The upcoming budget fight this fall will set the stage for 2025, when many of the absurd and regressive tax cuts from Trump’s 2017 Tax Cuts and Jobs Act expire. As we’ve noted previously, 2025 will be a make-or-break moment for our tax code. Depending on who controls the White House and Congress, it may be a chance to – finally – reform tax policy to break the stranglehold of the ultra rich on our economy and reinvigorate democratic capitalism in America.
We’ve outlined our vision for a complete overhaul of American tax law – The Internal Revenue Code of 2025 – in Crack the Code. But to be best positioned for 2025, we have to know where we are now. So it’s important to understand the battle lines for the budget fight we’re likely to see this fall.
The Republican Tax Package
Earlier this month, the Republicans in the House Ways and Means Committee advanced on a party-line vote the American Families and Jobs Act, which actually consists of three bills: the Tax Cuts for Working Families Act, the Small Business Jobs Act, and the Build It In America Act. Here is a summary of each of those bills.
The Tax Cuts for Working Families Act. This bill would rename the standard deduction as the “guaranteed deduction” and would temporarily increase the amount of the deduction – for tax years 2024 and 2025 – by $2,000 for single taxpayers and $4,000 for married taxpayers filing jointly. The increase in the deduction would be phased out for single taxpayers making over $200,000 and married taxpayers making over $400,000. Unfortunately, this increase in the deduction would favor those incomes closer to the phase-out threshold and not low-wage workers that need the most help. For example, a couple with an income of $390,000 would see a $1,280 tax cut from the increased deduction, whereas a couple with an income of $50,000 would see a tax cut of just $400 from the increased deduction.
The Small Business Jobs Act. This bill includes the following measures:
- Increases in the information reporting thresholds for contractor services and goods and services sold online
- An increase in the exclusion from taxable income for gain on small business stock held between 3 and 5 years, and an extension of the exclusion for stock in S corporations
- An increase in the maximum deduction for depreciable business assets from $1 million to $2.5 million
- An expansion of the qualified opportunity zone program, which allows for the deferral of the recognition of gains reinvested in designated areas of persistent poverty, to include rural opportunity zones
These might seem like relatively minor in-the-weeds changes, but they add up to a significant handout to wealthy Americans who own and run small businesses. The bill’s expansion of the opportunity zone program is particularly egregious – opportunity zones were sold as a tool to increase investment and, yes, opportunity in poor areas of the country by giving people a tax break for investing in those neighborhoods. But instead, they’ve primarily functioned as a way for ultra-wealthy investors to avoid paying taxes on profitable investments they would have made anyway in gentrifying neighborhoods. The areas that are truly struggling have received almost no opportunity zone investment. Expanding this program would just do more of the same.
The Build It In America Act. This bill would repeal many of the provisions in the Inflation Reduction Act that promote the use of renewable energy and would extend, through 2025, the following business tax breaks:
- The immediate deduction of research expenses that will generate income over multiple years
- So-called “bonus depreciation,” which allows the cost of capital assets with useful lives greater than one year to be fully written off in the year of purchase
- A higher limit on the deductibility of interest expense: 30% of income before interest, taxes, depreciation and amortization, as opposed to 30% of income before interest and taxes
The timing of expense deductions is another issue that, while it might seem minor, has an enormous effect on corporate tax revenue. This bill’s changes to research expenses and bonus depreciation are estimated to add over $64 billion in tax cuts per year for corporations.
The Democratic Proposal to Expand the Child Tax Credit
The shape of the Democratic tax package is less clear at this point, but one component will almost definitely be an expanded child tax credit (CTC). In the House, Representatives DeLauro and Larson have introduced the American Family Act, which would expand the CTC as follows:
- Reinstate the monthly CTC
- Make the CTC fully refundable
- Continue the Young Child Tax Credit of $300 per month ($3,600 per year, up from $2,000 per year) for children under 6 years of age
- Expand the maximum CTC to $250 per month ($3,000 per year, up from $2,000 per year) for kids ages 6 to 17
- Extend the expanded and improved CTC to the United States Territories
The contrast between the Republican and Democratic tax priorities could not be starker. The Democratic proposal to expand the child tax credit would overwhelmingly benefit the poor and middle class; in 2021, the expanded CTC cut child poverty roughly in half. Meanwhile, the Republican package would benefit mostly wealthy taxpayers. According to analysis by the Institute on Taxation and Economic Policy, under the Republican package, the poorest fifth of Americans would receive an average tax cut of just $40 next year while the richest one percent would receive an average $16,550 cut.
Regardless of how much of their proposals make it into the final budget package, Republicans’ strategy is clear. Their current proposals are scheduled to expire in 2025, along with many of the Trump tax cuts. That will set the stage for a massive tax cut package in 2025. Their plan will involve making all the expiring tax cuts permanent, or at least extending them for another decade. And it may well include more giveaways to the rich, such as a full repeal of the estate tax, which has the support of at least 40 Republican senators.
However, that strategy only works for them if they control the White House and both houses of Congress. Otherwise, the Democrats logically will have all the leverage, as the automatic expiration of the Republican tax cuts would work to their advantage.
Unfortunately, the Democrats have failed to seize on similar opportunities in the past. Indeed, the very reason the Patriotic Millionaires came together back in 2010 was to call on then-President Obama to not go ahead with his plan to extend the Bush-era tax cuts for the rich. (He did.)
In 2025, the stakes couldn’t be higher. We must seize the opportunity to not only let the worst of the Trump tax cuts expire, but also to overhaul the entire tax system. We need to convert our tax code from one that guarantees increasing levels of destabilizing inequality into one that instead mitigates inequality and protects our capitalist democracy for the long term.