% in after-tax incomes.

Progressivity of the Federal Tax System

Examining the share of federal taxes paid provides crucial context. Even after the OBBBA, the federal tax system remains heavily progressive:

  • The share of taxes paid rises steeply with income, reflecting higher effective tax rates for higher earners and the unequal distribution of income.
  • Under both prior law and the OBBBA, the top 20% of earners pay over 70% of the total federal tax burden.
  • Conversely, the bottom 40% pay less than 5% of federal taxes collected.
Market Income Percentile 2026 (Prior Law) 2026 (Post-OBBBA) 2034 (Prior Law) 2034 (Post-OBBBA)
0% – 20.0% 0.80% 0.80% 0.70% 0.70%
20.0% – 40.0% 2.60% 2.70% 2.50% 2.60%
40.0% – 60.0% 7.50% 7.50% 7.60% 7.60%
60.0% – 80.0% 17.90% 17.70% 18.40% 18.40%
80.0% – 100% 70.90% 71.20% 70.50% 70.40%
Total 100.00% 100.00% 100.00% 100.00%

Table 2. Share of Federal Taxes Paid After the One Big Beautiful Bill Act

Post-OBBBA, the shares of taxes paid across income groups are generally similar to prior law. Notably, the share of taxes paid by the top quintile actually rises slightly in 2026 (from 70.90% to 71.20%), a dynamic also observed after the TCJA. This mixed picture suggests the OBBBA, like the TCJA before it, simultaneously makes the tax system more progressive (as effective tax rates rise with income) while reducing the extent of tax redistribution within the code.

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