Election Insights | Tax Hikes Are Coming, Regardless of Who’s in the White House

Are tax increases on the horizon in 2025, no matter who takes office? In this episode, we explore why changes to the tax code could hit your wallet, regardless of which party comes out on top.

Joining Kyle Hulehan is Erica York, Senior Economist and Research Director. They break down the expiration of the Tax Cuts and Jobs Act, Trump’s plans for the tax code, and Harris’s proposals to raise taxes.

Links

• Expiring TCJA Tax Provisions in 2026 Would Produce Substantial Tax Hike across the US See more
• Tax Calculator: How the TCJA’s Expiration Will Affect You See more
• Why Are the Individual Tax Cuts Expiring? See more
• Tracking 2024 Presidential Tax Plans See more
• Harris Tax Plan Ideas: Details and Analysis See more
• Trump Tax Plan Ideas: Details and Analysis See more
• Options for Navigating the 2025 Tax Cuts and Jobs Act Expirations See more

Transcript

Kyle Hulehan: 0:00

Hello and welcome to the deduction, a tax foundation podcast. I'm your host, Kyle Houlihan, and today we are back with another election episode with my cohost, Erica York, senior economist and research director here at the tax foundation, Erica. How are you doing today?

Erica York: 0:16

Doing all right. Thanks, Cal.

Kyle Hulehan: 0:17

You know, we're all, you know, battling these seasonal allergies. We've got some sniffles going on and it's, it's not just those of us who you can see on camera, even our producer Dan. So we're a little bit deeper voiced today. Um, so if you could just bear with us through that, I think we're, you know, I wouldn't call it our Jordan flu game or anything, but if you want to, you can. Um, so we're, we're, we're battling out here for you guys. Um, So anyway, let me just run through what we're going to do real quick for the episode today. You know, we're heading into that final stretch of election season. So today we're tackling something that's going to impact all of you, no matter who wins. Here's the deal. Whether you're rooting for one side or another, there's a chance your taxes are going to increase. In this episode, we're going to dive into why that is. So let's just jump right in to today's what's in the news segment. So Erica. Take care. Could you explain to us, you know, why would tax cuts be expiring? You know, there's the tax cuts and job, job tax, which is set to expire in 2025, you know, what does that mean for us regular folks? And you know, how big of a, of a tax cut are we going to lose? You know, how big of a hit are we going to take?

Erica York: 1:23

Yeah, so in 2017, Congress enacted a very large tax cut that cut taxes for individuals, lowered rates, increased the standard deduction, boosted the child tax credit, but it did that temporarily. And they put a sunset on that. So after 2025, All of those provisions are scheduled to go away. We've estimated that 62 percent of tax filers would see their taxes go up. Um, along with those individual expirations, there's some business tax provisions phasing out. Um, all together, we've estimated that in a situation where those tax cuts are gone. Um, people on average, taxpayers on average would see tax increases somewhere around 2, 800 on average. Now, you know, individual taxpayer situations will vary. We've got a tax calculator at our website where you can plug in your own information or see sample tax filers and see how that tax change that's scheduled to happen will affect you. would impact your situation. Um, but ultimately what that means is that Congress is going to have to do a tax bill in the next year or two, um, to avert that automatic tax hike. Um, so it doesn't matter who's president, um, that's an issue that they will have to deal with because those tax cuts are just on a glide path to expire no matter what, unless Congress enacts something to change it.

