Tax cuts are financed through reductions in current outlays or higher government debt that will eventually have to be repaid. But the distributional effect of reduced government services and the debt are excluded from standard distributional tables.
Distributional analyses omit the ways tax cuts and tax increases affect other government finances—through either lower (or higher) spending or higher (or lower) debt. These omissions implicitly assume that lost revenue from tax cuts is never offset and that additional revenue from tax increases simply disappears. While these assumptions are unrealistic, there is no generally accepted way to include these financing effects. Gale (2018) and Gale, Khitatrakun, and Krupkin (2017) show that the distributional effects of the 2017 Tax Cuts and Jobs Act tax cuts are significantly altered if financing effects are considered, considering a range of scenarios.
Updated January 2024
Burman, Leonard E. 2007. “Fairness in Tax Policy.” Testimony before the Subcommittee on Financial Services and General Government, House Appropriations Committee, Washington, DC, March 5.
Congressional Budget Office. 2016. “The Distribution of Household Income and Federal Taxes, 2013.” Washington, DC: Congressional Budget Office.
Cronin, Julie-Anne. 1999. "US Treasury Distributional Analysis Methodology.” OTA paper 85. Washington, DC: US Department of the Treasury.
Gale, William. 2018. “Who Will Pay for the Tax Cuts and Jobs Act?” TaxVox. Washington, DC: Urban-Brookings Tax Policy Center.
Gale, William, Surachai Khitatrakun, and Aaron Krupkin. 2017. “Winners and Losers after Paying for the Tax Cuts and Jobs Act.” Washington, DC: Urban-Brookings Tax Policy Center.