The triumph of the Trump tax cuts
The so-called Trump tax cuts, officially called the Tax Cut and Jobs Act (TCJA) of 2017, are back in the news with the recent release of Democratic presidential nominee Joe Biden’s tax plan. Although framed as a repudiation of the Republicans’ signature tax reform, a closer look reveals Biden’s plan is a begrudging acceptance of the law’s most important provisions.
Early Democratic promises to repeal TCJA “on day one” of a Biden presidency have given way to a much narrower focus repealing a small portion of the law. The Biden campaign, for example, has proposed reversing TCJA only for those making more than $400,000, or the top 1 percent. This has led to a debate almost exclusively centered on the portions of the law that cut taxes for businesses and high-income earners. Biden’s plan would increase the top tax rate for individuals from 37 percent back to 39.7 percent and the tax rate for corporations from 21 percent to 28 percent (still substantially lower than the pre-TCJA rate of 35 percent).
Debating the merits of TCJA in this way ignores the elephant in the room: Democrats plan to leave TCJA unchanged for 99 percent of individual income taxpayers. Admitting this is politically awkward but it reflects an implicit recognition that the individual tax reform provisions at the heart of the law improved the tax code and are worth keeping in place.
What accounts for TCJA’s paradox as a policy success and a campaign failure?
Previous tax reform efforts centered on putting together coalitions to build support for the elimination of individual tax exemptions and deductions. Congress pursued this strategy in the lead up to the passage of the Tax Reform Act of 1986. Although lauded for its bipartisanship, the process watered down initial ambitious proposals until there was very little left. Two of the largest and most regressive individual deductions, which have long been part of the holy grail of tax reform – the Mortgage Interest Deduction (MID) and the State and Local Tax (SALT) Deduction– emerged relatively unscathed.
Congressional Republicans departed from this strategy in two important ways in 2017. First, they bucked conventional wisdom by ditching bipartisanship. Republican control of all three branches meant fewer opportunities for powerful interest groups to derail the process by targeting individual Democrats for defection.
Democratic members of Congress representing wealthy regions with expensive housing had a strong interest in protecting the MID and SALT deduction. Cutting them out of the process altogether allowed Republicans to lower the total amount of deductible mortgage from $1 million to $750,000 and limit the total amount of deductible state and local taxes to $10,000. Both provisions were highly progressive and reduced distortionary tax subsidies for wealthy homeowners in exclusive communities.
Second, rather than target individual deductions for elimination, Republicans worked to make it more beneficial for taxpayers to claim the standard deduction. By eliminating personal exemptions and using the savings to nearly double the standard deduction and the child tax credit, TCJA’s architects drastically reduced the incentive of higher income taxpayers to take advantage of the option to itemize deductions.
As a result, according to Joint Tax Committee estimates, the number of taxpayers who opted for more complex itemized deductions dropped by almost 60 percent. The total value of the MID declined from $60 billion to $25 billion, while the value of the SALT deduction plummeted from $109 billion to $20 billion. These changes simplified the tax code and reduced reliance on distortionary tax provisions.
Despite some pushback from congressional Democrats, the Biden campaign has indicated that it has no plans to reverse these aspects of TCJA. Unfortunately, the process through which Republicans passed TCJA requires that the provisions expire in December 2025 unless they are made permanent. This would be a major step backwards for tax reform. Congressional candidates and the winner of the presidential race should go one step further and commit to making the best parts of the law – the changes to personal exemptions and the standard deduction as well as the caps on the MID and SALT deduction – permanent as part of their campaign promises.
Anything less risks the possibility of throwing out the metaphorical baby with the bathwater and wasting a once-in-a-generation opportunity for enduring tax reform.
Joshua McCabe is the assistant dean of social science at Endicott College and a senior fellow at the Niskanen Center.