How two Senate plans to expand federal tax exemptions stack up, according to Wharton’s budget model

The Penn Wharton Budget Model released a brief on Monday comparing two Senate proposals that would expand the income range where Americans owe no federal income tax.

The March 16 report — titled “Deductions vs. Rate Caps: How Mechanism Shapes the Cost and Targeting of Zero-Bracket Expansion” — evaluates Sen. Cory Booker’s (D-N.J.) Keep Your Pay Act and the Working Americans’ Tax Cut Act, introduced by Sen. Chris Van Hollen (D-Md.). While both bills seek to expand the “zero tax bracket,” the report found that it does so through different mechanisms, leading to a varied distribution of benefits and potential economic effects.

Written by PWBM model developer and policy analyst Brendan Novak, the report details that KYPA aims to expand the zero tax bracket through a doubled standard deduction, while WATCA utilizes an “alternative maximum tax.”

Under current law, the income threshold below which single filers owe no federal income tax is $16,150, $24,200 for heads of household, and $32,300 for married couples filing jointly. Booker’s proposal would raise those thresholds to $37,500 for single filers, $56,250 for heads of household, and $75,000 for joint filers, while Van Hollen’s proposal would increase them to $46,000, $64,400, and $92,000 respectively.

According to the brief, expanding the standard deduction under KYPA would reduce federal revenue by approximately $5.1 trillion between fiscal years 2026 and 2035, compared with an estimated $1.4 trillion reduction under the WATCA.

The report attributes the difference in part to how deductions interact with tax brackets.

“A standard deduction reduces taxable income,” Novak wrote. “A taxpayer in the 10 percent bracket saves $0.10 per dollar of additional deduction; a taxpayer in the 37 percent bracket saves $0.37.”

The analysis found that the two approaches distribute benefits differently across income groups. Under the deduction-based approach proposed in Booker’s bill, the largest average tax reductions occur among households in the 80th to 90th percentile of the income distribution, with an average reduction of $7,165.

“The contrast highlights a second general principle: a deduction delivers benefits that rise with income in dollar terms, while a rate-based mechanism with eligibility limits can concentrate benefits on a target population, but only by accepting the distortions that eligibility limits create,” the brief continued.

The report also emphasized that Booker’s proposal would significantly reduce the number of taxpayers who itemize deductions. According to the report, the share of filers who itemize would fall from about 13.3% under current law to 2.3% if the expanded standard deduction were implemented.

According to the research, the deduction-based expansion of the range where there is no federal income tax has “cascading effects on the broader tax incentive structure that a rate-based mechanism does not.”

“Each mechanism creates a distinct distortion: WATCA’s binary eligibility threshold produces a marginal-rate cliff at the cutoff, while KYPA’s doubled standard deduction would reduce itemizers from 13.3 percent to 2.3 percent, eliminating the tax incentive for charitable giving and mortgage interest for most filers,” the report read.

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