Tax Policy Questions 2024 Presidential Candidates Should Address

This Thursday in Atlanta, President Joe Biden and former President Donald Trump will face off for the first debate of the 2024 presidential election. The future of the US tax code is one topic that should take center stage, as the next occupant of the White House will have to address the expiring individual and business 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. changes in the Tax Cuts and Jobs Act (TCJA). What’s more, the next president will enter office staring down massive debt and deficit levels and an ongoing trade war with China.

Both candidates should provide clear and honest answers about their plans (or lack thereof) to address the nation’s urgent tax policy issues.

The Individual Expirations

The expirations are the result of temporary changes made by the TCJA that overhauled the taxes individuals pay, boosting after-tax income across all income groups on average. Some of the major provisions set to expire at the end of next year 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 credit (CTC), personal and dependent exemptions, and the standard deduction 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 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. , 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 alternative 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, the TCJA established a new deduction that reduces tax rates for pass-through businesses (e.g., LLCs and partnerships) and doubled the estate tax exemption.

Trump has discussed extending the entire TCJA, as well as eliminating the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. in favor of higher taxes on American purchases from abroad. Biden has discussed extending the TCJA for people earning under $400,000 and offsetting the cost with higher taxes on US businesses and high-income taxpayers. Neither have provided a detailed plan for addressing the expirations. In his FY 2025 Budget, Biden has proposed increasing the top individual income tax rate to 39.6 percent, taxing capital gains as ordinary income, and creating a minimum tax on high-net-worth taxpayers that applies to unrealized capital gains, among several other tax increases on higher earners and 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. expansions for selected taxpayers.

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 must stretch deductions out over time. That creates a disadvantage because inflation 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. However, this provision is now phasing out so that companies this year can deduct only 60 percent of the qualifying costs immediately and must deduct the other 40 percent over time. The provision will fully phase out by the end of 2026, which means 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.
• Net interest limitation. The TCJA introduced a requirement to limit the deductibility of interest expenses initially based on earnings before interest, taxes, depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , and amortization (EBITDA). Since 2022, the interest limitation has become significantly tighter due to a switch from EBITDA to earnings before interest and taxes (EBIT).
• International provisions. The TCJA moved the international tax system toward a territorial one by exempting foreign profits from domestic taxation and creating anti-base erosion provisions targeted at high-return foreign profits, intangible income, and income stripped out of the United States. The four main components of the new international tax system are the participation exemption, GILTI, FDII, and BEAT, and the latter three provisions are scheduled to become more restrictive after the end of 2025.

Trump has discussed continuing all the 2017 TCJA policies, but Biden has not specified how, if at all, he would address bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. or R&D amortization. In his FY 2025 Budget, Biden has proposed raising the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate to 28 percent; increasing his new corporate alternative minimum tax (CAMT) from 15 percent to 21 percent; increasing the GILTI tax rate from 10.5 percent to 21 percent, calculating it on a jurisdiction-by-jurisdiction basis, and revising related rules; repealing the reduced tax rate on FDII and replacing it with unspecified incentives; and repealing the BEAT and replacing it with an undertaxed profits rule (UTPR) consistent with the OECD/G20 global minimum tax model rules.

The Trade War

Former President Trump instigated a trade war by imposing new tariffs (taxes) on imports of washing machines and solar panels (Section 201), steel and aluminum (Section 232), and billions of dollars’ worth of consumer, intermediate, and capital goods from China (Section 301) throughout 2018 and 2019. Based on levels of trade before the tariffs went into effect, the new levies amounted to a tax increase of $80 billion a year. Foreign retaliation in response currently applies to billions of US exports, amounting to approximately $13.2 billion in tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. revenues for foreign governments.

President Biden has retained nearly all the tariffs save for narrow suspensions and quota replacements and has even issued a report recommending the continuation of all the Section 301 tariffs on China with further rate increases on select goods. Biden has also signed into law several protectionist industrial policies in the 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. Reduction Act (IRA) and Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act that have inspired other countries to adopt protectionist policies of their own.

Tax Foundation estimates the Trump-Biden tariffs will reduce long-run economic output (GDP) by 0.2 percent, the capital stock by 0.1 percent, and full-time equivalent employment by 142,000 jobs. Trump has proposed drastic escalations of the trade war, with new 10 percent universal baseline tariffs and 60 percent tariffs on imports from China—amounting to tax increases of more than $500 billion annually. Biden has retained the original $80 billion in annual tariffs, while his recent tariff increases are smaller in magnitude, approximately $3.6 billion annually.

Despite the higher costs falling on American consumers and the harms to US employment and production—particularly in the manufacturing sector—both the Trump campaign and the Biden administration have continued to defend the trade war tariffs. That’s likely a reflection of the gap between economic reality (the tariffs have cost American consumers and on net made us poorer) and political messaging (which claims the tariffs hurt foreigners and help Americans).

The Growing Federal Debt

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 US debt, noting the alarming rise in the federal government’s interest costs as a share of revenue.

The widening gap between government spending and tax revenues will reach $1.9 trillion in 2024 according to new estimates from the Congressional Budget Office (CBO) that are 27 percent larger than CBO just projected in February, mostly due to new government spending. From 1974 through 2023, spending averaged 21 percent of GDP and will reach 24.2 percent in 2024, while revenues averaged 17.3 percent of GDP and will hover there at 17.2 percent in 2024. Over the next decade, deficits will total $22 trillion, with debt held by the public reaching $50 trillion in 2034, 122 percent of GDP.

The increasing pressure of the federal debt means the next president will have to make difficult decisions about taxes and spending. Tax Foundation estimates that over the next decade, fully extending the individual, estate, and business provisions in the TCJA would reduce federal tax revenues by more than $4 trillion on a conventional basis and nearly $3.5 trillion on a dynamic basis. If the TCJA is extended without any offsetting spending decreases or tax increases, debt and deficits will be even worse than currently projected.

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. They will also 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 US consumers, the implementation of a set of new, complex taxes on US businesses from the Inflation Reduction Act, and a resurgence of misguided industrial policy.

With long-run fiscal challenges looming, the two candidates should explain how they plan to address the federal budget while restoring simplicity, stability, and pro-growth elements to the tax code.

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