President-elect Donald Trump will face significant challenges when he assumes office on Jan. 20 on foreign and domestic matters. Long-term solutions to all of these problems will require cooperation from Congress. But when it comes to dealing with China, Ukraine, and illegal immigration, Trump will be able to make significant short-term progress with executive action alone.
The same is not true on the economic front. The clock is ticking on the signature domestic achievement of Trump’s first term, the Tax Cuts and Jobs Act. Without congressional action, it will expire on Dec. 31, 2025, which would directly raise individual taxes on almost everyone and would indirectly raise them on everyone through higher corporate rates.
A permanent extension of the 2017 tax law should be Trump’s top legislative priority after he is sworn in for his second term.
One reason voters remember the Trump economy fondly is that, contrary to false claims from the Democratic Party, the 2017 tax law’s reforms delivered higher after-tax, take-home pay up and down the income spectrum. Its corporate reforms also boosted capital investment, delivering greater economic growth, higher pay, and lower prices for everyone. Additionally, Trump made room for family-friendly tax relief by doubling the child tax credit from $1,000 to $2,000. His top priority should be to retain all of these changes.
A challenge will be recouping reductions in revenues when the federal government is already running at record-high deficits that apply upward pressure on inflation, which Trump has promised to bring down.
Congressional tax reform authors could start by repealing President Joe Biden’s massively expensive and inaptly named Inflation Reduction Act. Mere months after passage, the Congressional Budget Office revised its original cost estimates of the new law’s green energy tax credits as the scope of these corporate giveaways came into focus. Estimates vary, but a full repeal of the Biden tax credits could net the Treasury between $900 billion and $1.2 trillion in revenues.
The Tax Foundation estimates that on a dynamic basis, the cost of extending Trump’s tax reforms permanently would be $3.5 trillion, so repealing the Inflation Reduction Act’s tax credits will get about a third of the way toward making the extension revenue neutral. Other reforms will be needed.
The answer might just come from within the law itself. One of the first principles of effective tax reform is simplifying the tax code by broadening the base and eliminating loopholes, especially those that benefit predominantly wealthier taxpayers. Trump started down this road by capping the state and local tax deduction at $10,000 and setting the mortgage interest deduction ceiling at $750,000. These were brave beginnings, and a permanent extension of the 2017 law could be funded by eliminating both entirely.
Trump made other tax promises on the campaign trail, and while those ideas should be considered, tax reformers should weigh their costs and benefits before rolling them into a tax bill next year. Is a narrow exemption for taxes on tips worth higher income taxes for everyone else? Are lower taxes for Social Security benefits for the elderly really more important than keeping the tax bills of young families trying to have more children as low as possible? These are real trade-offs that tax writers must consider.
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Trump has made comments about using tariffs to pay for other tax cuts, rhetoric not unlike what he used in his first term when he raised tariffs on steel, aluminum, and washing machine imports. Tariffs might be used strategically to extract concessions from unfair trading partners, but it is unrealistic to expect them to produce revenue to replace the income tax code.
Trump already has a proven formula for delivering widespread economic growth and prosperity in his last round of tax reforms. His administration should build on that successful model, not scrap it for an unproven and risky alternative.