Principles for the 2025 Tax Debate: End High-Income Tax Cuts, Raise Revenues to Finance Any Extensions or New Investments

Key provisions of the 2017 Trump tax law are scheduled to expire at the end of 2025. Given the law’s fundamental problems — its high cost, skew toward high-income people, and failure to produce the promised economic benefits — policymakers should take that opportunity to make a course correction in the nation’s revenue policies. This would mean adhering to three principles: ending the tax cuts for high-income households on schedule, raising more revenue, and making new investments that prioritize low- and moderate-income people and families.

This report examines the first two of those principles:

1. Tax cuts for people making over $400,000 should end on schedule. Ending the 2017 law’s tax cuts for high-income households — 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).^[1]
2. The tax system needs to raise more revenues to finance any 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 any tax cuts they choose to extend or expand for those with incomes below $400,000 and pay for other high-value investments they enact. Additional revenues can also improve our long-term fiscal outlook.

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.^[2] Adopting the two principles highlighted above would begin to reverse course and rebuild our revenue base. While a single tax bill is extremely unlikely to address our full revenue needs or even return revenues to 1990s levels as a share of the economy, it could meaningfully improve our fiscal outlook and finance investments critical to the nation’s future prosperity.

Principle#1: Expiring Tax Cuts for People With Incomes Over $400,000 Should End on Schedule

Like the Bush tax cuts before it,^[3] the 2017 tax law benefited high-income households far more than households with low or moderate incomes. Ending the expiring 2017 tax 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.

Policymakers should keep three facts in mind as the 2017 law’s individual income and estate tax cuts approach expiration:

First, while the 1 percent of households with the highest incomes received very large tax cuts from the 2017 law — averaging $61,090 apiece in 2025 — the largest average tax cut measured as a percentage of pre-tax income went to households with incomes in the 95-99^th percentiles.^[4]Their tax cut averaged 3.2 percent of their pre-tax income or nearly $13,000 in 2025, more than triple the roughly 1 percent average gain for households with incomes in the bottom 60 percent of the income distribution, according to the Tax Policy Center (TPC).^[5]

Households with incomes in the 95-99^th percentile are often referred to inaccurately as “upper middle class.” The reality is far different. They have annual incomes roughly in the $400,000 to $1 million range, according to TPC,^[6] and they generally have high levels of resources. Their median net worth was over $3.9 million in 2022, according to an analysis of the Survey of Consumer Finances, compared to just $169,000 for those with incomes below $400,000 and just $52,000 for those in the bottom 50 percent of the income distribution.^[7]

Even though households in the top 5 percent of the income distribution represent a small share of the population, extending their individual income tax cuts would be very expensive. As Figure 1 shows, 41 percent of the cost of extending all of the expiring 2017 tax cuts would flow to people making over roughly $400,000. Letting the tax cuts for this group expire on schedule would avoid $1.6 trillion in costs over ten years.

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Second, these large tax cuts for high-income and high-wealth households come on top of the large benefits those households also receive from the 2017 law’s permanent corporate tax cuts, which are tilted even more heavily toward wealthy people than the expiring individual tax cuts.^[8] In 2018, the first year the law was in effect, the top 5 percent of households received 40 percent of the individual tax cuts but more than half of the law’s other tax cuts, which were primarily corporate tax cuts.^[9]

These large, regressive tax cuts widened racial disparities in after-tax income. Due to racial barriers to economic opportunity, households of color are overrepresented at the bottom of the income distribution, while non-Hispanic white households are heavily overrepresented at the top. The 2017 law’s core provisions tilt heavily to households with incomes at the top of the distribution: white households in the highest-earning 1 percent receive 23.7 percent of the law’s total cuts, far more than the 13.8 percentage share that the bottom 60 percent of households of all races receive.^[10]

Third, the benefits of income tax cuts for high-income people do not trickle down to most households, contrary to proponents’ claims, so letting them expire likely would not cause broad economic damage. A 2023 review of the trickle-down literature by Carnegie Mellon University economist Max Risch found that “across different income tax policies that statutorily affect the rich, the evidence suggests the burden is predominantly born by the rich.”^[11] In other words, income tax cuts at the top don’t generally benefit workers with low or moderate incomes. Risch also separately found that when the top tax rate rose following the partial expiration of the Bush tax cuts, business owners bore over 80 percent of the tax increase on business income, and top-earning workers bore the remainder, while the tax increase had no impact on employment.^[12] (Similarly, the benefits from corporate tax cuts do not trickle down to workers, as discussed below.)

