Policymakers Should Reject Trump, Republican Tax Agendas That Would Double Down on Failures of 2017 Tax Law

Following a campaign in which President-elect Trump promised to improve the economic circumstances of working-class people across races, it’s jarring that the incoming Trump Administration and Republican majority seem intent on rushing through an extension of the 2017 Trump tax law. That law was skewed to the wealthy, expensive, and failed to deliver on its promises. Instead of doubling down on this costly failure, policymakers should shift course and make better, more equitable choices. They should require wealthy households and corporations to pay their fair share. They should make the tax code work better for families with more modest incomes and people of color. They should support key investments and strengthen our fiscal outlook.

Here’s how:

End tax cuts for high-income people on schedule. Ending the 2017 law’s tax cuts for high-income households with incomes above $400,000 — the tax rate cuts, special deductions, and estate tax cuts on massive inheritances — would avoid fully 41 percent of the $3.9 trillion cost of extending the 2017 law over ten years (2026-2035).

The 2017 tax law benefited high-income households far more than households with low or moderate incomes. Ending the expiring cuts for high-income households is an essential step in shifting away from the regressive, costly tax cuts of recent decades and toward a more equitable tax system that raises revenue sufficient to meet the nation’s needs.

  

Increase federal revenue. To support sound budget policies, the level of federal revenue — measured as a percent of the nation’s economy, or gross domestic product (GDP) — needs to rise. Our current approach of low investment and support for people and communities relative to other wealthy nations, coupled with even lower revenue, has led not only to a fiscal deficit, but also an investment deficit.

To meet our commitments to seniors, make high-value investments that will improve well-being and broaden prosperity, and improve our fiscal outlook, we must raise more revenue. We cannot meet 21st-century needs with past levels of revenue. As a first step, policymakers should use the scheduled expiration of most provisions of the 2017 tax law as an opportunity to bolster the revenue base.

Raise revenues through the tax system to finance tax-cut extensions or new investments. Policymakers need to raise more revenues from wealthy people and profitable corporations, such as by partially reversing the 2017 law’s corporate tax rate cut, to offset tax cuts they extend or expand and pay for other high-value investments they enact. Additional revenues can also improve our long-term fiscal outlook.

That revenue should come from three sources:

1) Scaling back the 2017 law’s corporate tax cuts and strengthening the international tax regime. 

2) Requiring the wealthiest people to pay some annual income tax on their unrealized capital gains and reducing their special tax breaks. 

3) Replenishing and extending mandatory IRS funding to reduce the tax gap.

  

End the pass-through deduction on schedule. Few provisions of the 2017 Trump tax law exemplify its flaws better than the 20 percent pass-through deduction, and policymakers should reject any efforts to extend the provision when it expires in 2025.

More than half of business income flows to businesses organized as pass-through entities (such as partnerships, S corporations, and sole proprietorships), which are not subject to the corporate tax. Instead, their income “passes through” the business and is reported on owners’ individual tax returns.

The pass-through deduction:

• Is skewed to the rich: Over half of the deduction’s benefits in 2024 will go to households with more than $1 million in income, according to the Joint Committee on Taxation.
• Costs significant revenue: Extending this provision beyond its scheduled expiration at the end of 2025 would cost around $770 billion over the decade that would follow.
• Has failed to deliver on its economic promises: Proponents argued the pass-through deduction would boost investment and create jobs. But a team of researchers concluded that the deduction’s benefits have largely failed to trickle down to workers who aren’t owners and did not provide any significant boost in economic activity.

  

Choose alternatives to corporate tax cuts that would benefit workers and families. Rather than hope that corporate tax cuts will eventually, indirectly benefit lower- and middle-income households by boosting the economy, policymakers can provide more effective direct help to families that face challenges affording the basics — and secure lasting gains in health, education, and earnings for children in those families — by making investments such as expanding the Child Tax Credit and Earned Income Tax Credit (EITC) and expanding access to affordable, high-quality child care that can broaden opportunity and support a stronger, fairer economy.

Expand the Child Tax Credit, as both President-elect Trump and Vice-President-elect J.D. Vance have supported. A key priority in the tax debate should be expanding the Child Tax Credit to benefit the roughly 19 million children shut out from receiving the full credit simply because their families have low incomes. Lawmakers should, at a minimum, reinstate the successful 2021 American Rescue Plan expansion of the Child Tax Credit, including making the full credit available to children in families with low incomes and increasing the maximum amount of the credit to $3,600 for children aged 5 and younger and $3,000 for children aged 6 to 17, among other changes.

Strengthen the EITC. The federal EITC provides extremely limited support to adults aged 25-64 who work low-paying jobs and are not raising children in their household. Low-paid workers who are younger than 25 or older than 64 are excluded from the EITC entirely if they aren’t raising children in their home. Congress should expand the EITC, as it did in 2021, so that people working in low-paying jobs, whether or not they are raising children in their home, do not live in poverty.

  

The 2017 tax law and other large tax cuts enacted over more than two decades have eroded the nation’s revenue base, undermining investments, driving up deficits and debt, and, in turn, increasing future economic risks. It’s time to reverse course.