At The Hamilton Project
As Prepared for Delivery
Following the economic devastation during the pandemic, the U.S. economy has come back strong. After inheriting an economy with millions out of work and a surge in prices from broken supply chains, the President secured major legislation that has resulted in the best labor market in 50 years and gains in real purchasing power and wealth for the middle class. Investment, growth, and productivity are up, while unemployment and inflation are down. Communities from Allentown to Racine are seeing record small business creation and employment.
The fundamental economic policy choice that lies ahead is whether to return to the Republicans' failed trickle-down approach or forge ahead with the President's proven plan to grow the economy from the middle out and bottom up. Do we want a tax system that favors the middle class or the wealthy? The expiration of Trump's 2017 tax package next year will put tax fairness front and center.
Tax fairness is central to the President's approach to building an economy that works for all Americans-where growth is broadly shared, everyone has a fair shot, and we reduce fiscal risks and keep our commitments to seniors. The President is honoring his ironclad commitment to not raise taxes on anyone making less than $400,000 and will cut taxes further for workers and families, paid for by asking corporations and those at the top to contribute more.
This week, the Congressional Budget Office (CBO) confirmed that the full extension of Trump's tax package would add nearly $5 trillion to our national debt over the next decade, while disproportionately benefitting the highest-income taxpayers. So it is clear we need to end the 2017 tax breaks for the wealthy and scale back costly permanent corporate tax breaks.
With this debate looming, today I want to lay out the clear differences between Republican trickle-down tax policies, and a tax code that works for the middle class.
Congressional Republicans' Trickle-Down Tax Plan
Republican plans make the tax system more unfair, and jeopardize the nation's fiscal health. They double down on the 2017 Tax Cuts and Jobs Act (TCJA), which failed to deliver the benefits that were promised. The TCJA's biggest tax cuts went to the wealthiest Americans, with those in the top 1% receiving tax cuts worth over 50 times those for middle-income households.
And the trickle-down never happened. The prior administration promised growth of "4, 5, and maybe even 6%," but the economy and fixed investments all grew at about the same rate in the two years after TCJA's passage as the two years prior. The Trump Administration claimed the TCJA would cause household wages to increase by at least $4,000, but the Congressional Research Service found "no evidence" of a surge in wages after the TCJA. Instead, top executives saw their wages rise by nearly $50,000, while workers below the 90th percentile saw zero wage increases. The corporate tax cuts fueled a surge in stock buybacks that benefitted wealthy and foreign investors.
Now Republican plans would continue the TCJA's tax cuts for the wealthy, giving the top 0.1% of households average annual tax cuts of $175,000 each. They would cut capital gains taxes and eliminate the estate tax that currently applies to only the very wealthiest 0.1%. And they propose nearly $1 trillion more in corporate tax cuts, including eliminating the Inflation Reduction Act's corporate minimum tax and stock buybacks tax.
That's not all. Their proposals to eliminate President Biden's investment in the IRS would add hundreds of billions of dollars to the deficit and make it easier for the wealthy to evade paying what they owe. Meanwhile, Republican opposition to implementing the global minimum tax agreement is rewarding corporations that invest abroad rather than in America.
And let's remember: these regressive tax cuts do not pay for themselves. The TCJA has come nowhere near paying for its $1.9 trillion cost. Revenues were projected to be over 18% of GDP in 2023 before the TCJA passed, but revenues have turned out to be only 16.5% of GDP-a shortfall of over $400 billion. CBO estimates unpaid-for extensions of the TCJA would increase primary deficits by over 1% of GDP over the next decade.
This is a long-standing problem of trickle-down tax policy. The Trump tax cuts and the Bush tax cuts and their extensions have added $10 trillion to the national debt, accounting for 90% of the non-emergency increases in the debt-to-GDP ratio since 2001. There's no reason to believe another round of lopsided tax cuts would turn out any differently. It is past time to reject the Republican argument that tax cuts should not be offset.
Republicans will likely respond to fiscal pressures created by unpaid-for tax cuts by pushing for draconian cuts to Social Security, Medicare, health care, and other programs that hardworking Americans count on. They have already raised taxes by opposing the extension at the end of 2021 of the President's expansions of the Earned Income Tax Credit and Child Tax Credit-a tax increase of up to $300 per child per month for millions of Americans.
Republicans also propose to increase taxes on middle-class families by eliminating the President's premium tax credit expansions, raising the cost of health insurance for millions of Americans, and eliminating tax credits worth thousands of dollars for families installing a heat pump or solar panels.
And today, it appears that Senate Republican leaders are holding out on helping working families this year so they can set up their agenda for next year to deliver tax breaks to the ultra-wealthy.
A Fairer Tax Plan
The bottom line is, the President is fighting for a better approach, one that gives working people a fair shot and lowers deficits by asking the wealthy and big corporations to pay their fair share. Our approach is guided by five common sense principles.
First, our tax system should be fair. It should reward work, not wealth. It should give tax cuts to working- and middle-class families to give them a fair shot while asking the wealthiest households to pay their fair share. The President is committed to ensuring that the over 95% of American households that earn less than $400,000 do not pay any more in taxes. He has stood by that pledge, and will continue to stand by that pledge.
He has gone further and proposed tax cuts for millions of families to help them invest in their children, make work pay, and secure health insurance, building on the targeted tax cuts in the American Rescue Plan (ARP) and Inflation Reduction Act (IRA) that Republicans have fought to eliminate.
