The Tax Cuts and Jobs Act released last week offers a tremendous opportunity to move forward on the contentious issue of tax reform. Tax policy often faces the challenge of a trade-off between equity and efficiency. It may not be efficient and pro-growth to simply redistribute money from high income taxpayers to low income taxpayers, but it leads to a more equitable society, wherein people with fewer means share in the economic gains enjoyed by those at the top. So how does the tax plan, in its current version, perform on the key issues of equity and efficiency?

The business reforms in the House Republican tax plan lead to a more efficient corporate tax code, are pro-growth, and likely to benefit average American households in the long run. The proposed reforms to the individual income tax include some bold efforts at base broadening, but they also transfer money to lower income households through new and expanded family-based credits. Overall, the plan leads to tax cuts across all income levels in the initial years. However, some of the tax cuts benefiting middle class families are set to expire after five years, causing their taxes to rise in 2023. But by 2027, families at all income levels pay lower tax rates, according to the Joint Committee on Taxation. Considering these distributional effects with the positive business tax reforms, the House tax plan is a step forward in the right direction.

The main redistributive provision of the Republican tax plan is an expansion of the child tax credit from $1000 per child to $1600 per child. In addition, the plan introduces a new family flexibility credit that provides $300 for each taxpayer and their spouse, as well as a $300 non-child dependent credit. The plan does not increase the earned income tax credit or the refundable portion of the child tax credit, so no additional money will be transferred to the poorest households through those credits. For the lowest income households, which often have no tax liability and do not rely on itemized deductions, some households will benefit from the expanded standard deduction.

Others will see little change in their tax liability because the increase in the standard deduction will offset the loss of the personal exemption. According to the Joint Committee on Taxation, the average tax rate paid by those earning less than $10,000 will be lower in each year from now through 2021, will increase marginally by 0.1 percentage points in 2023 as the family flexibility credit and the $300 non-child dependent expire, and will fall again in 2025 and 2027 relative to present law. The trend is similar for households earning between $20,000 and $40,000.

Households in the middle of the income distribution will benefit from a larger standard deduction, an expanded child tax credit and the additional family credits. However, since many of these households use itemized deductions, these benefits will be partially offset by the loss of most itemized deductions (except mortgage interest, charitable contributions, and the first $10,000 of property taxes paid), as well as the repeal of the personal exemption. It’s important to note here that even within the middle class, the benefits of these deductions disproportionately accrue to upper middle income households.

For upper income households, the situation is very similar in terms of the gains, as for middle income households. Some upper income households would see a cut in the personal tax rate, as the beginning of the 39.6 percent bracket would be raise to $1 million for married filers. High income households will also benefit from the application of a maximum 25 percent tax rate for a portion of their pass-through income. The bill would also double the exclusion amount for the estate tax, and it would repeal it entirely in 2024. On the cost side, high income households rely heavily on itemized deductions, so they are the most likely to be hurt by the repeal of state and local tax deductions and the capping of the mortgage interest and property tax deductions.

According to the Joint Committee on Taxation, middle income and upper income households will face lower average tax rates through 2027. Overall, the expanded standard deduction and family credits have much larger effects than the base-broadening measures, at a total cost of $1.5 trillion. Whereas the changes to the individual income tax will have little effect on efficiency, the business tax reforms are more pro-growth. As I have written before, the effort to make the U.S. corporate tax code more competitive will likely provide a significant boost to investment and middle class wages. In addition, shifting away from our inefficient worldwide system of taxation, with deferral, to a territorial system levels the playing field for U.S. multinationals competing with foreign firms abroad.

Overall, the plan does some amount of direct redistribution to poor and low income households. To offset the tax hikes on the lowest income households after the phase out of family and child credits, an expanded earned income tax credit should be considered as well, though it is not currently under discussion. But the biggest boost to household incomes is expected to come from the private sector, through corporate tax reform that could deliver benefits that extend to all working class Americans. Such a strategy is riskier than direct redistribution, and the anticipated benefits could be more muted if the worsening of the U.S. fiscal imbalance drags down economic growth.

But if done in a fiscally responsible way, perhaps through even greater base broadening on the individual side and further capping of deductions that largely accrue to higher income households, evidence from the around the world suggests the possibility of greater upward economic mobility for American families through expanded job opportunities and higher wages. This is a risk worth taking.