The White House
The expiration of the Tax Cuts and Jobs Act is inspiring gloomy scenarios about a nationwide budgetary cliff as lawmakers and policy experts search for politically feasible solutions.
“There has been a fairly persistent resistance to embrace fiscal sustainability,” said Jared Bernstein, the chairman of the Council of Economic Advisers at The White House. His comments came during a pair of panel discussion produced by the Brookings Institution on Tuesday.
“The only way that changes is with a forcing event, and perhaps one of the few forces that could potentially discipline the Trump administration in this regard is the bond market.”
The TCJA is set to expire at the end of 2025, while extending it remains a point of emphasis for the incoming Republican administration.
The crown jewel of President Trump’s legislative achievements in his first administration, the TCJA repealed advance refunding of tax-exempt bonds and put a cap on the deduction for state and local taxes, two unpopular provisions in the municipal bond market.
The cost of extending the tax cuts is an epic budget buster. “We have annual deficits of almost $2 trillion now,” said Isabel Sawhill, a senior fellow emeritus in Economic Studies at Brookings.
“Interest costs alone are now larger than all spending on defense and spending on Medicare. Interest payments take about 40 cents out of every dollar of income tax.”
The panel members contributed to a bipartisan, independent
According to their findings, a somewhat modest goal of stabilizing the ratio between the national debt and gross domestic product requires $6 trillion in spending cuts or tax increases over the next 10 years, even if all the provisions of the TCJA expire on schedule.
The report calls for far-reaching tax reform policies including replacing the business interest tax deduction with deductions for wages, investment expenses, and purchases from other firms.
According to the report, “By not allowing deductions for interest expenses, this reform would put debt and equity financing on equal footing.” The proposed rule change would apply to C corporations, S corporations, partnerships, corporate, and non-corporate businesses.
The report also calls for eliminating personal income tax for the middle class and replacing it with a value added tax that shows up as sales tax added to goods and services each time value increases.
Per the report, “The VAT is now used in all other advanced countries. In our version, the tax would exclude few goods and services and would be very broad-based.”
Summoning the political will required for major tax reform is currently an unknown quantity along with the possibility of tapping seemingly low hanging fruit of boosting revenues through better enforcement.
“I think for any bipartisan commission that’s thinking about raising more revenue by closing a tax gap, funding the IRS should be an absolute, required part of any grand bargain,” said Bernstein. “Underfunding the IRS is really just a shadow tax cut for wealthy tax evaders.”
The cap on the SALT tax deduction remains a viable bargaining chip in the upcoming negotiations. A
According to the Committee, applying the SALT cap to corporate income taxes produced the biggest bang by reducing the deficit by $300 billion. Disallowing the business deduction for state and local payroll taxes would save $40 billion.
Avoiding tax reform while extending the TCJA prolongs making hard decisions in Congress. The ever-spiraling national debt may force the lawmaker’s hand.
“I’m asked all the time, when will fiscal responsibility become something that policymakers have to deal with?” said Ben Harris, the vice president and director of the Economic Studies Program at Brookings.
“The answer is when bond markets decide it’s time and that could happen really quickly. That could happen over the course of a few weeks, over a few months. If you see Treasury rates spike by 100, 200 basis points it’s important to have plans in place if, and I think when, that happens.