T he Tax Cuts and Jobs Act — signed into law by Donald Trump at the end of 2017 — marked a historic overhaul of the U.S. tax system. It cut taxes for families at every income level and made American businesses internationally competitive again. The tax cuts boosted investment, wages, and economic growth. We are still reaping those benefits today.
Most of the tax cuts expire at the end of 2025 thanks to arcane Senate procedural rules and the unwillingness of a few Republicans to eliminate some of the most politically popular tax loopholes. Beginning in 2026, taxes are set to automatically increase by more than $400 billion a year.
This fiscal cliff represents a once-in-a-generation opportunity to complete the reforms that were started in 2017 and cut tax rates to their lowest level in almost 100 years.
The tax code includes more than $1.4 trillion annually in loopholes, subsidies, and spending. These special-interest provisions pad insurance-industry profits, funnel money to unaccountable universities, inflate child-care costs, and fund the Biden administration’s costly climate regulations.
A recent Cato Institute analysis shows that if Congress repealed all these loopholes, it could slash tax rates to historic lows and eliminate some of the most economically destructive taxes currently on the books.
Top income-tax rates could drop from 37 percent to 25 percent. Corporate-tax rates could drop to 12 percent from the still too high 21 percent. Congress could allow permanent full deductions for new business investments and cut the capital-gains tax rate to 15 percent. Estate tax, gone. Alternative minimum taxes, gone. Obamacare investment taxes, gone. Tax rates would be lower than any seen since Calvin Coolidge — one of the great presidential champions of limited government.
The historic opportunity for continued tax reform is only jeopardized by thinking too small. Simply making the 2017 tax cuts permanent — or attempting to work within the same framework — would be a waste of an opportunity to continue cutting tax rates for American families and removing barriers to America’s global business dominance. Making the 2017 tax cuts permanent — at a cost of more than $4 trillion over a decade — without offsetting spending cuts or reforms to tax loopholes would also be fiscally unsustainable at a time of $2 trillion annual deficits and ballooning spending obligations.
However, pro-growth tax reform is not constrained by mounting debt. Tax reform that does not exacerbate the deficit is only constrained by a political preference for keeping the current level of spending and the hundreds of billions of dollars in tax preferences littered through the tax code.
Keeping taxes low over the long term will require politically difficult reforms to the spending-based drivers of America’s fiscal imbalance. Congress cannot tax its way back to fiscal health. However, deficit-neutral, pro-growth tax reform that turbocharges economic growth starting next year would make necessary future spending reforms a bit easier.
In 2025, Congress should think bigger. Slashing tax rates to near century lows is eminently doable if Congress is willing to clear out all the junk that has accumulated in the tax code over the past decades.