Kyle Hulehan: 2:48

Yeah, and I think we forget that a little too easily that, you know, we've been talking about the election and the president and how important that is, but you need Congress at the end of the day to do something to make a lot of this happen. And right now, Congress hasn't done a lot but shifting gears here, we'll move over to Trump. You know, Trump's still talking about exempting various things from the tax code. Uh, you know, he likes to throw some stuff out there. And the tariff conversation, you know, it just never really seems to end. Could you maybe give us an update on, on some of those things and maybe where, uh, Donald Trump stands on the TCGA expirations

Erica York: 3:22

Yeah. So on TCGA, Trump has talked about extending all of it. And then on the campaign trail, he's identified lots more tax cuts he would like to add on top of that. Um, we've talked about exemptions for tips, exemptions for overtime, exemptions for social security benefits. He's kind of been brainstorming some other exemptions, but I wouldn't yet call them concrete. Proposals, he said he would consider exempting certain types of workers from tax, like firefighters, police officers, um, active duty, military veterans. But I wouldn't say that, like, he's actually promised that that is going to be something he would pursue. And then, um. Of course, on the tariff side, we know he's proposed these universal tariffs on all imports of either 10 percent or 20%. He's talked about significantly higher tariffs on Chinese imports. And then in the last couple of weeks, he's tossed out what sounds like, you know, some hyperbolic numbers, um, considering tariffs of however high it takes. Um, there's a question of, well, I I mean, it takes to do what? We don't exactly know what the goal is, but he's thrown out 200 percent tariffs, 1000 percent tariffs. Again, I don't see these as like concrete proposals. I just see them as indicative of the seriousness with which he wants to pursue more tariffs if he's reelected.

Kyle Hulehan: 4:41

and, you know, I'll, I'll follow up with this. Cause this has been in the news recently. Um, which is that he has, um, you know, recently, again, started talking about maybe Replacing individual, uh, income taxes with tariffs. Why is that such a bad idea?

Erica York: 4:56

Well, when it's just not possible, we import about 3 trillion worth of goods on a yearly basis. Um, And we, raised trillions of dollars of individual income tax revenue. So about the size of that tax base. Um, so if you put a really high percentage tax on imports, you would discourage imports, which means you would actually raise less revenue. So it's just mathematically impossible to make up all of our tax collections with tariffs. Um, it's also misguided because tariffs invite foreign retaliation and they increase the Tensions, um, with, with our trading partners, most of what we import comes from friends and allies. And so it would be pretty misguided to slap huge taxes on imports that we're buying from our allies. And then the other issue is distributional. Um, if you look at the individual income tax code, it's highly progressive. Lower income and middle income taxpayers pay a smaller burden than higher income taxpayers. Tariffs would reverse that. They create a larger burden on lower and middle income households. And so it would be a hefty tax hike on low and middle income households and a massive tax cut on high income households if we were to switch to tariffs instead of income taxes.

Kyle Hulehan: 6:16

And that in general is kind of like the opposite of how our system is set up, which is it's intended to be more progressive. So that's not ideal in that sense. Um, but switching gears here, we're going to move over to, what Kamala Harris thinks of the TCGA expirations. And, and maybe, you know, she's talked about, Raising taxes on the wealthy, you know, and corporations, does she address, the coming expirations in her tax policies?

Erica York: 6:40

She doesn't have any specifics. Um, the white house budget this year had like three bullet points on the looming expirations to outlining their big picture goals. Those goals are continue the tax cuts for people making under 400, 000, let them expire For people making over 400, 000 and then pay for that partial extension with even more tax increases on businesses and high net wealth or high income people, but that doesn't really give us anything to go on. Um, we don't know, like, is it just a hard cut off? Is there a phase out for some of these provisions? Do they all get continued or is it just some of them? Um, so there are more questions than there are answers, but the general idea is. Some type of continuation of the tax cuts for the vast majority of taxpayers paid for by even higher taxes that haven't been specified.

Kyle Hulehan: 7:37

All right. So. What should we expect in the future with these expressions coming in 2025? Congress hasn't done anything about it yet. You know, we don't know what's going to happen in the election yet. So, so how do you see this playing out?

