2025 Tax Debate Needs to Happen now
Introduction
One of the least discussed topics in 2025, but also one of the most consequential, is how Congress will deal with the expiration of the 2017 tax cuts enacted under the defeated former president. In 2025, corporate tax deductions for new asset purchases and research and development will be eliminated. Also, in 2025, individuals will have a standard deduction reduced but a personal exemption restored. The tax rates will increase slightly for most taxpayers and even more significantly for taxpayers in the top 20% of income earners, with the threshold for the top tax rate reduced and the tax rate increasing by nearly three percentage points(37% to 39.6%). The tax cuts primarily benefited high-income earners, although some benefits were given to middle and lower-income taxpayers. The law also cut the corporate tax rate by 14 percentage points(35% to 21%); that provision does not expire.
What are the effects of the tax cut?
The tax cut's effects on the economy in the short term are minimal. However, most economic policies debated in wealthy countries only have minimal effects that may be more significant over several decades. A study by the National Bureau of Economic Research found the 2017 tax law to boost household income by $750 on average over the long run. They attributed the increase in household income to a boost in corporate capital investment mainly as a result of the provision that allows companies to deduct certain physical assets from their taxable income, known as “bonus depreciation.” While studies may vary, they all point to all else being equal, a slight economic boost from the tax cut. These studies, however, do not consider the financial effects of additional debt and reduced government expenditure, and the tax cuts are very costly. The same study by the NBER found the tax cuts caused corporate tax collections to fall by 39% in the first few years and by about 33% over the next decade, so unlike what the GOP said, the tax cuts did not come close to paying for themselves.
What should be done
If it were up to me, I would extend the provision that allows companies to deduct new asset purchases and extend some individual provisions for lower-income Americans, such as the larger standard deduction, but increase taxes for high and middle-income individuals. Members of Congress should insist on revenue neutrality and limiting loopholes in the 2025 tax debate. If a divided government occurs and the tax cuts expire, and if Republicans won't accept a revenue-neutral and progressive tax bill, Democrats should not compromise and let the tax cuts expire because the tax cuts are simply too expensive to keep sustainably. The fact is that debt-fueled tax cuts can be recipes for disaster as seen in places like the UK and in states like Kansas and Arizona. Increased government debt is terrible when finances are a regressive policy and occurs during a time of high interest rates, so right now is practically the exact time to avoid adding to the debt. Policymakers should note that incentivizes matter, and having tax rates that are too high could cause people and or companies to move their capital out of the economy, which would have adverse effects. Still, I do not see that happening in the US as of now because the US taxes are below that of the vast majority of OCED countries. Only Ireland, Mexico, and Chile have lower taxes than the in OCED countries, a group of countries that economists often compare. The bottom line is to be careful and avoid adding debt through tax cuts while not raising taxes to rates so high that it would then be counterproductive. In Summary, the 2017 Tax law was a little good, Mostly Bad, and Certainly Ugly.
REFERENCES
https://www.nber.org/system/files/working_papers/w32180/w32180.pdf
https://www.nytimes.com/2024/03/04/us/politics/trump-corporate-tax-cut.html
https://www.nytimes.com/2023/03/10/opinion/taxes-medicare-medicaid.html
https://www.nytimes.com/2023/10/10/opinion/us-budget-deficit-interest-rates.html
https://www.taxpolicycenter.org/feature/analysis-tax-cuts-and-jobs-act
https://www.oecd.org/tax/tax-policy/global-revenue-statistics-database.htm
https://docs.google.com/spreadsheets/d/1yizgQVXM7R38taruzoP6e_bxeNLzdc7Jini1aJ45Qhw/edit#gid=0
https://www.crfb.org/blogs/2017-tax-cuts-continue-lose-revenue
