The next person to live in the White House will have to deal with a number of important tax policy problems, such as the expiring Tax Cuts and Jobs Act (TCJA) changes for individuals and businesses and the growing deficits and debt.
The Individual Expirations
The changes were made temporarily by the Tax Cuts and Jobs Act (TCJA), which changed the way people pay taxes and, on average, made everyone's income after taxes go up. Some of its most important rules are:
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 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 exemption.
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 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, 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 be able to change big parts of the tax code, which will have an effect on people's wallets as well as their work and business choices. We should know what measures are most important to them.
Aside from the TCJA, the next president will have to deal with several other important tax policy issues. These include a global tax deal that could hurt U.S. jobs and wages, an ongoing trade war that is costing U.S. consumers billions of dollars in import taxes, the implementation of a set of new, complicated taxes on U.S. businesses from the Inflation Reduction Act, and the return of misguided industrial policy.
To make things even more complicated, the government budget is on a path that can't be maintained, since projected spending is much higher than projected income. This is why Fitch Ratings recently downgraded U.S. debt, pointing out the worrisome rise in the federal government's interest costs as a share of its income. With the debt cap coming up again in early 2025 and long-term budget problems on the horizon, candidates should explain how they would solve these problems while making the tax code more simple, stable, and growth-friendly.