The expiring provisions of the 2017 law that primarily benefit the most well-off include the following:^[13]

Cut in Top Individual Tax Rates and Weakening of AMT

The 2017 law cut the top individual income tax rate from 39.6 percent to 37 percent and raised the threshold to which the rate begins to apply from $480,000 to $600,000 for a married couple.^[14] (The threshold applies to people’s taxable income; their gross income can be significantly higher because of deductions, exemptions, and other tax benefits that high-income people disproportionately use. Taxable income also excludes unrealized capital gains, a primary source of income for many wealthy households.) Restoring the 39.6 percent top tax rate and applying it to taxable incomes exceeding $400,000 could save at least $500 billion over a decade (2026-2035), relative to extending the 37 percent top rate.^[15]

The 2017 law also dramatically weakened the alternative minimum tax (AMT), which was 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 law made far fewer households subject to the AMT and enabled many of those still subject to it to pay far less,^[16] delivering another sizable tax cut to many affluent households. Permanently extending the 2017 law’s changes to the AMT would cost around $1.5 trillion over the following decade (2026-2035).^[17]

20 Percent Pass-Through Deduction

The 2017 law adopted a new 20 percent deduction for certain income that owners of pass-through businesses (partnerships, S corporations, and sole proprietorships) report on their individual tax returns, which previously was generally taxed at the same rates as wage and salary income.

The pass-through deduction has the same fundamental problems as the 2017 law overall: it is skewed to the rich, cost significant revenue, and failed to deliver its promised economic benefits.^[18] Over half of its benefits in 2024 will go to households with incomes over $1 million, according to the Joint Committee on Taxation (JCT).^[19] And despite promises from the law’s proponents that the deduction would boost investment and create jobs,^[20] a team of researchers from the Treasury Department, Federal Reserve, and Dartmouth College concluded that the deduction’s benefits have largely failed to trickle down to workers who aren’t owners and didn’t significantly boost economic activity.^[21]

Extending the deduction beyond its scheduled expiration at the end of 2025 would cost around $770 billion over the following decade (2026-2035).^[22]

Estate Tax

One of the most egregious examples of trickle-down tax cutting in recent decades has been the long-term effort to reduce or even eliminate taxes on massive inheritances for some of the wealthiest families in the country.^[23] The 2017 tax law continued this trend, doubling the amount that a wealthy couple can pass on to their heirs tax-free from $11 million to $22 million, indexed for inflation (the 2024 threshold is $27.22 million).

The few estates large enough to remain taxable under the 2017 law — about 1 in 1,000 estates nationwide — receive a tax cut of $5.4 million per couple from this provision alone.^[24] Moreover, they can use loopholes to reduce or eliminate their remaining estate tax liability, such as by artificially valuing their assets at less than their true value or by using certain kinds of trusts to pass along considerable assets tax-free. Despite opponents’ claims that the estate tax hurts the economy, evidence shows it likely has little or no impact on overall private saving and even boosts economic growth by encouraging heirs to work.^[25] And a robust estate tax can push back against income inequality: large inheritances represent roughly half of all wealth.^[26]

Extending the 2017 law’s estate tax provisions would cost nearly $200 billion over ten years (2026-2035). Ending this tax cut should be the easiest decision of the 2025 tax policy debate. But policymakers should go further, by closing the glaring loopholes in the estate tax that allow wealthy estates to reduce or eliminate their estate tax liability and by restoring the 2009 estate tax parameters: an exemption of $7 million per couple and a 45 percent top rate.

Principle #2: Raise More Revenues to Finance Any Tax Cuts Extended or Expanded and Other Critical Investments

Policymakers should raise more revenues from wealthy households and profitable corporations to offset any tax cuts they choose to extend or expand for people with incomes below $400,000 and other high-impact investments they choose to make. Additional revenue increases could also be used to improve our fiscal outlook.

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Revenue increases should be progressive, as the nation’s income in recent decades has grown increasingly unequal. Typical middle-income families with children had almost 50 percent more income after taxes in 2019 than such families had in 1984, after adjusting for inflation. But among the top 1 percent of households, their already disproportionate incomes grew three times as fast over that period: almost 150 percent.^[27] The 2017 tax law aggravated this dynamic by further shifting income upward to people at the top of the income scale: over 40 percent of its tax cuts flowed to the top 5 percent of people,^[28] at a cost of roughly $2 trillion over ten years.^[29] The 2025 course correction should do the opposite.

