Parts of the massive Trump tax cuts are expiring, providing an opportunity to change course

Next year, 2025, is setting up to be a pivotal year when it comes to how our nation raises the money needed to pay for public services — things like health, housing, the nation’s safety net, and more.

The reason for this dates back to 2017. That year, Congress enacted the Tax Cuts and Jobs Act, better known as the Trump tax cuts. This tax package contained massive changes to our tax system that mostly amounted to huge tax cuts for the rich and corporations. For procedural reasons, as well as to mask the true costs of these massive tax cuts, Congress made some parts of the Tax Cuts and Jobs Act temporary. It gave them an expiration date. And that expiration date is 2025.

The expiration of parts of the Trump Tax plan offers an opportunity to reassess our nation’s tax policy, explains Samantha Jacoby, Deputy Director of Federal Tax Policy at the Center on Budget and Policy Priorities. 

Transcript

Next year 2025 is setting up to be a pivotal year when it comes to the fiscal policy of our nation — how we raise the money needed to pay for public services, things like health, housing, the nation's safety net and more. The reason for this dates back to 2017. That year, Congress enacted the Tax Cuts and Jobs Act, better known as the Trump tax plan. This tax package contained massive changes to our tax system that mostly amounted to huge tax cuts for the rich and corporations. For procedural reasons, as well as to hide the true cost of these massive tax cuts, Congress made some parts of the Tax Cuts and Jobs Act temporary. It gave them an expiration date, and that expiration date is 2025. 

The expiration of parts of the Trump tax plan offers an opportunity to reassess our nation's tax policy, explains Samantha Jacoby. Samantha is the Deputy Director of Federal Tax Policy at the Center on Budget and Policy Priorities, a nonpartisan research and policy institute based in Washington, D.C.. Alejandro Queral, Executive Director of the Oregon Center for Public Policy, spoke with Samantha about the Trump tax cuts: what they are, who is benefiting, and what Congress ought to do in light of the fact that important pieces of the tax package are scheduled to expire.

Alejandro Queral: Thank you for joining us at Policy for the People, Samantha. Many of us are looking at 2025 as a pivotal moment for the United States. Not only are we facing an election that could have profound consequences for our democracy, we're also facing a choice that will define federal budget policy for the next decade, as important provisions in the Tax Cuts and Jobs Act of 2017, also known as the Trump tax law, will expire. Can you summarize what is at stake? 

Samantha Jacoby: Sure. The 2017 tax law, The Trump tax law, was a wide ranging tax bill. It did some things on a permanent basis, including a large corporate tax cut. And then other changes that it made were temporary. They are set to expire at the end of 2025. So while many people think about the corporate tax tax cut as sort of the centerpiece of the law, there were a lot of changes that were made on a temporary basis.

And most of those are tax changes that affect people, individuals, including cuts to individual tax rates, cuts to the estate tax, cuts to the alternative minimum tax, as well as deductions that people often take — the state and local deduction, mortgage interest deduction. Some other things included expanding the child tax credit, changes to the standard deduction and doubled the standard deduction.

And so all of these temporary provisions are scheduled to expire at the end of 2025, which means that there is very likely to be major tax legislation next year. A major debate about what should be in that legislation is starting now. Basically, what's at stake is a lot of revenue. Extending all of the tax cuts from 2020 to 2017 would cost around $4 trillion over ten years from 2026 through the following ten years, according to the Congressional Budget Office.

And that's essentially on top of the cost of the original original bill, which was about $2 trillion. So a very large cost, disproportionate tax cuts that benefited high income people. 

Alejandro: Talk a little bit more about that. Who are the very high income people that are receiving most of these benefits? And also, who's ultimately paying for those tax cuts?

Samantha: Yeah. So there were some changes that affect lower and middle income households. Those changes often kind of offset each other for many low income households, resulting in sort of a small overall tax cut for most households compared to very large tax cuts for high income people. So extending the expiring provisions would give another $48,000 annual tax cut to households in the top 1%. And that's compared to $500 for the bottom 60% of households.

Think about the major provisions. The top tax rate going from 39.6 to 37% in the 2017 law. That exclusively benefits people basically in the top 1%. The estate tax cut benefits people who have millions of millions of dollars. So these are things that just disproportionately benefit people with high incomes. 

Alejandro: And when you're talking about the 1%, give us a sense of what that income range is.

Samantha: It depends on what income measure you're using. But basically millionaire type people, $800,000 or a million, depending on what income definition you're using. 

