Our experts provide the latest policy research, analysis, and commentary on the US federal budget and spending, including the impact of US debt and interest rates.
The US government’s $6.8 trillion budget is larger than the GDPs of Germany and Japan. Its roughly $2 trillion annual deficit is larger than the GDP of Mexico. And it has 441 agencies that employ more than 2.8 million civilian employees.
The Social Security trust funds face looming insolvency if policymakers don’t reform the program. One issue that garners a lot of attention in the debate over solutions is the payroll tax cap.
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Fiscal pressures are likely to weigh heavily on lawmakers as they craft a tax reform package. That increased pressure could result in well-designed tax reform that prioritizes economic growth, simplicity, and stability, or it could encourage budget gimmicks and economically harmful offsets. Lawmakers should avoid the latter.
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Join hosts Kyle Hulehan and Erica York in this episode of The Deduction as they break down the US tax policy implications of Donald Trump’s next presidential term.
Trump’s tariff hikes would rank as the the largest tax increase outside of wartime since 1940. Meanwhile, Harris’s tax plan would rank as the 6th largest tax increase outside of wartime since 1940.
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On tax policy, Harris carries forward much of President Biden’s FY 2025 budget, including higher taxes aimed at businesses and high earners. She would also further expand the child tax credit (CTC) and various other tax credits and incentives while exempting tips from income tax.
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While federal tax collections—especially corporate taxes—have reached historically high levels, these gains have not kept pace with escalating spending, particularly on debt interest, leading to a substantial and concerning budget deficit in FY24.
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CBO data shows that the federal fiscal system—both taxes and direct federal benefits—is getting more progressive and redistributive in 2024.
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The stakes for next year’s expiring tax provisions are quite high. If Congress does nothing, then 62 percent of households will see their taxes go up in January of 2026.
Short FormWorld War II shaped many aspects of the modern world, including the US tax code. But the dramatic changes to our system that military mobilization required didn’t subside when the fighting finished; they’ve persisted to today.
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If lawmakers are convinced that new revenues must be part of any long-term effort to solve the budget crisis or offset the cost of extending the TCJA, they must choose the least harmful ways of raising new revenues or else risk undermining their efforts by slowing economic growth.
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Exempting Social Security benefits from income tax would increase the budget deficit by about $1.6 trillion over 10 years, accelerate the insolvency of the Social Security and Medicare trust funds, and create a new hole in the income tax without a sound policy rationale.
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Short FormProject Apollo achieved its clear objective to put a man on the moon. But not all government spending projects are so simple (that is, if you consider flying a spaceship to the moon simple).
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While neither full expiration nor a deficit-financed full extension of the TCJA would be appropriate, lawmakers should consider the incentive effects of whichever tax reform they pursue. Because taxes affect the economy, they also affect the sustainability of debt reduction.
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For over a century, lawmakers have exempted politically favored organizations and industries from the tax code. As a result, the tax-exempt nonprofit economy now comprises 15 percent of GDP, roughly equal to the fifth-largest economy in the world.
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Lawmakers should see 2025 as an opportunity to consider more fundamental tax reforms. While the TCJA addressed some of the deficiencies of the tax code, it by no means addressed them all.
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Short FormImproving the country’s fiscal situation won’t be comfortable, but economic growth can help cushion the blow.
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Policymakers should have two priorities in the upcoming economic policy debates: a larger economy and fiscal responsibility. Principled, pro-growth tax policy can help accomplish both.
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The TCJA improved the U.S. tax code, but the meandering voyage of its passing and the compromises made to get it into law show the challenges of the legislative process.
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Over the next 10 years, the IRA’s energy tax credits are projected to cost north of $1 trillion, adding to the federal government’s budgetary challenges and burgeoning debt.
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