Revenue should come from three sources:

1) Scaling back the 2017 law’s corporate tax cuts and strengthening the international tax regime. The centerpiece of the 2017 tax law was a deep, permanent cut in the corporate tax rate from 35 percent to 21 percent.^[30]

During the 2017 debate, Trump Administration officials claimed the rate cut would “very conservatively” lead to a $4,000 boost in household income.^[31] Instead, a rigorous recent study by economists from JCT and the Federal Reserve Board found that workers with earnings below the 90^th percentile of their firm’s income scale — a group whose incomes were below roughly $114,000 in 2016 — saw “no change in earnings” from the corporate rate cut.^[32] (See Figure 2.)

Rather than using their tax cut windfalls to increase the wages of rank-and-file workers, corporations have used most of their excess cash from the tax cuts to distribute profits to shareholders,^[33] such as through dividends and stock buybacks, which are expected to exceed $1 trillion in 2025, according to Goldman Sachs.^[34] These massive buybacks should further motivate policymakers to raise the corporate tax rate next year.^[35]

In 2017, Republicans prioritized making the less-popular corporate tax changes permanent to avoid having to debate those cuts when the other provisions expired. As former House Speaker Paul Ryan explained in 2023, “We made temporary what we thought could get extended; we made permanent what we thought might not get extended that we wanted to stay permanent.”^[36] In fact, the law’s cut in the corporate rate was even deeper than what the corporate community had lobbied for.^[37]

Raising the corporate rate to 28 percent — halfway between the current rate and the pre-2017 rate — as the Biden-Harris Administration has proposed would make the tax code more progressive while raising $1.3 trillion over ten years (2025-2034).^[38]

The 2017 law’s international tax rules also require reforms to deter costly profit shifting more effectively and to better align with the global minimum tax agreement that the United States and more than 130 other nations signed in 2021. The 2017 law exempted certain foreign income of U.S. multinationals from U.S. tax and added several provisions, including a minimum tax on certain foreign profits, to try to limit incentives for foreign profit shifting. These provisions have serious design flaws, however, and leave significant room for multinationals to avoid taxes by shifting their profits to low-tax countries.^[39] Two years after the 2017 law’s enactment, a study by economists Ludvig Wier and Gabriel Zucman found “no discernible decline in global profit shifting or in profit shifting by U.S. multinationals.”^[40]

The Administration has proposed reforms to international tax rules that would raise around $600 billion over ten years (2025-2034) from large multinationals, according to the Treasury Department.^[41] The proposed changes would ensure that U.S. multinationals’ foreign profits are taxed at a rate closer to the rate on their domestic profits and that more foreign profits are subject to the tax, greatly reducing the tax savings from reporting income offshore. The Administration has also proposed to penalize foreign multinationals that operate in the U.S. if they earn profits in a country that does not impose adequate taxes. Failure to update our rules would mean that another country could levy extra taxes on a U.S. multinational that operates within its borders — tax revenue that should be flowing to the U.S.

2) Requiring the wealthiest people to pay some annual income tax on their unrealized capital gains and reducing their special tax breaks. An important 2021 investigation by ProPublica brought national attention to a major flaw in the tax code by showing that some of the nation’s wealthiest people pay little or no income tax each year.^[42] ProPublica found that individuals such as Amazon founder Jeff Bezos and Tesla CEO Elon Musk paid relatively little in federal income taxes, even managing to pay zero federal income taxes in some years.

The individual income tax is the primary federal tax, accounting for roughly half of all federal revenue; tens of millions of middle-class people pay income tax throughout the year as employers withhold taxes from their paychecks. To a great degree, however, the income tax is essentially voluntary for the nation’s richest people. Much of their income comes in the form of gains in the value of their stocks and other assets, and they can avoid taxes on those gains simply by holding on to their assets rather than selling them. Often, wealthy people never sell these assets, instead choosing to pass them — including the untaxed increase in value as the investments appreciate — to their heirs, who will never pay income tax on those gains. (Under a tax code provision known as “stepped-up basis,” the income tax that a wealthy person would have owed on an asset’s increase in value since they purchased it is erased when they die and pass their appreciated asset to their heirs.) This dynamic perpetuates a cycle of income and wealth inequality across generations.

Among other impacts, this worsens inequality in income and wealth, both overall and across racial and ethnic groups. Because of racial barriers to economic opportunity, households of color are overrepresented at the lower end of the income and wealth distributions, while white households are overrepresented among the wealthy. For example, the wealthiest 10 percent of white households — a group that makes up just 7 percent of all households — hold 61 percent of the nation’s wealth. By contrast, people of color with incomes in the bottom 90 percent account for 30 percent of all households but hold just 4 percent of the nation’s wealth. (See Figure 3.)

