Tax policy is one of the biggest differentiators between President Joe Biden and former President Donald Trump, who are slugging it out in the 2024 presidential election. Biden wants to raise taxes on businesses and the wealthy, while Trump wants to cut those taxes.
Something will have to change, because the 2017 tax cuts for individuals expire at the end of 2025. If Congress does nothing, tax rates will return to the higher levels they were at before the 2017 cuts. The top federal rate for wealthy filers would rise from 37% to 39.6% and taxes for most middle-income families would rise, as well.
One of Trump’s key campaign promises this year is to make all the 2017 tax cuts for individuals permanent. That could only happen if Trump wins, of course. But now it looks like Trump could have difficulty extending those tax cuts even if he takes the White House and Republicans sweep both houses of Congress for complete control of the government, which is how they passed the initial tax cuts in 2017.
There’s one huge thing in the way of more tax cuts: the ever-worsening outlook for the national debt. The Congressional Budget Office (CBO) recently boosted its estimate for the 2024 annual deficit from $1.5 trillion to $1.9 trillion. That’s the largest deficit ever outside of a crisis.
There’s no relief in sight. The federal debt is due to hit 122% of GDP within 10 years, up from around 100% now, according to the CBO. Since 2000, federal debt has averaged just 62% of GDP.
That 10-year forecast is based on the assumption that all the Trump tax cuts expire at the end of 2025, as scheduled. If Congress renews some or all of them, it will only add to annual deficits, making the long-term debt load even larger.
Many predictions of a federal debt crisis have failed to materialize, but that only means economists have guessed wrong about when the breaking point will occur. Wobbles in the market for Treasury securities during the last 12 months suggest markets are finally growing uneasy with all the debt Washington is issuing to finance deficit spending. When the amount of Treasury debt on offer exceeds demand or investors get jittery about the government’s ability to pay everything it owes, interest rates will rise, pushing the government’s borrowing costs even higher and triggering an elusive debt crisis.
Even some Republicans who favor tax cuts as the answer to all economic problems are beginning to express doubts about extending income tax cuts that would add another $4.5 trillion to the national debt over a 10-year period.
“We cannot — as Republicans who claim to have the mantle of fiscal responsibility — have an agenda that produces greater deficits in the out years,” Rep. Jodey Arrington (R-Texas), chair of the House Budget Committee, said during a recent interview with the Hill.
In 2017, Republicans relied on the dubious supply-side argument that the Trump tax cuts would stimulate so much economic growth that federal tax receipts would go up, not down. Big surprise: They were wrong.
The Trump tax cuts have so far added $1.9 trillion to the national debt, according to the Committee for a Responsible Federal Budget. When Congress passed those tax cuts in 2017, the total national debt was a mere $20 trillion. Now it’s $33 trillion.
“Whoever wins [in 2024], those massive deficits are likely to make what will be a difficult 2025 fiscal debate even more challenging,” Howard Gleckman of the Tax Policy Center wrote recently.
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While there are two major presidential candidates, there are four possible election outcomes that will determine what happens with taxes in 2025. Biden could win with a split Congress or one controlled by his fellow Democrats, and Trump could win with a split Congress or one controlled by his fellow Republicans.
Up till now, only one of those four scenarios was likely to produce a full extension of the 2017 tax cuts: A GOP sweep of Congress and the White House. Any other outcome would give Democrats at least some leverage to block a full extension or demand concessions in exchange.
But runaway deficits may now prevent further tax cuts even if Republicans manage a 2024 sweep. If Congress were to extend all the tax cuts for another decade, it would take more than half of all individual income tax revenue just to pay interest on the debt. That alone would be untenable.
Other budget squeezes are rapidly approaching. Medicare and Social Security may be on the brink of insolvency by the time the next president’s term ends. That alone will require belt-tightening at some point relatively soon.
None of these gloomy budget projections account for the likelihood of a recession that would depress federal tax revenue and generate public pressure for deficit-financed stimulus measures. Since recessions occur every seven years or so, there’s a good chance the 10-year budget outlook will end up much worse than advertised.
Biden’s stance on the issue is to let all the individual tax cuts expire at the end of 2025, except for those on workers earning $400,000 or less. That’s more realistic, but even that would add to a national debt that’s already teetering.
Biden wants to raise business taxes to offset renewed tax breaks for individuals, but he couldn’t get that done during his first two years in office, when Democrats controlled both houses of Congress. Second time isn’t necessarily a charm. So voters listening to two candidates compete on how much they want to cut taxes should keep in mind the many other possibilities.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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