The Tax Foundation has significantly upgraded its “Taxes and Growth” model, a tool used to analyze the economic, revenue, and distributional impacts of federal tax code changes. These enhancements, detailed in a forthcoming methodology update, improve the accuracy and scope of our tax policy simulations.
Key Improvements:
- Updated Baseline Data: We’ve incorporated the Congressional Budget Office’s (CBO) January 2025 baseline, reflecting current economic projections. This update, which projects larger tax and economic variables, impacts our revenue estimates while maintaining our ability to analyze tax policy changes within the 2025-2034 budget window.
- Enhanced Data Matching: By statistically matching data from the Census Bureau’s Current Population Survey (CPS), we’ve added valuable demographic information (age, gender) and income breakdowns for joint filers. This allows for a more refined payroll tax model, seamless integration with our individual income tax simulator, and the ability to model policies affecting non-filers.
- Refined Distributional Analysis: We’ve shifted from using adjusted gross income (AGI) to a broader “market income” definition for our distribution tables. This provides a more comprehensive view of after-tax income changes across income percentiles. The new “Market Income” definition includes AGI plus items such as tax exempt interest, non taxable social security income, and the employer share of payroll taxes.
- Improved User Cost of Capital Model: We’ve refined our user cost of capital formula, which separates required rates of return for businesses and savers. The Tax Foundation maintains its “small open economy” assumption, where the U.S. relies on foreign capital inflows. This assumption influences how we model the impact of domestic savings changes and budget deficits on investment and national income.
- Detailed Corporate Tax Model: We’ve developed a more granular model of federal corporate tax liabilities, utilizing data from the IRS and the Bureau of Economic Analysis. This allows us to analyze the effects of profit shifting, business credits, and international tax provisions like GILTI and FDII. We can now also simulate the impact of new provisions like the corporate alternative minimum tax (CAMT) and stock buyback tax, as well as changes to depreciation deductions.
Modeling Philosophy:
While no model perfectly replicates the real world, our enhancements provide a more accurate and detailed analysis of tax policy impacts. Our “small open economy” assumption differs from approaches used by the Joint Committee on Taxation and the CBO, leading to varied perspectives on the effects of domestic savings and budget deficits.
Looking Ahead:
The Tax Foundation remains committed to providing insightful analysis of tax policy trade-offs, contributing to informed public discourse on the U.S. federal tax code.