The President has expanded the premium tax credits to make health insurance more affordable for millions of Americans purchasing coverage on the Affordable Care Act's marketplace. This expansion helped lift health insurance coverage to record levels, with over 21 million people covered in the exchanges. The expansion will lapse if there is no action by fall 2025, so making it permanent is at the top of President Biden's 2025 agenda.
Expanding the Child Tax Credit is one of the highest-yielding investments we can make. The President's expansion of the Child Tax Credit cut child poverty nearly in half in 2021, primarily by allowing all low-income families to access the full credit for the first time. Despite its documented effectiveness, Republicans refused to extend the expansion, causing three million children to fall into poverty. Restoring the expanded Child Tax Credit would lift those children out of poverty and cut taxes by an average of $2,600 a year for 39 million families. And, restoring the expansion of the Earned Income Tax Credit would cut taxes by an average of $800 per year for 19 million low-paid workers, especially younger workers.
Achieving a fairer tax system also means we cannot extend expiring TCJA tax cuts for those with incomes above $400,000 or bring back deductions and other tax breaks for these households. As the President has said, tax cuts for the wealthy will stay expired on his watch.
Second, tax policy in 2025 should raise revenue consistent with the President's strong commitment to fiscal responsibility. At minimum, we should avoid making the fiscal hole created by Republican tax cuts deeper, by fully paying for any tax cuts that are extended. And we should use the 2025 tax debate as an opportunity to meet our national needs by raising revenue overall by asking the wealthy and large corporations to pay their fair share.
Since the TCJA was enacted, revenue as a share of GDP has averaged 17% of GDP, compared to over 19% of GDP on average in the five years leading up to the Bush tax cuts. Revenue has fallen at the very time we long knew we would need more revenue to meet commitments to our seniors. The aging of the population directly increases fiscal pressures on programs that are the bedrock of financial security for Americans, and tax revenue must keep pace.
Our seniors earned their Social Security and Medicare benefits paycheck by paycheck. As the President has made clear, he rejects Republican efforts to cut Social Security, Medicare, or Medicaid, or put health care and other programs that families count on at risk. The President's Budget reflects his commitment to protect and strengthen these programs, make targeted investments in America, and improve our fiscal path by raising revenue-all without raising taxes on anyone making below $400,000.
Third, corporations that are making record profits should contribute their fair share. Fixing corporations' shrinking share of tax responsibilities at a time when corporations' profits are unusually elevated should be at the center of next year's tax debate. The evidence suggests we can increase corporate tax revenues without undermining productive business investment. Recent evidence has shown that targeted investment incentives are more effective in boosting productivity-enhancing business investment than the unconditional large tax cuts enacted in 2017.
Our tax system currently asks much less of corporations than it used to, even though corporate profits have grown as a share of the economy. In the 1950s, around 70% of our revenue came from labor income and 30% from corporate income. Today, around 90% comes from labor income and under 10% comes from corporate income. We also ask far less of corporations than other large economies: in 2021, American corporate tax receipts were just 1.6% of GDP, just half of the OECD average of 3.3%-owing in part to the TCJA.
The lackluster investment response to the TCJA suggests that bringing corporate taxation more in line with past U.S. and current international practice could raise substantial revenue without hindering economic growth.
The President's Budget would scale back the TCJA's corporate rate cut by bringing it to 28%-only halfway back to the previous 35% rate. It would also build on the IRA's minimum tax on billion-dollar corporations by increasing the rate from 15 to 21% and boost the stock buybacks tax from 1% to 4% to encourage corporations to invest in their workers and the broader economy, rather than payouts to investors. Even with these changes, corporate income taxes as a share of the economy would be similar to their levels in the mid-2000s and corporate tax rates in peer countries.
Fourth, taxpayers should pay what they owe and play by the same rules. This requires an IRS with the resources needed to identify and address tax evasion by wealthy people, complex partnerships, and large corporations-and to provide adequate customer service and a smooth tax filing experience to the vast majority of tax filers who are trying to pay what they owe.
After a decade of severe underfunding, the IRA's investment in modernizing the IRS is already paying off. The IRS provided exemplary customer service this tax filing season, successfully piloted the free Direct File tool, and launched new initiatives aimed at high-end non-compliance. But this investment will lapse without action, starting with the IRS's taxpayer service cliff in 2026. We will extend the investment and oppose Republican efforts to rescind the IRA funding.
Finally, our tax system should avoid an international race to the bottom on tax. The Treasury Secretary negotiated a historic multilateral agreement, signed by more than 130 nations, that will do just that. The agreement will finally address the race to the bottom in corporate taxes, while enabling businesses to compete and allocate capital based on workforce talent and market factors instead of tax minimization strategies. These reforms would be particularly impactful for large pharmaceutical companies, for instance.
Many of the world's largest economies are implementing this transformational agreement. It is critical that we join them in 2025. The President's proposals would implement the agreement and impose a 21% minimum tax on the foreign profits of the biggest multinationals. Implementing the Administration's international tax reform is crucial to leveling the playing field and fixing our broken international tax system.
Conclusion
As we approach next year's tax debate, the stakes could not be higher for tax fairness and our nation's fiscal future. The President is fighting for a fair tax system that gives tax breaks to the middle class and raises revenue by asking the ultra-wealthy and large corporations to pay their fair share. The contrast with Republicans' trickle-down approach could not be clearer.
