By: Erica York, Alex Durante, Huaqun Li, Garrett Watson, William McBride
Executive Summary
Policymakers should have two priorities in the upcoming economic policy debates: a larger economy and fiscal responsibility. Principled, pro-growth tax policy can help accomplish both.
Congress is staring down the expiration of the Tax Cuts and Jobs Act (TCJA), and Tax Foundation is prepared to provide insight and analysis on the policies at stake. Since its enactment in 2017, the Tax Foundation team has studied the TCJA’s underlying construction and resulting strengths and weaknesses. We have also analyzed fundamental reforms that would dramatically improve the U.S. tax system to support economic growth as well as greater efficiency and simplicity.
Whether lawmakers target fundamental tax reform or follow the outline of the TCJA, they will confront decisions on what to prioritize in this forthcoming round of tax reform. In that regard, staying within the overall TCJA construct, the Tax Foundation team has analyzed difficult, but revenue-neutral ways to build a pro-growth set of reform options that would not significantly worsen the deficit once changes to the economy are considered or substantially change the distribution of the tax burden across the income scale.
The alternative reform options outlined in this paper may not be politically popular, but they would grow the economy and provide sufficient revenue to avoid significantly increasing our nation’s debt. The two alternative options would further broaden the tax base for individual income (more so than the TCJA), maintain much of the individual rate cuts from that law, improve the business tax base to support investment, and maintain the corporate tax rate of 21 percent.
Both reform options would provide working families and businesses with more long-term certainty than the current expiring tax code and remove many of the tax code’s special interest provisions.
The options prioritize provisions that have the largest “bang for the buck,” or the most economic growth per dollar of revenue loss. These include immediate cost recovery for investments in the types of machinery and equipment upon which millions of small and large businesses depend, as well as immediate write-offs for investments in research and development. These two policy changes support a growing economy like no other tax policies proposed since the corporate tax rate was reduced from 35 percent to 21 percent. The options would also extend better cost recovery to investments that are currently excluded, resulting in more neutral tax treatment across assets.
The options in this paper show that pro-growth tax reform that does not add to the deficit requires tough choices. If lawmakers do not like the types of choices represented here, there are still other pro-growth options to achieve similar goals. Tax Foundation has modeled several alternative options over the last year. Our primary concern is not to endorse any of the specific policy options here, but to provide a resource to lawmakers so they can create sound tax policy.
With respect to the two options in this paper, the first would support an economy that is 1.4 percent larger in the long run and reduce the long-run debt-to-GDP ratio by 1.7 percentage points compared to what would happen under current law. The second option would have somewhat smaller impacts with an economy that is 0.9 percent larger and a debt-to-GDP ratio that is 0.1 percentage points larger.
Working families and businesses deserve a tax code that prioritizes growth and fiscal responsibility. This paper demonstrates multiple ways to reach those goals without substantially changing the distribution of the tax burden. These options can help Congress as lawmakers begin the difficult work of designing legislation to prevent an automatic, detrimental tax hike at the end of 2025.
https://taxfoundation.org/research/all/federal/2025-tax-reform-options-tax-cuts-and-jobs-act/