All numbers are based on the Tax Foundation’s calculator, taking the standard deduction and excluding Social Security payments. | Photo: iStock
All numbers are based on the Tax Foundation’s calculator, taking the standard deduction and excluding Social Security payments. (Photo: iStock)
When the new session of Congress opens on January 3, the clock will already be ticking for the most important political elections to be held this decade.
Decisions made until the end of 2025 will determine the direction of millions of American dollars. Will they remain in wallets, bank accounts, and retirement portfolios, or will they flow to the US Treasury to finance war and aid?
This “fiscal cliff” is eight years in the making. The 2017 Tax Cuts and Jobs Act (TCJA) reformed both the federal and individual tax codes. But while the new, lower, corporate tax rate (and associated changes) were made permanent, most of the changes to the tax code were temporary. These include higher deductions, the expanded child tax credit, and lower tax rates that have allowed nearly all taxpayers to save more of their money over the past several years.
Unless those provisions are extended or made permanent by the end of 2025, the top pre-TCJA policies will automatically return. This would mean higher taxes for almost all American taxpayers.
Of these complex and interconnected issues, individual tax issues are the most pressing for Congress to address. Under the TCJA, the top rate was reduced from 39.6 percent to 37 percent—with rates for other tax brackets falling similarly.
The victory of Donald Trump and the Republican takeover of the US Senate (the majority of the US House was unclear when this story came out) will settle the discussion. But neither party has made the upcoming fiscal policy a major issue during the election process, and there is no unified stance across the board. Most Republicans and Democrats are on record as supporting the expansion of the TCJA’s lower rates for many taxpayers, but there are those who disagree. Sen. Elizabeth Warren (D-Mass.), for example, called on Democrats to allow the TCJA to expire in its entirety. Meanwhile, some figures on the so-called New Right have urged Republicans to allow the tax cuts to expire. and should reverse the corporate tax reform implemented in 2017 to raise taxes on businesses.
The financial situation can bite too. When the TCJA passed, analysts predicted it would increase the budget deficit and the national debt—and it did. But those problems were easily shaken off when the country was running at a slower rate each year and the debt-to-GDP ratio was not reaching levels not seen since the height of World War II.
A full extension of the TCJA would add another $4.6 trillion to the deficit over the next decade, the Congressional Budget Office projects. When the economic benefits of lower taxes are taken into account, the increase would still reduce revenue by $3.5 billion, according to estimates by the Tax Foundation, a think tank. With a $2 trillion annual deficit, lawmakers must confront the discrepancy between how much the US government is getting and what it’s paying out.
Ideally, Congress would solve the continuing tax burden by reducing spending. In fact, that is unlikely, since most of the expected growth of the income during the next decade is for rights programs that run on autopilot and are obliged to pay interest on the already accumulated debt.
If spending is stagnant and the appetite for more borrowing is low, then taxes must rise. But who should bear that responsibility?
Each tax and brackets are just part of the arithmetic. Lawmakers will also have to decide whether to keep the TCJA’s cap on the repeal of state and local income taxes. Repealing that would benefit wealthy taxpayers in high-tax states like New York and California while increasing the deficit. The elimination of the tax credit, on the other hand, could generate $2 billion in revenue over 10 years.
Accordingly, they must choose how to handle the child tax credit, which was made more generous by the TCJA. Just expanding the child tax credit in its current form would cost an estimated $600 billion over 10 years. Lawmakers on both sides of the aisle want to increase it again, but giving more help to families means some will pay more (or add more to less).
It would have been helpful for the 2024 election season to focus on voters’ tax and spending issues so that voters would be more aware of the upcoming financial situation and the challenges they are having to navigate through it. That didn’t happen, but there are a few broad, competing visions that are being drawn with tanks facing the tax.
On the left, the Center on Budget and Policy Priorities (CBPP) asserts that high-income earners should see their taxes return to pre-TCJA levels. Allowing the lower rates to expire for taxpayers earning more than $400 a year would avoid more than 40 percent of the total cost of expanding the TCJA’s policies, according to the group’s calculations. The CBPP is also proposing to raise the corporate tax rate to remove the protection of low personal taxes.
Meanwhile, The Tax Foundation warns against using higher taxes on corporations or wealthy individuals as a tool to “pay taxes for others while undermining economic growth for all.” The group also opposes plans to use tax dollars to limit taxes, as these taxes would cause a wide range of economic impacts — and would end up being paid for by the American people anyway.
Hopefully, one can see this fiscal cliff as an opportunity for Congress to bring the deficit under control and improve America’s fiscal relationship with the federal government. But it is also a serious problem of the interplay of political and political goals, which would be difficult to solve even in an era when Congress was no longer broken and more adamant about reform.
The post A Taxpocalypse of Rising Rates Is Coming to Americans If Congress Doesn’t Act appeared first on Reason.com.