Erica York: 7:49

I see it as like a big tax showdown. Of course, how, how it gets debated in Congress and dealt with. With Congress, working with the White House will ultimately depend on the outcome of the elections, who takes the house, who takes the Senate, who takes the White House. We could have a divided control situation where parties have to deal with each other and say, all right, we'll compromise on this so that we can get this. You could have a unified control, um, where More agreement amongst, um, politicians on what to do. But either way, it's going to be really tough, particularly because of our fiscal situation. If you just continued everything that's expiring, that would be a tax cut of more than 4 trillion over the decade. When we're already running deficits that will exceed 20 trillion over the decade. So there's going to be a lot of pressure to reduce the cost, to find ways to offset the cost of providing tax cuts. And that of course, just further complicates the political situation. So lots of deal making, um, lots of pressure and lots of uncertainty for taxpayers as they wait to see what Congress and the next president will ultimately do.

Kyle Hulehan: 9:02

Well, hopefully sooner rather than later, we can get some sort of plan in place, maybe reduce some spending, maybe have some options that could actually help people so we could continue tax cuts. Uh, because I personally don't want to be paying 2, 800 more myself. So let's move on real quick to listener questions. We've got a great question from, uh, Andres. so let me read that for you here. In a recent episode, both tax plans that are currently being presented by the candidates were dubbed. Bad. What criteria do you think Congress should consider when developing tax legislation in order for it to be deemed a good tax plan? AKA, what's your criteria for determining whether a tax plan is ultimately great versus not?

Erica York: 9:42

I love this question. Um, so at tax foundation, we believe in 4 principles of sound tax policy. We think taxes should be simple, neutral, transparent and stable. And so those are 4 criteria that we use to evaluate a tax plan. For instance, if you look at what we wrote about the proposals to exempt tips from income tax, which Trump first proposed, and then Harris also adopted, that sounds simple at first, but I'm going to go to whether it's neutral or not, it violates that principle of neutrality because depending on how someone Um, Receives their compensation, they would be taxed differently. And so it creates a really big incentive for people to recognize as much of their income as possible and tips, which wouldn't be taxed rather than wages or salaries that do face the tax. And then if we look at the simplicity side of it, simple means. it should be simple for the taxpayer as well as for the government to enforce. if the IRS has to come up with rules to avoid abuse of that, that becomes really difficult to enforce. So that's one way that we evaluate tax policy, just a qualitative assessment of whether it meets Those principles. We also have a model, a tax foundation where we can estimate the impact that a given tax policy change will have on the economy will have on incomes, jobs, wages. And so that also gives you an idea whether a tax policy is pro growth or not. And even if it's pro growth, it may not be really efficient at boosting growth. Um, you know, a different type of tax can have a different effect on the economy, and you might have one tax change that, for the revenue that is lost, it has a really powerful effect in boosting the economy. You might have another tax change that, even though it boosts the economy, it costs the It costs a lot of revenue to do it, so it's not really efficient at, you know, driving new investment or driving, um, more labor force participation. So that's another indicator that we can use to say, well, is this pro growth? Is it really powerful pro growth? Um, is it going to shrink the economy? And so that combination of does it meet these principles? What does it do to the economy? Lets us see whether it generally moves the tax code in a good direction or a bad direction.

Kyle Hulehan: 11:52

And in general, if people are curious to know more about the model, is there, is there a place on the website they can go for that?

Erica York: 11:57

Yeah, we have a really long methodology paper that like goes into all of the equations that are in the model that's available on our website. We also have a like higher level overview that just gives you a big picture idea of the moving pieces like the tax calculator that we use. And other assumptions that we have in the model to estimate how, you know, people change their labor force decisions in response to a tax change or businesses change their investment decisions in response to a tax change. That's all on our website.

Kyle Hulehan: 12:26

Awesome. Well, if you guys want to dive further into that, you can check that out on our website. Erica, thank you for being on the show today.

Erica York: 12:32

For sure. Thanks, Kyle.

Kyle Hulehan: 12:34

All right. And so before we sign off, you know, if you've got any of those burning questions on taxes in the election, send them our way. I know that we're in the homestretch. We really only have like, One more episode before the election, or maybe that'll be after the election. But, uh, you can find us at podcast at tax foundation. org. If you want to email us, or if you want to, you know, slide into the DMS on Twitter, uh, at deduction pod. Thank you for listening.