One of the most important issues for Congress next year is tax reform. The main changes in Donald Trump’s 2017 Tax Cuts and Jobs Act were legislated to expire at the end of 2025. If the law is extended, as Trump and many Republicans would like, federal revenue will be reduced by $4 trillion or more over the next decade. Budget deficits would surge and the outlook for public debt would shift from bad to dire.
This is not the only threat to fiscal prudence. During his campaign, Trump promised a variety of further tax cuts, such as lowering the corporate rate from 21% to 15%, and exempting tips and overtime pay from income tax. His plan to raise tariffs, supposing it takes effect, would make barely a dent in the revenue shortfall but would throttle economic growth. It’s all too plausible that Democrats and Republicans in Congress will strike a deal that combines an extended Tax Cuts and Jobs Act and other tax cuts with higher spending on transfers and other outlays.
Public debt already stands at roughly 100% of gross domestic product. It’s on track to exceed 120% by 2034, even if the tax bill is allowed to expire and Congress enacts no new spending programs. Any so-called compromise that lowers taxes and raises spending is a formula for imminent breakdown.
One consolation is that the tax law’s scheduled expiration puts reform back on the legislative agenda. Another is that Scott Bessent, Trump’s nominee for Treasury secretary, might be a moderating influence, as many investors hope. Ideally, Congress and the administration would undertake a thorough review aiming to broaden the tax base, close loopholes, simplify the code, and encourage work and investment. It’s been 40 years since the last such comprehensive reform, which quickly unraveled. Another ambitious effort is long overdue. Even a relatively modest package could move the tax structure in the right direction while, crucially, starting to get borrowing back under control.
Given the dual need to improve the system and raise revenue, parts of the tax law are worth preserving — and indeed expanding. Most notably, the law simplified the code for most taxpayers while broadening the base by increasing the standard personal deduction and narrowing the scope of itemized deductions. These changes should be taken further. For instance, rather than capping the deduction for state and local taxes, eliminate it; cut the deduction for mortgage interest and plan, over time, to phase it out. To make the system fairer, close notorious loopholes such as the treatment of unrealized capital gains at death.