Alejandro: So the tax cuts disproportionately benefited millionaires, some of them getting $48,000 checks. Meanwhile, the middle class also got some benefits. But all of these income and estate tax cuts expire. What was the rationale for putting that expiration date on all of these provisions? 

Samantha: The total cost of the law for procedural reasons and had to be 1.5 trillion over a ten year budget window. So to get all the cuts they wanted they essentially made some of them expire early to make it seem like the bill would cost less. And then assumed, you know, come 2025, legislators would then extend those tax cuts again. It's kind of a similar dynamic as the Bush tax cuts from the early 2000, where those then got extended a couple of times. 

Alejadro: Thank you for that explanation, because I think it is revealing for listeners to understand that the policies that have been enacted, particularly around tax policy, whether in this last latest round in 2017 or during the Bush Bush tax cuts in the early 2000 that you know, the sausage making, this policymaking is not always necessarily grounded on what is the best policy that is going to lead to the best outcomes. But it is established by a set of political frameworks that may not necessarily benefits middle class Americans, low income earners. 

Samantha: And I'll just add that I mentioned before that the law made the corporate tax cuts permanent and the individual tax cuts temporary. And that was also in part a political calculation, because the Republicans knew that the corporate tax cut was unpopular and was less likely to be renewed if it had been made temporary.

So they prioritized the corporate cuts and made those permanent and made the individual tax cuts temporary because they felt that those had a better chance of being renewed. 

Alejandro: That's an another excellent example of how politics often shapes the type of policy that we end up with. And so you've raised corporate tax cuts and the fact that they are permanent. Can you summarize the most important changes to corporate taxes in the 2017 law? 

Samantha: So the corporate tax rate was cut from a top rate of 35% to 21%. So a 40% cut in the rate that corporations pay on their profits. The law also made several changes to the way multinational corporations are taxed on their foreign profits. And instead of having corporations pay tax on that, the corporate rate on all their foreign earnings, they are taxed on foreign earnings basically at a at a discounted rate of 10.5% on foreign profits and then all foreign profits that had been sort of parked overseas to avoid paying U.S. tax received kind of a discounted rate again for those profits. Additional corporate tax changes were to allow corporations to fully expense or deduct the cost of equipment purchases in the year, the day they make the purchase. That's another large benefit. So those are the major changes. I think the big one for folks to take away is the large cut in the corporate tax rate.

Alejandro: Let me let me go on a tangent here, and then we'll come back to the Trump tax cuts, because there is something that has happened since. Treasury Secretary Janet Yellen has negotiated with many of our economic partners throughout the world and reached an agreement, or they seem to have reached an agreement, and maybe this is something you could clarify for me, of having a corporate minimum tax of 15%. What's the status of that? Do you know about that? And how does this play into what we're talking about, not just the tax cuts, but what comes next? 

Samantha: Yeah, so that agreement was negotiated by the Biden administration with other OECD countries. It wasn't started by the Biden administration. This process has been ongoing for four years before the Biden administration took it on. The Trump administration was also engaged in these talks, and then they came to an agreement. Many countries signed on to the agreement to enact a 15% minimum tax that basically every country would enact.

And what that effectively would do is set a floor for all corporations to effectively pay at least 15% corporate taxes in all jurisdictions in which they operate, which prevents, countries from kind of undercutting corporate tax rates by reducing their rates and setting up this kind of race to the bottom, which Secretary Yellen talks about a lot and eliminates kind of the benefits of tax havens and profit shifting that occurs from that.

So the status of that is there was this agreement a few years ago and then countries would start to implement the agreement and several countries have begun implementing it by drafting legislation and starting to set timelines for when the legislation will take effect. Several countries in addition to the EU have started to implement it. I believe beginning next year it would go into effect.

The US has not begun implementing the agreement, although we do have a ten and a half percent minimum tax. So we sort of start even going back to 2017 where the what the framework that they put in place could be built upon to align with the OECD agreement, but it hasn't been updated to comply. So that is something that next year I think there will be a lot of discussion about doing that so that we can kind of keep up with the rest of the world and prevent other countries from effectively generating revenue from U.S. multinationals that should be going to the US if we had enacted a 15% minimum tax rate. So it's ensuring that the revenue that we should be getting comes to the US and other countries. 

Alejandro: Thank you for that clarification. That's very important it seems. And so just to close this line of questioning, the does that create pressure on legislators to revisit the corporate tax cuts from 2017 and make changes to those provisions that are currently permanent?

