Less Economic Growth & More Taxes Without Congressional Action

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“In 602 days, most of the 2017 Tax Cuts and Jobs Act (TCJA) will expire if Congress does not act. That will mean a tax increase for just about every U.S. taxpayer. It will also mean less economic growth.”

This is how the Tax Foundation’s May 8, 2024 Insider Update began. It is a clear reminder that how we will be taxed in 2026 onward is still an uncertainty.

In the newsletter, the Tax Foundation was featuring its new article “Options for Navigating the 2025 Tax Cuts and Jobs Act Expirations .” It is a fascinating read for those who want to do a deep dive into the facts.

For those who don’t have the time, this section alone makes an interesting summary. The six co-authors write (emphasis added):

As lawmakers face the challenge posed by the upcoming expirations, they should be guided by the principles of sound tax policy: simplicity, neutrality, transparency, and stability. Weighing how each provision affects individuals’ tax burdens, federal revenue, the complexity of today’s income tax system, and, most importantly, the effects of taxes on economic growth, will help prioritize which provisions should be permanent and how they should be funded.

One looming threat is that Congress will offset the cost of extending the individual tax cuts by hiking economically harmful taxes elsewhere. Several proposals have already surfaced suggesting higher taxes on corporations, investment, work, and saving to pay for continuing the TCJA’s lower taxes for individuals. Elsewhere, higher tariffs (taxes on U.S. purchases from foreign businesses) have been proposed to offset the cost of individual tax cuts. While such proposals may offset the fiscal cost of TCJA extensions, they would worsen incentives for productive activity in the United States and impose significant economic costs on the same taxpayers they purport to help. The expirations in 2025 should not be used to further riddle the tax code with distortions, redistributions, and economically harmful provisions to pay for tax breaks for some at the expense of economic growth for all.

Instead, lawmakers should use the opportunity in 2025 to further simplify and improve the tax code. Broadening the individual income tax base and ensuring permanence for better cost recovery provisions and lower tax rates would make the system more pro-growth without significantly reducing federal revenues or harming incentives to work and invest.

Ideally, tax reform would reach farther than the TCJA provisions alone. Tax Foundation has outlined several options for fundamental reform, including moving to a flat individual income tax paired with a distributed profits tax , as other nations have successfully implemented, as well as moving to a consumption-based business profits and household compensation tax. Such reforms would go beyond the TCJA’s changes to the income tax system and move instead toward a consumption tax system. However, short of the consumption tax reform ideal, policymakers should avoid economically counterproductive tax hikes on business, trade, and investment to offset the cost of individual tax cuts. We illustrate two better options that primarily rely on base broadeners to pay for TCJA-like extensions.

The system of taxation is one of the issues which affects us directly. Alas, there is only one thing we can do to help dictate which kind of tax system we face and that is vote. Our vote this year will help to determine what tax future we will have, and the congressional elections will matter greatly.

While there doesn’t seem to exist a central place to review congressional candidate proposals, the Tax Foundation has created a summary of each 2024 presidential candidate’s tax policy on their 2024 Presidential Tax Plans page. I have my fingers crossed that we’ll get a candidate with a clever proposal, but I’m not holding my breath.

Photo by Jessica Ruscello on Unsplash. Image has been cropped.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.