The Tax Cuts and Jobs Act of 2017 may seem like a thing of the past, but as William Faulkner once said to one of his characters: Requiem for a nun“The past never dies. It’s not even the past.”
The 2017 tax law is particularly interesting to economists because it represents the most sweeping change to U.S. tax law since the Tax Reform Act of 1986. As such, it provides an opportunity to study and reexamine many topics in light of new evidence. But perhaps most important for policymakers is that many of the provisions of the 2017 tax law were passed with an expiration date of the end of 2025. As a result, unless Congress revisits the U.S. tax code next year, under current law, much of the tax code will revert to the 2016 rules at the end of next year.
This may seem odd, but here’s the context: When the Tax Cuts and Jobs Act of 2017 became law, Republicans in Congress controlled both the Senate and the House, but they didn’t have the 60-vote majority in the Senate needed to override a filibuster. They could pass their desired tax bill with a simple majority vote, under a procedure known as “budget reconciliation.” However, under a longstanding practice dating back to the 1980s, legislation passed this way cannot increase the budget deficit beyond the 10-year budget period. (This rule gives Congress flexibility to act in response to short-term events, such as a pandemic or recession, while also imposing some restrictions on actions with long-term budgetary consequences.) As a result, many of the sweeping changes in the Tax Cuts and Jobs Act of 2017 were passed with an expiration date of the end of 2025.
Supporters of the bill had hoped that by 2025, the tax changes would be well-established enough to warrant an extension. But with the threat of a backlash against the 2016 law looming, every aspect of the U.S. tax code is likely to be up for political debate in 2025. It’s worth remembering that even Democrats who weren’t particularly enthusiastic about the 2017 law haven’t made any meaningful efforts to change it during President Biden’s term.
Summer 2024 issue just released Economic Outlook Journal So here’s a set of five articles on aspects of the Tax Cuts and Jobs Act of 2017.
I won’t attempt to summarize the article here, but I’ll give you a few key points to give you a sense of what might be coming up in U.S. tax policy in 2025.
The provisions of the Tax Cuts and Jobs Act of 2017 combined would result in a revenue reduction. It’s hard to estimate exactly how much, because it requires separating the budgetary impact of the pandemic from the tax law’s impact. But Gale, Hoopes, and Pomerleau note that a major estimate from the Congressional Budget Office suggests that extending the 2017 tax law as it is now through 2025 would reduce federal tax revenues by about 1.1 percent of GDP by 2033. The need to reduce future deficits is greater now than it was in 2017, given the very high deficits incurred as part of the pandemic response, just over a decade after the very high deficits incurred as part of the response to the Great Recession of 2007–08. So the parts of the 2017 law that reduce revenues are likely to be particularly scrutinized.
Gale, Hoopes, and Pomerleau also point out that the conventional way of thinking about the distributional effects of tax cuts is to look directly at how large the tax cut is across income levels. But when tax cuts are part of a larger long-term budget deficit, the issue is different. If the higher deficits resulting from tax cuts are addressed primarily by cutting spending programs for low-income earners, then the distributional effects of tax cuts through the need to reduce the budget deficit will be greater for low-income earners. If future plans to address budget deficits depend on imposing higher taxes on high-income earners, then the distributional effects of addressing the revenue loss from tax cuts will look different. In either case, the distributional effects of tax law changes made in 2025 should be considered against the backdrop of how to address persistently high budget deficits.
One of the major changes in the 2017 tax law for individual income taxes was the dramatic increase in the standard deduction. In U.S. income tax, every taxpayer compares the size of their standard deduction to a list of possible deductions for mortgage interest, charitable contributions, state and local taxes, and others. If the standard deduction is larger, they apply it to their taxable income before calculating their tax bill. If other deductions are larger, they “itemize” these personal deductions instead.
But when the standard deduction got much bigger, fewer people found it worthwhile to itemize. As Bakiya points out, the share of taxpayers who itemized their deductions fell from 31% in 2017 to 9% in 2021. As a result, many middle- and upper-income earners no longer faced marginal tax incentives to donate to charity or take out larger mortgages.
Should we return to a much smaller standard deduction? Should we provide an alternative way for the tax code to provide incentives for charitable giving? Many people in high-tax states have been able to deduct state and local taxes from their federal income, but they would like to be able to do so again. These questions will be widely discussed in 2025.
There are several problems with corporate taxation. One challenge with corporate taxation is to continue to collect income on profits without undermining the investment incentives that help build long-term productivity growth. One tradeoff here is that, as discussed in the Chodorow-Reich, Zidar, and Zwick paper, lowering corporate tax rates actually rewards past investments that have led to current profits. However, one could imagine a combination of a somewhat higher corporate tax rate and a generous tax cut on current investments, i.e., taxing companies that do not invest more than those that do.
At the international level, a dramatic change is that nearly all of the U.S. trading partners have been participating in the Base Erosion and Profit Shifting (BEPS) project for more than a decade. The project aims to make it more difficult for multinationals to shift profits to low-tax jurisdictions using accounting methods. As Clausing discusses, Pillar 2 of the agreement “includes a 15 percent country-specific minimum tax on multinational enterprise income, regardless of where it is reported.”
The agreement, which the EU and many other countries signed in late 2022, includes something called the untaxed profits rule. If a company from a country that has not signed Pillar 2 rules, such as the US, does business in a country that has signed the rules (such as the EU, Japan, etc.), the other country can impose an “additional tax” on the US corporation to collect a higher corporate tax. US tax laws that apply to multinational corporations do not currently comply with Pillar 2.
The U.S. tax code is also replete with highly targeted tax breaks for highly targeted social goals. The 2017 tax law included tax breaks for certain types of “opportunity zones,” as Corinth and Feldman discuss, with the goal of stimulating investment in low-income areas. Of course, the challenge with these tax breaks is that some investment in these areas would have occurred even without the tax breaks, so these investors are compensated for what they would have done anyway. With or without the tax breaks, no other investment would have occurred in these areas. So the challenge is to figure out how much of the marginal share of investment in these areas increased because of the tax incentives. The authors found that in these cases, most of the increased investment was in real estate, not in businesses that created jobs for local residents.
If the 2017 tax rules expire at the end of 2025 and the tax code reverts to the 2016 version, the reaction to this change will provide fertile ground for economic researchers. But from a public policy perspective, it seems like an unusual way to run the tax system.