Samantha: There is certainly pressure on the international provisions to ensure that our laws align with what the rest of the world is doing to make sure we're not losing revenue that we should be getting that can hopefully create some pressure. I think also just in general, the corporate tax rate on domestic profits will be certainly part of the debate. I think there's a widespread understanding or a sense that the corporate rate cut from 2017 overshot, went too far. Corporations didn't need that big of a cut just to “remain competitive.” They can bear a slightly higher tax rate without harming the economy. I think even a few Republicans have come out and said that they would be open to raising the corporate tax rate. Some of these 2017 tax cuts for families, moderate income families, low income families — many people will want to extend those. The expansion of the child tax credit, lower tax tax rates for lower income households, the standard deduction possibly being being one. Those will also have a cost. And if we want to pay for those, which we should, they're going to need to be other revenue raisers on the table and the corporate tax rate is an important one.

Raising the corporate tax rate just from what it is now, 21%, even just sort of halfway between what it is now and what it was before 2018 to 28% would raise over a trillion dollars, $1.3 trillion. So that's a really huge opportunity and should be on the table as a way to pay for tax cuts for low or moderate income families or other policy priorities like further expansions of the child tax credit.

Alejandro: We'll come back to some of those individual provisions, because I do think it's important to highlight what are some of the potential changes that would really benefit lower income earners and middle class families. But let's take a step back and look at the big picture, because there are significant consequences of the 2017 Trump tax cuts to the overall revenue base in the United States. Explain why that's important and what are the potential long term consequences of the loss of that revenue base? 

Samantha: Going back a few decades, the tax cuts that were enacted under the George W Bush administration and then under Trump have been hugely costly in terms of revenue. So my colleagues at the Center on Budget found that the Bush tax cuts added $3 trillion to deficits from 2001 to 2011. I mentioned that the CBO had estimated the Trump tax cuts cost $1.9 trillion over their first ten years and extending them would add another 4 trillion. So $350 billion a year starting in 2027. And so in terms of the federal budget, you know, the fact is we need more revenue, not less. Look at some demographic shifts that have been happening with an aging population, higher health care costs. Social Security, Medicare, Medicaid, budgets are all going to keep going up.

And that, you know, is not even mentioning the unmet needs that we face in terms of climate change, housing, child care, addressing child poverty. So we really have a situation where there's inadequate federal revenues that have limited our ability to make some of those required investments and address those problems. And that really has to change. And next year is an important sort of marker in our ability to do that.

Alejandro: Let's turn our attention to what happens next. In 2025, Congress will have to deal with these expiring provisions. I wanted to ask you specifically about the individual tax cuts, the provisions that are expiring. Is the right policy to simply let those tax cuts expire, or is this an opportunity to actually raise taxes on those high income earners?

Samantha: We're thinking of this as, what are your principles for the 2025 tax debate? Principle number one: end tax cuts for people making over 400,000. The Trump tax cuts for people making over 400,000 should end on schedule. The second principle: the wealthiest people, wealthy corporations, should pay even more in taxes. That means that if we do extend tax cuts for people below 400,000, those tax cuts should be paid for by increasing revenues from the people and corporations who can most afford to pay. That can be done through, as I mentioned, corporate tax rate increases and other corporate tax changes. There are plenty of things we can do to improve the taxation of capital gains from wealthy people. And then also another important way to raise revenue is by extending the Inflation Reduction Act's funding for the IRS, because that funding has been cut and every dollar spent bolstering the IRS generates multiple dollars in revenue. So those are the three main revenue raisers that can be used to raise revenue to pay for any tax cut extensions that occur for people below 400,000.

A third principle: any new tax related benefits, like the Child Tax Credit expansions, Earned Income Tax credit Expansions or extensions of the Affordable Care Act tax credits, those tax related benefits should be targeted to the folks who need them the most. 

Alejandro: You and your colleagues at the Center on Budget and Policy Priorities just this morning published a report on the pass through deduction that is also part of this conversation around the expiration of tax cuts. The title makes it very clear that it's essentially skewed to the rich, it's costly, and it's failed to deliver on its promises. Can you talk a little bit about each of those criticisms that you have on this pass through deduction? 

Samantha: So for a little bit of background: we've talked a lot about corporations, but about half or more than half of business income in the United States is generated by what are known as pass through businesses. So these are businesses who don't pay the corporate tax.

The income from the business essentially passes through the business, and the owners of the business pay taxes on their individual income tax returns on their business income. So partnerships, S corporations, sole proprietorships, these are examples of pass through businesses and they account for about half of business income in the United States.

So basically, when the 2017 law was passed, there was this huge corporate tax cut and business lobbyists said, “Hey, wait a minute, if you're going to cut taxes for corporations, you need to cut taxes for pass through businesses, too.” So the law created a 20% deduction for owners of pass through businesses that effectively exempts up to 20% of their business profits from tax.

