An Economic Analysis of the TCJA's Larger Standard Deduction

Abstract

The Tax Cuts and Jobs Act dramatically increased the standard deduction while eliminating the personal exemption and making other changes that left tax-free thresholds (the amount of income that households can earn before owing income tax) largely unchanged. The primary effect of those policy changes was to increase the floor on itemized deductions and dramatically reduce the number of taxpayers claiming those deductions. Although the reduction in the number of itemizers lowered administrative and compliance costs, the cost savings are too modest to justify the increase in the standard deduction. If itemized deductions are otherwise good policy, the administrative and compliance costs associated with claiming them are too small to justify denying deductions to taxpayers with tens of thousands of dollars of qualifying expenditures.

Instead, the TCJA’s increase in the standard deduction appears to have been intended to indirectly curtail itemized deductions that were seen as unjustified but were too popular to directly limit. Unfortunately, increasing the standard deduction is a problematic way to curb tax preferences. That strategy curtails all tax preferences that are provided through itemized deductions, no matter how beneficial they may be, while sparing all tax preferences that are provided through exclusions, preferential rates, above-the-line deductions, and credits, no matter how pernicious they may be. Further, the strategy curbs the affected tax preferences for only some taxpayers, generally making the preferences more poorly targeted.