Webinar | The Future of US Tax Policy in 2025

Join us on November 15th at 12:00 pm EST for our upcoming webinar as our experts seek to answer this question and provide insight on many more.

Our experts will recap the election and provide insights on what to expect in 2025. We will also take some time to explore what US tax and trade policy shifts could mean for other countries, particularly in Europe.

Tax Foundation’s President & CEO Daniel Bunn will lead a discussion with Tax Foundation’s own Will McBride and Erica York, who will focus on what the election means for US federal tax policy, and Sean Bray, who will link US tax developments to the European policy landscape.

Transcript

Daniel Bunn: 0:00

Hello, everyone. Welcome to Tax Foundation's webinar focused on the future of U. S. tax policy in 2025. My name is Daniel Bunn. I'm president and CEO of Tax Foundation. And I'm joined by some of my colleagues today who have been focused very much on how The election has gone over the course of the last several months with the wrapping up of the campaign, the actual election, and also paying attention to what policy priorities we are seeing from Capitol Hill. Tax Foundation has been paying attention to U. S. federal tax policy since 1937 and here where we are in 2024 and what we're looking at in 2025. Our position is going to be consistent where we are going to be analyzing the economics of tax policy, using our macroeconomic model, looking at the different alternatives in the debate, trying to see where the revenue and the proposals add up or not, uh, and where their impacts are on growth. Uh, and opportunity in the United States. We're also going to be taking a little time today to talk about some transatlantic perspectives on the U. S. Tax reform and other policies in the debate right now, because the U. S. is not alone in the world. And there are a lot of things in the policy debate that will impact not only the U. S. economy, but economies globally. around the world. I think it'll be great to hear from my colleagues today. We have Dr Will McBride, we have Erica York, and we have Sean Bray, who are all very focused on looking at the different alternatives that are live in the debate and prepping for what will, in, It's going to be an interesting debate in Congress early next year. And of course, we're not sure where things will land. But we do know at this point that the Republicans have control of the White House, the House and the Senate. There are different factions at play with different policy priorities. And our goal is to pay attention as much as possible to the different proposals as they come forward. Um, and to be able to help lawmakers make decisions in line with the evidence. Um, as we get into the session today, I think it'll be, uh, really important to, uh, set some context for where we are here in the fall of 2024 looking ahead. Um, but some of that context is derived from what we've seen over the last several years. I'm going to turn things over to my colleague, Erica York, to give us a reason why we should be thinking about tax reform and why tax reform. It's a huge part of the debate going into 2025. Erica, give us a little bit of the history of the tax cuts and jobs act, what we're looking at on the expirations landscape and curious about where things stand with what we call extenders in the tax policy debate

Erica York: 2:47

Yeah, thanks, Daniel. So the 2017 Tax Cuts and Jobs Act made several substantial changes to U. S. tax policy on the individual side, for estate taxes, for international taxes, and for corporate taxes. A lot of those changes were made temporarily, and so that's what we're talking about. What the big forcing mechanism is going to be for Congress next year and doing tax policy, and that's that the vast majority of the individual tax cuts are scheduled to sunset after 2025. So that means individual provisions like the rates in brackets. The standard deduction, the child tax credit, limitations on itemized deductions like the home mortgage interest deduction and the state and local tax deduction or SALT, um, the changes to the AMT, to the estate tax exemption. We've got a timeline here that shows all of the moving pieces. Thank you. those sunset. So that means in 2026, if Congress were to do nothing on tax policy, Americans would wake up to tax hikes. Um, we've estimated about 62 percent of taxpayers would see their taxes go up in 2026. If the individual provisions alone are allowed to expire. So these are big changes that affect. Most taxpayers. They also affect businesses. Um, and that is why Congress will have to do something because otherwise everyone will will see a tax increase. Now there's a lot of uncertainty about how they'll handle those provisions, and I think we'll get into that later. But a couple of the other big pieces that are potentially going to be in a package have to do with TCGA provisions that have already changed are Okay. are changing on a different timeline than the individual expirations. And these are business provisions for research and development for interest limitations. Um, those have already tightened because of the way that the TCGA was written into law. And then deductions for machinery and equipment investment are shrinking over time. TCGA temporarily for about four years. Five years provided a full and immediate deduction for those types of business investments. Um, but that's been shrinking from 100% to 80%, down to 60%, 40%, 20%, and then it'll hit 0% as well. Um, so that's on the table for Congress to deal with as they also look at these individual and estate tax provisions.

Daniel Bunn: 5:04

and Erica, what is the overall price tag that we're looking at for that, you know, that, that package, if, if Congress were to just, you know, change all the dates, on the tax cuts and jobs act to extend this out maybe permanently in the future. What, what's the, what's the price tag for that?

