AMAC Exclusive – By Andrew Abbott
While Congress and the national media remain fixated on the ongoing debt ceiling negotiations, financial analysts are warning that another financial “hurricane” could be heading directly for the U.S. economy: the expiration of the tax relief in former President Donald Trump’s 2017 Tax Cuts and Jobs Act (TCJA). Even if President Joe Biden manages to avoid a default disaster in the coming weeks, the expiration of the TCJA could be catastrophic for the economy – and Joe Biden’s nascent 2024 re-election bid.
The Trump-led TCJA was the most significant overhaul of the U.S. tax code in decades. Among its many changes, the bill lowered five of the seven income tax rates to their lowest level in decades. The overwhelming majority of this relief was focused on middle and lower-income earners.
However, the majority of provisions contained within it are set to automatically expire in 2025. The expiration of these provisions would result in higher taxes on millions of Americans.
Biden excoriated the TCJA throughout his 2020 campaign, calling it “welfare for the rich” – even as virtually every American was coming off years of paying less in taxes. He repeatedly pledged that when he took office, “on day one, I will move to eliminate Trump’s Tax Cuts.”
Once elected, however, Biden reversed himself, calling for an extension of most of Trump’s tax policy. As Michael Lucci noted in an article with City Journal, “Deference to the TCJA reveals that it is, in fact, good policy with bipartisan appeal.” With two years of unified government, Democrats failed to repeal the TCJA.
But Biden’s desire to keep the Trump tax cuts in place has run up against the reality of his inflationary big spending policies. Although Biden has proposed massively increasing taxes on businesses and the wealthy to offset spending, economists warn that such a strategy will not only fail to raise the money to pay for Democrat programs, it will likely collapse the U.S. economy in the process.
If President Biden lets the Trump tax cuts expire or repeals them, it would have a calamitous effect on millions of families. According to Americans for Tax Reform, taxes would rise by as much as $2,000 for families earning less than $73,000 a year. Single parents making less than $50,000 yearly would see their taxes rise by over $1,000. Most alarming, “millions of households would see their standard deduction cut in half, adding to their tax complexity as they are forced to itemize their deductions and deal with the shoebox full of receipts on top of the refrigerator.”
These harsh realities put Democrats in a difficult position when debating the debt ceiling. In an interview with MarketWatch, Maya MacGuineas, president of the Committee for a Responsible Federal Budget, noted, “Budgets that ignore [TCJA] expirations are likely to paint an overly rosy outlook, as extensions without offsets would dramatically worsen the fiscal outlook. As a result, any solution or compromise in the current budget battle that does not take into account the future of the Trump tax cuts is doomed to fail.”
Biden’s proposed budget seemingly attempts to have his fiscal cake and eat it too. He suggests preserving the Trump tax cuts for middle and working-class Americans while reversing and increasing those aimed at wealthier individuals. Yet, many small businesses and retiring families will also suffer heavily under these higher tax rates.
Biden’s budget would also raise the top marginal rate on long-term capital gains. CNBC notes, “The impact would be significant for many small business owners who want to sell businesses, especially the scores of Baby Boomers who are aging out.” In short, any retiring individual who doesn’t have the lion’s share of their money in savings accounts would suffer heavily. Older families selling their homes and retirees selling their businesses would all be hit hard.
Biden has also called for reversing the TCJA’s reduction of the corporate tax rate from 35 percent (which was by far the highest in the developed world) to 21 percent. Biden’s plan would hike it back up to 28 percent, likely discouraging business investment and slowing economic growth.
Debate over the repeal or restructuring of the Trump tax cuts would likely heat up sometime in the summer of 2024 – right as the presidential race enters its most critical months. If Biden alienates seniors, a critical demographic in any election, it could be disastrous for his campaign. Moreover, uncertainty about the future of the TCJA in the business community could encourage market instability and ripple effects throughout the entire economy, creating fears of an economic downturn right when Biden needs it least.
At the same time, if Biden fails to rescind Trump’s tax cuts, it would severely hamper the government’s ability to raise more revenue – meaning that the Treasury will have to print even more money to fund the government. This would send inflation, still nearly three times the Fed’s target rate, skyrocketing once again.
There don’t seem to be many good options for Biden at the moment. But in light of his reckless actions over the past two years, that is a problem entirely of his own making.
Andrew Abbott is the pen name of a writer and public affairs consultant with over a decade of experience in DC at the intersection of politics and culture.