2025 Tax Debate Begins, Offers Opportunity for Course Correction

A high-stakes tax debate will begin this year, accelerate through the presidential campaign, and likely culminate with legislative action in 2025. This debate provides an opportunity to correct our course — moving away from the flawed trickle-down path of the 2017 tax law and toward a tax code that raises more needed revenues, is more progressive and equitable, and supports investments that make the economy work for everyone. Specifically, this course correction should include letting regressive provisions of the 2017 tax law expire on schedule, scaling back the egregiously large and permanent tax cuts provided to corporations and their shareholders in the 2017 tax law, and ensuring that the wealthiest households pay some income tax each year.

Policymakers could use the progressive revenues generated from reforms that insist that high-income households and profitable corporations pay a more reasonable amount of tax to pay for key priorities such as expanding the Child Tax Credit and extensions of 2017 tax law provisions that benefit low- and middle-income people.

The individual income tax cuts in the 2017 law include provisions that give a roughly $49,000 annual tax cut to the top 1 percent but only about $500 to those in the bottom 60 percent. They’re scheduled to expire in 2025, but more than 70 House Republicans recently introduced a bill that would make them all permanent. Simply extending those provisions would be an expensive policy mistake, costing around $2.2 trillion from 2023 to 2032, according to the Congressional Budget Office (CBO).

Most importantly, policymakers should block the extensions of these regressive provisions, which alone would cost roughly $1.6 trillion between 2023 and 2032:

• Cutting the top individual tax rate to 37 percent. The 2017 tax law lowered the top tax rate from 39.6 percent to 37 percent and raised the income threshold to which it begins to apply, from roughly $470,000 to $600,000 for a married couple.
• Creating a special 20 percent deduction for pass-through business income. The 2017 tax law created a new 20 percent deduction for certain income that owners of pass-through businesses — such as partnerships, S corporations, and sole proprietorships — report on their individual tax returns, which previously was generally taxed at the same rates as labor income (that is, income from work, such as wages and salaries). The deduction effectively cuts the top tax rate on this pass-through income by 20 percent, to 29.6 percent, compared to the 37 percent top rate that applies to wages and salaries. Its benefits are highly tilted toward the wealthy; around 61 percent of its benefits will go to the top 1 percent of households in 2024, according to the Joint Committee on Taxation.
• Doubling the estate tax exemption. The 2017 law doubled the amount that the wealthiest households can pass tax-free to heirs, from $11 million to $24 million per couple (indexed for inflation).
• Weakening the alternative minimum tax (AMT). The AMT is a parallel tax system designed to ensure that higher-income people who take large amounts of deductions and other tax breaks pay at least a minimum level of tax. The 2017 tax law significantly weakened the AMT by raising both the amount of income that’s exempt from the tax (from $86,200 to $109,400 for a married couple) and the income level above which this exemption begins phasing out (from $164,100 to $1 million for a married couple). The overall effect is a further tax cut for affluent households. Policymakers should ensure that this group pays a fairer amount of individual income taxes by letting the 2017 law’s AMT changes fully expire or by adjusting AMT parameters in combination with other individual income tax changes, such as a cap on the value of major deductions and exclusions.

Policymakers should take two important steps to help create a tax system that collects more revenues and requires that high-income households and wealthy corporations who benefit the most from our economy pay a fair amount of tax.

1. Reform the 2017 tax law’s costly and regressive corporate provisions. Policymakers should reconsider the 2017 law’s permanent provisions that are heavily tilted in favor of large corporations and their shareholders, who are disproportionately wealthy. The centerpiece of the 2017 tax law was a deep cut in the corporate tax rate, along with the adoption of a new international tax framework. These corporate provisions faced strong public opposition from the start, and the case against them has only grown over time as each has failed to deliver the benefits the law’s drafters promised. Cutting the corporate tax rate cost significant revenue without any clear economic benefits for employees, and corporate profit shifting to overseas tax havens remains a major problem. In 2017 Republican lawmakers made a policy mistake by singling out these provisions for permanence, and policymakers should not repeat it by exempting them from reconsideration in the debate around the expiring provisions of the 2017 tax law. The European Union’s recent move to adopt a robust global minimum tax — raising the prospect of new taxes on U.S. multinationals with the revenue flowing to other countries and not to the U.S. Treasury because the U.S. has not taken similar action — adds to the urgency.

2. Ensure that more income of very wealthy people faces annual taxation. The debate shouldn’t ignore the deepest flaw of the individual income tax code: the wealthiest people in the country often pay little or no income taxes on much of their income. The individual income tax is our main federal tax, raising roughly half of federal revenues. For most of the income spectrum, the progressive individual income tax generally works as it should, with higher-income households paying a larger share of their incomes in tax than households with lower incomes. But this relationship often breaks down at the very top because capital gains, the primary source of income for many of the country’s richest people, aren’t taxed until the assets those gains are based on are sold.

   Moreover, even when very rich people’s income is counted on their tax returns, it often enjoys special breaks, like the carried interest loophole that lets private equity executives treat their labor income as tax-advantaged capital gains income or low tax rates that apply to capital gains and dividend income. Policymakers should update tax laws to reflect the realities of today’s economy by closing special loopholes that benefit the wealthy and ensuring that the richest people in the country pay at least a minimum amount of individual income tax, as President Biden has previously proposed.

These reforms to the corporate and high-income provisions of the tax code — beyond those 2017 law provisions that are scheduled to expire — belong at the center of the coming tax debates. They’d generate substantial progressive revenue that could be used to fund key national priorities such as an expanded Child Tax Credit and policies to make health care, child care, and housing more affordable and to offset the cost of extending any of the 2017 law’s individual income tax provisions affecting households with low and moderate incomes.

The public deserves a broad and robust tax debate leading up to the 2025 expirations of the 2017 tax law’s provisions. That debate should weigh which provisions should expire, how corporate and high-income provisions should be reformed, how to ensure the wealthiest people in the country pay a reasonable amount of individual income taxes each year, and what national priorities those funds should pay for.