Erica York: 5:24

Yeah, over over the 10 year budget window. It's a bit north of 4 trillion. We put it at about 4. 2 trillion. And it's important to note that that's just nine years of extension because those things don't go away until after 2025. That cost doesn't start until 2026. So if we had to shift out another year, um, when, when the budget window moves to 2026 through 2035, um, that cost would go up by roughly another 500 billion.

Daniel Bunn: 5:53

Thanks so much, Erica. That, that's a super helpful summary of where the landscape is on the tax cuts and jobs act. And obviously that price tag is going to be a huge part of the discussion next year. I think it's also worth remembering that the tax cuts and jobs act is not the only contextual piece. Um, for lawmakers going into 2025, um, but there was also the American rescue plan. Uh, there was the build back better that did not become law, um, and the inflation reduction act, which has multiple layers of tax policy in that. Uh, let me turn now to Will to dive into some of those details, uh, to give some context on where, uh, things are with the inflation reduction act and key pressure points for the policy debate.

Will McBride: 6:35

Sure. Um, so yeah, the Inflation Reduction Act, uh, uh, was the biggest tax legislation passed, um, since, uh, the Tax Cuts and Jobs Act. So it was, um, kind of the derivative of the Build Back Better process, uh, that started really big and then got, uh, quite a bit smaller and, um, um, and, and actually just came down to essentially five parts, I think, are laid out in the, uh, the slide we have here. Um, and, uh, So what survived, um, ultimately and became law, um, the Inflation Reduction Act that was passed in August of 2022, um, consisted of, of these five parts. Um, and, uh, you know, I'll say, you know, the, the debate around the Inflation Reduction Act and, and the cause of its name, of course, was, uh, uh, around concerns, uh, about the. Inflation, rising inflation at that time, uh, and it's a connection to deficits. Um, and so the idea was to construct a bill that was a deficit reducing over 10 years. And that's what they got in the official score that came from the joint committee on taxation and the congressional budget office. They did find that it slightly reduced the deficit by roughly a hundred billion over 10 years. Those, that's, that's counts as slight, um, in, um, in our, our federal budget terms. But, um, in the, you know, shortly thereafter, um, shortly after it was enacted, the in place reduction act. Um, it became more and more clear that that score was questionable, particularly because of the cost of the, the laws, uh, 22 green energy tax credits. And so the, the, um, the initial score, um, on those credits was, uh, around 270 billion over a decade. Um, and, um, but, you know, subsequent scores by outside groups, uh, Goldman Sachs, uh, Brookings Scholars, um, and a subsequent score by the Joint Committee on Taxation, uh, pointed towards a much higher cost of those credits, closer to a trillion dollars over a decade. So then, you know, if all, uh, all else is, uh, the same in, in this, uh, Inflation Reduction Act, and that would indicate the bill as a whole, uh, actually increases deficits. And so that, that's kind of its big, um, uh, its big problem going forward. I think it makes it a, a big target, um, in, uh, Congress next year for repeal in, in part or entirely. Uh, so it's definitely going to be up for debate, um, and, um, as it should be. And in, in that process, um. The, uh, you know, hopefully we get a better idea, a more, uh, precise idea about its current fiscal costs. We, we have put in some effort to try to, um, provide our own estimates, updated, um, but it's very challenging. I'll go through some of the features of the, um, Inflation Reduction Act that make it very challenging to estimate, uh, just the basic, uh, cost of the credits in particular, but also the other revenue raisers. So, as I mentioned, one of the five major parts of these credits, 22 tax credits, they're either added or amended. That itself, itself is exceptional. Um, this is why, um, the law was very soon after it was enacted, really sold less as a deficit reducing measure and more as the, quote, largest climate legislation in history. That's how the administration sold it, and that's probably true. And so what are these credits do? They are aimed at boosting investment in the use of various renewable energy and low carbon technologies, including batteries, electric vehicles, solar panels, hydrogen energy, um, and carbon sequestration, just to name a few of these technologies. I'm not going to try to explain what those things are here. Uh, but, uh, they are on the cutting edge. You might say a bit hard. To of course understand the future of these, um, these new evolving technologies so that that itself makes it cha a challenge to get a handle on the cost of these credits. But the law also added all sorts of complicated conditions to these credits, um, that, that made it, uh, extra difficult to, uh, to, to, uh, estimate what sort of, uh, uptake or use of these credits there would be. So in particular, there's domestic content requirements, uh, big, big, uh, objective with, uh, many of these credits, um, uh, as voiced by the sponsors of the bill, uh, was to, um, you know, it was essentially a protectionist, uh, kind of effort to, to advantage U. S. producers of these technologies. Uh, relative to