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Even when high-income households do owe tax on income from their assets, such as capital gains and dividends, they benefit from the tax code’s preferential treatment of this income. Capital gains and dividends are taxed at a maximum rate of 20 percent, far below the 37 percent top rate on wages and salaries.^[43]

The 2025 tax policy course correction should address both of these tax code flaws. Policymakers should curtail wealthy people’s ability to avoid income taxes on unrealized capital gains as those gains accrue and when they pass them along to their heirs, as well as the special tax breaks they receive when they do pay tax.

Policymakers can change the tax code in several ways to treat some or all of the unrealized capital gains of the wealthiest households as taxable income. One is to make the gains taxable each year, as in Senate Finance Committee Chairman Ron Wyden’s proposal to shift to a “mark-to-market” system for taxing capital gains.^[44] A much more modest approach would be to repeal stepped-up basis: while wealthy people could still avoid tax on unrealized capital gains throughout their lives, they would have to pay taxes on those deferred capital gains at death.

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A third option, which the Biden-Harris Administration has proposed, would combine elements of both by essentially requiring very wealthy households to prepay some of their taxes on unrealized capital gains each year — similar to the withholding system that applies to wages and salaries — and paying any remainder when those gains are realized.^[45] The Administration’s proposal would also end the stepped-up basis loophole for wealthy households with significant unrealized gains (at least $10 million for married couples and at least $5 million for single filers).

The Treasury Department estimates the Administration proposal would raise $500 billion over ten years (2025-2034).^[46] This revenue would come from a small subset of the wealthiest households in the country who often enjoy extremely low average tax rates.

Policymakers should also limit other special tax breaks that primarily benefit high-income households. One of the simplest ways to do so is by taxing income from capital gains and dividends — which are highly concentrated at the top of the income scale (see Figure 4) — at the same rates as wage and salary income. Taxing capital gains and dividends at ordinary rates for households with more than $1 million in income, combined with ending the stepped-up basis loophole, would raise nearly $300 billion from 2025-2034, the Treasury Department estimates.^[47]

Other important reforms include closing a loophole that allows certain pass-through business owners to avoid a 3.8 percent Medicare tax that others pay; ending the “carried interest” loophole, which lets private equity executives treat their compensation as capital gains in order to benefit from lower rates; and repealing the “like-kind” exchange tax break, which lets real estate developers avoid capital gains tax even when they sell buildings and receive profits. Combined, these proposals would raise another $400 billion over ten years (2025-2034), according to Treasury.^[48]

Policymakers could also increase the 1 percent excise tax on stock buybacks, enacted in the 2022 Inflation Reduction Act (IRA), to 4 percent, as the Administration has proposed. Buybacks are one of the two basic ways in which corporations can distribute profits to their (disproportionately wealthy) shareholders: they can either issue dividends, which is the traditional route, or buy back a certain number of their own shares, which generally raises the value of the remaining shares. But whereas dividends are generally taxable when shareholders receive them, shareholders who don’t participate in a stock buyback but still benefit from the increase in the value of their shares don’t pay tax on the gain until they sell. The economic return on their stock (i.e., their income) increases, but their taxes don’t.

The excise tax is designed to correct this tax policy inefficiency, but recent research suggests that the current 1 percent rate is too small to eliminate the tax benefit of buybacks over dividends.^[49] Increasing the rate to 4 percent would reduce this disparity and raise $165 billion over ten years (2025-2034), according to Treasury.

3) Replenishing and extending mandatory IRS funding to reduce the tax gap. After a decade of budget cuts severely undermined the IRS’s ability to enforce the nation’s tax laws and serve taxpayers, the IRA created an $80 billion, ten-year mandatory funding stream — funding provided directly in authorizing law rather than through the annual appropriations process. This funding is designed to improve tax compliance and increase tax collections primarily from high-income households, while also improving customer service for all tax filers.^[50] It will enable the IRS to undertake the years-long process of hiring and training more compliance and customer service staff and to make needed technology upgrades. But last year Congress rescinded $20 billion of that funding to meet Republican demands during negotiations over the debt ceiling.

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Because every dollar spent on IRS enforcement raises multiple dollars in revenue from increased tax collections, these cuts to IRS funding increase deficits. Recent research found that every $1 the IRS spends auditing a very high-income taxpayer yields over $6 in revenue from audit collections (see Figure 5), and yields $12 when revenue from increased voluntary compliance is taken into account.^[51]

Policymakers should fully restore the cuts to IRS funding enacted in the IRA and make the mandatory funding stream permanent. The Treasury Department estimates that restoring and extending the mandatory funding would raise a net $236.7 billion^[52] over ten years by ensuring that high-income and high-wealth households pay more of the tax they already owe under current law but are failing to pay.