As the upcoming U.S. presidency approaches, the issue of expiring tax breaks enacted by former President Donald Trump under the Tax Cuts and Jobs Act (TCJA) of 2017 has gained significant attention. These tax breaks, which include lower federal income tax brackets, a higher standard deduction, and doubled estate and gift tax exemptions, amongst others, are set to expire after 2025 unless Congress passes legislation to extend them. However, the federal budget deficit could pose a major challenge in this regard, as fully extending these tax breaks could potentially add an estimated $4.6 trillion to the deficit over the next decade, according to a recent report by the Congressional Budget Office.
Experts warn that the decision on how to handle these expiring provisions could have far-reaching implications, affecting virtually all aspects of the tax code and affecting the vast majority of American taxpayers. Moreover, the timing of economic, political, and public mood factors between now and 2025 could further complicate legislators’ willingness to pay for any tax cut extensions.
In response to this looming debate, President Joe Biden’s top economic advisor, Lael Brainard, has proposed higher taxes on the wealthy and corporations to finance extended middle-class tax breaks from the TCJA. She argued that it is vital to end the 2017 tax breaks for the ultra-wealthy and scale back expensive permanent corporate tax breaks, while Biden plans to extend expiring TCJA provisions for individuals earning less than $400,000. However, the outcome of such proposals remains uncertain as the control of Congress is yet to be determined.
Meanwhile, Trump has advocated for sweeping tax cuts, promising a “Trump middle-class, upper-class, lower-class, business-class big tax cut” at a recent campaign rally in Wildwood, New Jersey. Nonetheless, he has not disclosed any concrete details regarding how to fund these additional tax cuts beyond his support for tariffs on US imports.
Given the complex nature of this issue, Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, likens it to a “game of three-dimensional chess”. Economic, political, and public mood factors between now and 2025 will undoubtedly influence legislators’ decisions regarding tax cut extensions. It’s challenging to predict precisely what legislative priorities will be enacted given the fluidity of Congress’s control. Nevertheless, one thing is clear; the federal budget deficit will be a crucial factor that will need to be considered as negotiations over these tax breaks progress.
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