foreign producers of things like solar panels, electric vehicles, et cetera. So a lot of domestic content requirements written in, in various ways into these, uh, these credits. Also requirements for, for, um, certain types of labor used, particularly unionized labor. Requirements for, um, apprenticeships, um, uh, offered as, uh, to achieve a higher levels of credit. Uh, there, uh, as well, higher levels of credit or bonus credits. are available for certain geographic areas in the country that can demonstrate they face disruptions from the introduction of these technologies. That's typically, uh, you know, um, historically fossil fuel producing areas like, uh, parts of West Virginia. Uh, you've got, in addition to that, you've got, uh, some, some really, uh, quite novel features in these credits. You've got, uh, transferability. Allow meaning that the credits, uh, you know, if one taxpayer pair can't use the credit, they don't have the tax liability, uh, or the income to use the credits in a given year. They can sell those credits on the, on a market, uh, that's established, uh, for exchange of the credits. Um, and, um, that has, uh, that's, that, that continues to evolve those, those markets. Those are private markets that are evolving in different ways. different ways. Um, then you've got, um, the ability to, uh, elect direct pay for these credits. Okay. So this means they, they are then really essentially spending, spending run through the IRS. Um, and this as well, these, they can be claimed, um, by tax exempts. This includes state and local government entities, schools, for instance, uh, tribal governments. Um, this is another thing that really opens up the, um, the, uh, use, uses of these credits, um, in a way that's not very typical, certainly for, uh, tax credits. It makes them much more like, like, like spending, but without the normal controls on spending programs. That is, there's no budgeting, uh, of the, no formal budgeting or caps on, on this. Uh, uh, most of these credits, there's a cap, I believe, on one of the credits, but, uh, most of them are uncapped and they are only limited by how much taxpayers can demonstrate that they have, uh, uh, achieved in the way of eligibility requirements. Um, so it's all these things that have really led to the exploding cost of this credit. So the other, I'll move to the other features of the Inflation Reduction Act that are also, you know, share, uh, uh, some similarities with these credits. Um, and, and in particular, they are novel, um, and they are complicated. Okay. So we've got the, the major revenue raisers, uh, the, the largest of which is the corporate alternative minimum tax that was introduced in the Inflation Reduction Act. This is a 15 percent minimum tax that applies to the financial statement income of large U. S. companies, uh, uh, on their worldwide income. And, uh, okay. Easier said than done, as it turns out. Basically, that has become a real challenge for the Treasury Department and the IRS to figure out how that could possibly work with existing tax rules. And we're talking about large companies here with very complicated, uh, operations that are, uh, with, uh, you know, several entities. There's, you know, all sorts of challenges in, Uh, marrying two different sets of standards, basically tax standards and then the standards for financial statements, um, that go out to shareholders. Those are, those have operated forever under entirely different standards and different objectives. And this, this, uh, corporate alternative, uh, minimum tax, or CAMT as it's called, uh, says let's, let's mix and match, uh, these concepts and, um, See, see how it works out. Well, it hasn't actually worked out, uh, um, technically they have not finalized the regulations yet more than two years after the law has been enacted. The, the final regulations were issued just very recently and, uh, will not be finalized until the new year. Uh, so this actually has not, um, it's not clear that, um, basically IRS has given companies a reprieve on this KMT. and not required them to pay it, um, as of yet, um, and so, uh, it's not clear how much, if any, revenue has been collected under the CAM T. Um, and so you, you might say it's, has not, it's clearly not been an effective minimum tax, uh, as of yet, but what it has been is a, uh, a very large compliance burden for the taxpayers subject to it. Uh, the buyback tax is the third component. Uh, this is a one percent, uh, tax on share repurchases, um, uh, for publicly traded companies in the U. S., okay? So this is, um, a more straightforward tax, uh, it doesn't have nearly the complexities and challenges, uh, uh, that the CAM T does, um, but it's also, um, questionable and will be up for debate next year as it is, uh, attempting to, uh, uh. Uh, tax a normal, uh, means by which companies distribute their profits to their share, their shareholders.

Daniel Bunn: 17:55

So, Will, as you're describing all of these layers to the Inflation Reduction Act, I'm thinking of what Erica shared on the Tax Cuts and Jobs Act. So, really, it's just a massive landscape for potential policy levers that policymakers will play with, x year and huge fiscal price tags associated with those different policies and a lot of uncertainty as well.

Will McBride: 18:15

that's correct. That's correct. It's all, it's all certainly going to be part of the mix, part of the, what looks to be a reconciliation process early, early next year.

