Earlier this week, during his State of the Union speech, President Trump thanked Congress for passing the Working Families Tax Cuts (WFTC) last year, referring to them as “really important, and very necessary tax cuts.” One of the most important parts of the WFTC was the full extension of the individual tax rate cuts passed in the 2017 Tax Cuts and Jobs Act (TCJA)—with some changes that benefitted lower income workers. Had these extensions not been passed by Congress last year, the average American would have faced an 8% increase in taxes, with an average individual tax increase of $1,960 per year. When considering the combined effect of lowering most tax rates and greatly increasing the standard deduction, the TCJA significantly lowered tax levels for virtually all Americans. Last year, the WFTC increased the standard deduction even more, in addition to adding an additional inflation adjustment at the lowest tax brackets. Considering the extension of TCJA individual tax rates, the WFTC was indeed, as noted by President Trump in his speech earlier this week, one of the biggest tax cuts in American history. Making these individual tax cuts permanent was one of the most pro-growth parts of the bill, providing tax certainty for Americans to plan for the long term.
However, as the WFTC was being drafted in early 2025, some populists were pushing tax changes, like income tax increases on the wealthy, that have been anathema to GOP policymakers ever since the days of Ronald Reagan. One of the more specific proposals floated back then was creating a new top bracket at 39.6% for individuals making either over $1 million or $2.5 million a year. This was extremely concerning because economic analysis clearly shows that inordinately raising income taxes on the wealthy is both inefficient and detrimental to economic growth. After all, the American tax system is already one of the most progressive in the world.
Furthermore, this tax hike effort ignored how beneficial the TCJA was to working class families. TCJA’s largest percentage tax cuts went to those making between $20,000 and $50,000 per year—not exactly the rich. Also, the lowest income Americans not only pay no federal tax, but also frequently receive federal benefits thanks to the tax code. As a result, it is hard to provide additional tax cuts to those who are already not paying anything. Those in the top 1% of income earnings already pay over 40% of federal taxes, and the deduction limitation for state and local taxation (SALT) made the system even more progressive.
The TCJA also made several other changes to limit tax breaks that mainly benefit higher income Americans, including limiting the mortgage income deduction, ending deductions for home equity loans, and suspending a variety of other deductions. Congress later made additional changes on the individual side in the WFTC that made the code more progressive, including lowering the cap on itemized deductions for taxpayers in the top tax bracket. The only provision on the individual side of the WFTC that mainly benefits wealthier taxpayers was the increase in the SALT deduction, which is disproportionately utilized by higher income residents in high tax states. Overall, these tax changes boosted the share of taxes paid by higher income taxpayers, as well as growing wages, investment, and the overall economy.
Additionally, raising the top income tax rate would have had a negative effect on the economy. According to the Tax Foundation, most of the economic benefits that TCJA provided on the individual side was from the reduction in the top marginal tax rate. Adding a top rate of 40% on incomes over $1 million would have offset around half the overall benefit of extending individual rates, reducing long-run GDP and American incomes by 0.2%. Many small businesses are structured as pass-through entities and pay taxes on the individual side of the tax code, so increasing the top rate would hit them hard. Higher income Americans often invest in high risk, high reward business developments like startups and new companies. Overly increasing tax burdens on these individuals could cause the loss of jobs and limits on investments.
Going after taxpayers in the highest income tax brackets may not only hurt the economy—it could also cause higher levels of tax evasion and avoidance. The wealthiest Americans already take the majority of their income in ways other than wages. If the top wage tax brackets were substantially increased, it is quite likely that these individuals would shift more of their incomes away from wages to loans, stock, dividends, share repurchases, and other forms of income. Higher income individuals also have the resources and capability to shift assets to lower tax jurisdictions, which President Trump noted in his eventual opposition to increasing rates last year. Wealthy Americans have regularly moved from higher tax states to ones with lower burdens over the last few years, and it would be likely that many of these people would shift assets outside of U.S. jurisdiction if rates went up.
The WFTC isn’t perfect. Congress should enact more changes to make the individual side of the tax code more focused on growth, jobs, and investment. But President Trump and Congress took a risk in extending all individual tax rates from TCJA in the WFTC, and it appears to be a wise move. Overall, tax return levels this year are trending higher than last year, and the economy seems to be doing very well. The Working Families Tax Cuts played a key role in these positive changes, and President Trump does indeed deserve our thanks for that.