US Election 2024: A look at how much it would cost to extend the 2017 tax cuts
Proponents of tax cuts argue they help spur economic growth, but the cost of extending the 2017 cuts could significantly increase the already ballooning US government debt.
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The fate of the major tax cuts that came when Donald Trump resided in the White House now hangs in the balance of the upcoming US presidential and congressional elections. The Tax Cuts and Jobs Act of 2017 (TCJA) was the Trump Administration’s signature piece of legislation. The key changes it brought to US tax law included:1
- Lower individual income tax rates. The law reduced marginal income tax rates and brought the highest marginal rate down from 39.6% to 37%. The legislation also raised the income levels that require payment of the Alternative Minimum Tax (AMT). These changes came with a number of others that constituted a mix of new tax benefits along with the loss of former tax breaks. For example, while the standard tax deduction increased, personal exemptions were eliminated. Homeowners also lost the right to deduct state and local property taxes paid in amounts above $10,000 per year.
- Higher estate and gift tax exemptions. In 2024 and 2025, as a result of the 2017 tax law change, the lifetime federal estate/gift tax exemption is $13.61 million. Since every individual taxpayer can claim the exemption, a married couple who use the right estate planning tools can pass estates valued at up to $27.22 million to their heirs without incurring a federal estate tax. In 2017, the individual lifetime estate/gift tax exemption was $5.49 million. While the rule that this exemption must be indexed annually to inflation is permanent, the threshold for estate taxes would revert to its 2017 level. With the inflation indexing, that amount would be an estimated $7 million in 2026 if the change to the much higher threshold was not extended.
- Changes to investment taxes and the alternative minimum tax. The TCJA made it possible for lower- and middle-income taxpayers to enjoy even more preferential tax treatment of their income from capital gains and qualified dividends. It also changed the rules for when the AMT must be applied in ways that greatly reduced the number of taxpayers subject to it.
- Deductions for small business income. The TCJA provided a 20% deduction for qualified past-through income for sole proprietorships, partnerships and S-corporations. These provisions would cease to be available if the TCJA is allowed to sunset.
- Lower corporate rates (which will not expire in 2025). The corporate tax rate was reduced from 35% and 21% with the 2017 law, and this change does not have a sunset provision. Absent any other legislation on corporate tax rates, the 21% level would remain. Other provisions that affect corporate taxes – including a 100% bonus depreciation deduction for assets with useful lives of 20 years or less – would expire, however, if the rules are not extended.
A decidedly different fate for the tax cuts, depending on the election’s outcome
If Donald Trump wins a second term and has a Republican-controlled Congress to work with, the provisions of the TCJA will likely be extended past 2025.
If Kamala Harris wins the presidency and Democrats control both the Senate and House of Representatives, major provisions of the TCJA are likely to change. Vice President Harris and her fellow Democrats have frequently criticized the degree to which the 2017 tax cuts favored the wealthy and corporations. Still, candidate Harris has vowed to uphold President Biden’s promise to not raise taxes on anyone earning less than $400,000 per year. Honoring that pledge would require an extension of some of the 2017 law’s provisions on individual income taxes.
Vice President Harris has also proposed several new tax cuts for the middle class. These proposals include: an expansion of the child tax credit, with a bonus of $6,000 for newborns; a $25,000 tax credit for first-time homebuyers; and the elimination of the taxes on tips earned by service workers.2 A number of Republicans, including former President Trump, have advocated for no taxes on tips, as well. Still, the full range of new tax cuts put forth by VP Harris will likely become law only if the Democrats have majority rule in both the Senate and House.
In a split government, with Republicans and Democrats having any combination of divided control over the White House, Senate and House of Representatives, the fate of the 2017 tax cuts will likely be similarly mixed, with some provisions being allowed to sunset, while others might be extended or restricted.
A high price tag associated with extending the cuts
The cost of extending the 2017 tax cuts will be considerable. In an era when the federal government operates every year with a budget deficit rather than surplus, the revenue lost in tax collection would add to the government’s debt in amounts ranging from $3.2 trillion for the individual tax cuts to $167 billion for the continuation of the higher estate and gift tax exemption. (See Figure 1.) Those staggering numbers are also based only on the impact over the 10-year period from 2025 to 2034.
Figure 1: A high price tag for continuing the 2017 US tax cuts
The cost – from 2025 to 2034, in billions of dollars – of extending the cuts
Source: Schroders Economics Group, Congressional Budget Office. Forecasts are based on assumptions within the bounds of what we currently know, and there is no guarantee they will be realized.
Greater budget deficits and higher amounts of total government debt can have myriad negative effects as they act as a drag on economic growth and potentially weaken the US dollar. The increasing amounts that must be spent simply to service the debt also limits the government’s ability to spend on other measures that could help the economy and US taxpayers. As Figure 1 shows, servicing the additional debt created by an extension of the 2017 tax cuts would, on its own, cost an estimated $605 billion from 2025 to 2034.
The total $4.6-trillion cost of extending all the 2017 tax cuts would constitute 1.3% of the United States’ projected gross domestic product over that 10-year period.1 Even if the individual income tax provisions were extended only for the middle class – to meet President Biden’s and VP Harris’s promise not to raise taxes on this group – the cost could still be $2.5 trillion over the next decade.2 The new individual income tax breaks proposed by VP Harris could cost another $1.4 trillion over 10 years.2
While economists can continue to debate whether tax cuts have a positive impact on the economy and the lives of consumers, the politicians who take office in January will decide the fate of the 2017 tax reductions and any new proposals. Ultimately, the decision rests with US voters, as they will determine, on November 5, who they send to Washington to shape future tax rules.
End notes:
- Source: “Which provisions of the Tax Cuts and Jobs Act expire in 2025?” Brookings.edu, by Comfort Oshagbemi and Louise Sheiner, 9/5/24, citing “Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues,” US Congressional Budget Office, May 2024
- Source: “How Harris’ and Trump’s tax and spending plans affect US debt,” Reuters, by David Lawder, 9/10/24
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