At least eight Republican presidential hopefuls will take the stage Wednesday night in the first presidential primary debate of the 2024 election cycle—and the future of the U.S. taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code should be one topic that takes center stage.
The next occupant of the White House will have to address several critical tax policy issues, from the expiring individual and business tax changes in Tax Cuts and Jobs Act (TCJA) to escalating deficits and debt.
The Individual Expirations
The expirations are the result of temporary changes made by the TCJA that overhauled the taxes individuals pay, boosting after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income. across all income groups on average. Some of its major provisions include:
- Lower tax rates and brackets. One of the largest changes was the reduction in tax rates that people pay. Before the TCJA, the tax code contained seven brackets with rates ranging from 10 percent to 39.6 percent. The TCJA substantially lowered several of the rates and widened the brackets to reduce marriage penalties.
- Expanded family benefits. The TCJA reformed the Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (CTC), personal and dependent exemptions, and the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. to increase the benefits lower- and middle-income households with children receive and to simplify the tax filing process. Specifically, it doubled the maximum CTC to $2,000 and extended it to more families, zeroed out exemptions, and nearly doubled the standard deduction, increasing the amount of money that doesn’t get taxed.
- Limits on itemized deductions. To help pay for the tax cuts, the TCJA placed limits on itemized deductions for home mortgage interest and state and local taxes paid and temporarily eliminated certain miscellaneous itemized deductions.
- Other changes. The TCJA also reduced the impact of the alternate minimum tax (AMT), a parallel tax system that requires households to calculate their taxes under a different system and pay the alternative amount if it is higher than the regular tax amount. Additionally, TCJA established a new deduction that reduces tax rates for pass-through businesses (e.g., LLCs and partnerships) and doubled the estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. .
The Business Expirations
Outside of the scheduled changes to individual income taxes, businesses also face instability in their taxes due to scheduled changes.
- Research and development. Due to a scheduled change in the TCJA that lawmakers included to help pay for the cost of lower business tax rates, companies that invest in research and development (R&D) can no longer take an immediate deduction for R&D expenses. Instead, they have to stretch deductions out over time. That creates a disadvantage because inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and the time value of money erode the real value of the deductions, discouraging R&D in the first place.
- Machinery and equipment. The TCJA temporarily improved how the tax code treats expenses for purchasing “short-lived assets” like machinery and equipment. From 2018 through 2022, companies could immediately deduct the cost of their investments, but it is now phasing out so that companies can immediately deduct only 80 percent of the qualifying costs immediately. The other 20 percent has to be deducted over time. By the end of 2026, the provision will fully phase out and companies will have to deduct all of their investment costs over longer periods. Long schedules for deducting machinery and equipment costs cause the same disadvantage they do for R&D investment, discouraging companies from investing and growing in the United States.
The Path Forward
The next president will have the opportunity to rewrite significant parts of the tax code, affecting Americans’ pocketbooks as well as their work and business decisions. We should know what policies they intend to prioritize.
Beyond the TCJA policies, the next president will have to contend with several other critical tax policy issues, including a global tax deal that threatens job opportunities and wages in the United States, an ongoing trade war with billions of dollars in import taxes burdening U.S. consumers, the implementation of a set of new, complex taxes on U.S. businesses from the Inflation Reduction Act, and a resurgence of misguided industrial policy.
To make matters more complex, the federal budget is on an unsustainable course, with projected spending far outstripping projected revenue. This is why Fitch Ratings recently downgraded U.S. debt, noting the alarming rise in the federal government’s interest costs as a share of revenue. With the debt ceiling coming up again in early 2025 and long-run fiscal challenges looming, candidates should explain how they would deal with these problems while restoring simplicity, stability, and pro-growth elements to the tax code.
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