So that means if you were a pass through business owner, you pay a top tax rate of 29.6% on that income. But if you're an employee doing the exact same work, you pay a top rate of 37%. So owners can pay lower taxes than their employees. And this is just plainly a huge giveaway to high income people.

It costs $50 billion a year and over half of the benefit goes to millionaires. It's highly skewed. And because it's technically an individual tax provision, this is another one that expires at the end of 2025. So it should not be extended. It's a skewed provision that highly benefits high income and wealthy people. It's, again, very costly and it just doesn't generate economic benefits sufficient to justify it.

Alejandro: One of the few provisions that seems to have had a broader impact, particularly on lower income families, was the expansion of the Child Tax Credit, which, you know, happened during the pandemic. But then in 2021, Congress increased the amount of the credit and made it fully available to the lowest income families. And what we saw is that these changes in policy quickly led to a dramatic decline in child poverty. Unfortunately, those changes were only temporary and they expired after one year. When that happened, child poverty went up through the roof. And ever since, advocates and champions in Congress have been trying to reinstate that expanded Child Tax Credit. You've alluded to it. Can you explain where things stand right now and what are the prospects of that enhanced Child Tax Credit being part of a new package in 2025?

Samantha: Yeah, that's a good question. You're right, the American Rescue plan enacted in 2021 included a massive expansion of the Child Tax Credit, made it fully available to households regardless of their earnings and made it also a monthly benefit, so folks could receive part of the credit each month to help them meet their ongoing obligations rather than a lump sum at the end of the tax year.

This is a very high priority for us. We believe that the full Child Tax Credit expansion should be renewed and made permanent. It reduced child poverty dramatically and made it so much easier for families struggling to get by to meet their basic needs. There have been efforts to expand the Child Tax Credit, particularly for the lowest income households.

There was a bill that had been negotiated earlier this year between Jason Smith, who is the Republican chairman of the Ways and Means Committee in the House, and Senator Wyden. It's a bipartisan, bicameral agreement to do a couple of things: to expand the Child Tax Credit, not to the level that it was in 2021, but to make it easier and more available for the lowest income families. That they get a larger credit. That Child Tax Credit expansion would have been paired with some business tax breaks that particularly Republicans were interested in. So that was an agreement and it passed the House very quickly and sort of overwhelmingly, which we were very excited about. But it has stalled in the Senate since then. So it remains to be seen if there's any opportunity this year or potentially maybe in a lame duck session after the election.

But as of now, that hasn't been enacted in law. So that's something that we expect to be on the table in 2025 to hopefully set up a position where there is an opportunity to bring back that transformational Child Tax Credit expansion that we saw in 2021. 

Alejandro: Thank you. That expansion is really critical. As it currently stands, there are 160,000 Oregon children that don't qualify for the credit. That could have a significant benefit. I want to ask you one last question, and mostly I want you to take a step back and perhaps reflect on sort of the big picture, because it seems to me that the Trump tax plan is just the latest iteration of what has been known as trickle down economics. You know, the notion dating back to the Reagan years that cutting taxes for the rich will create prosperity for the rest. What does the research say about what such policies could actually achieve? I mean, you live in data, you see the results of the policies and how they play out in real life. What's your assessment after, you know, 40 years of Reaganomics gone bad? What do you think? 

Samantha: We have just essentially seen a decade of tax cuts at this point that not only make it harder for us to raise adequate revenues, to make investments that we need, but as you said, don't don't then generate the economic growth that proponents promise. Going back to the Bush tax cuts, there is research that there's no evidence that those tax cuts generated growth. And for tax cuts that were so large — the cost of the Bush tax cuts is of roughly 2% of GDP in 2010 — to not generate growth, that's a pretty big denouncement of the trickle down economic theory. 

And, you know, we're seeing similar results with the Trump tax cuts. Some new research shows that the corporate rate cut had effectively zero benefit to worker wages, for workers in the bottom 90%. Any wage increases, any benefits have gone to owners, not to workers. There's some similar research from the pass through deduction. That research found that the pass through deduction didn't increase employment, didn't increase growth or investment for passenger businesses. So pretty clearly the trickle down justification for these tax cuts has not panned out. Opponents of the 2017 tax law, for example, promised a $4,000 household income benefit from the corporate rate, and that has clearly not materialized. So it's time for a course correction, and let these tax cuts expire. 

I really appreciate talking to you. That's it for today's show. Thanks for listening. And we will see you next time.