Daniel Bunn: 18:23

All right. So now that we have some context established, I think it's worth pivoting to what we saw in the political campaigns, obviously, with so much tax policy expiring next year and with tax policy generally being a useful part of campaign messaging and policy platforms. Um, maybe we can look at the different buckets for campaign policies and particularly obviously because, uh, former president Trump won the election, maybe a little bit of a focus on what his policy, uh, proposals look like. Maybe let's start with the individual taxes, Erica, what, what do we see on individual income taxes, uh, during the campaign season?

Erica York: 19:03

Yeah. So like at a, at a very basic level, president elect Trump promised continuing all of the expiring tax cuts. So that gives us a starting price tag of that 4. 2 trillion roughly. And on top of that, he promised tax cuts for a variety of different types of workers and industries and activities that add. Potentially trillions more. So we heard him campaign on exempting tip income from taxes, exempting overtime pay from taxes, exempting social security benefits from taxes, uh, creating a deduction for auto loan interest. He talked about creating a tax credit for family caregivers. Now, a lot of these proposals fleshed out in policy documents. So we don't have ideas for guardrails or limitations. Things of that nature. Uh, we just kind of saw the high level idea. Um, but I do think we're, we're likely to see at least some of these proposals, um, enter the debate, uh, in Congress. Um, for example, on the tip exemption, since Trump talked about that in the summer, um, we now have five bills in Congress from both Democrats and Republicans. Uh, Exempting tips and in some form or fashion from income and or payroll taxes. Um, so I think that all of these additional promises that were made on the campaign trail will complicate the debate and we'll add fiscal pressure to what's already going to be really challenged, um, really challenging situation with the price tag on the TCGA. itself.

Daniel Bunn: 20:34

Yeah. On the taxes on tips, I think obviously one of the reasons there's bipartisan proposals here. Is that, uh, the Harris campaign also proposed eliminating taxes on tips and who knows where where things end up on that proposal. But, you know, looking at the pace of those proposals coming out from the Trump campaign, there was questions even we had internally as whether there would be an income tax at the end of the campaign cycle. Uh, let's pivot a little bit to the business. Go ahead,

Erica York: 21:01

I was gonna say just one more area to watch. Um, the Trump campaign itself didn't say anything specific on the child tax credit, but vice presidential candidate J. D. Vance did float the idea of a 5000 child tax credit. Um, in an interview he had now that the campaign didn't pick that up. But I think that's another area to watch because the T. C. J. Expansion of the child tax credit is expiring. There might be a desire to go even further than what the TCGA did. And of course that comes with a really big price tag. So that's another area where there could be debate even amongst, you know, Republican members, um, on how to approach the expiration.

Daniel Bunn: 21:37

Yeah, that's a good point. The TCGA expanded the child tax credit to 2, 000 while also Um, doing some other reforms, eliminating personal exemptions, you know, doubling up the standard deduction and those sorts of things, but a 5, 000 expansion would be pretty hefty in terms of the fiscal price tag. Uh, Will, on the, on the business side, what, what did we see from the campaign season?

Will McBride: 21:59

Well, it was, um, relatively light. Um, and so we, we had, uh, uh, the main thing was, uh, again, the, the, uh, from the Trump campaign, the, certainly the signals that they intend to, to, um, extend permanently, uh, the Tax Cuts and Jobs Act, the expiring provisions, that includes some business provisions. As I think we've mentioned, there's three, three ones there to focus on. There's 100, 100 percent bonus depreciation for equipment. Uh, there's R and D expensing. Um, and then there's, uh, uh, the, a, a, a less stringent limitation on interest deductions for businesses. Um, it's, uh, based on, uh, EBITDA. And so this is what was applied from 2018 to 2020. And after that, a more stringent one, uh, has, uh, been, uh, um, been in force. And so I think likely that, um, there will be a push amongst, um, Republicans in Congress to, uh, extend the more taxpayer favorable, Uh, business provisions, um, in those, uh, TCGA, um, items. The other one, uh, to mention is the corporate tax rate, um, that Trump, um, uh, in, in various ways, um, talked about, but it was all in one direction. He talked about reducing the corporate tax rate, um, either to 20%, uh, that was mentioned a few times, uh, from the current 21%. Uh, as well as, uh, down to 15 percent, um, and in the case of the 15 percent corporate tax rate, uh, more recently, he talked about that as only applying to, uh, corporations that, uh, produce in the U. S. And so that could be, we don't have a whole lot of specifics on that at all, but, um, one thing that could be pulled off the shelf that might fit into that space is the old, uh, domestic production activities deduction that, uh, was part of the tax code for several years leading up to TCJ. It was one of the pay fors in TCJ when it was repealed, but that essentially gave manufacturers in the U. S. a lower corporate tax rate, and so that might be the approach used there.

Daniel Bunn: 24:25

Interesting. Um, and on the other side, just to mention the, uh, the approach from the Harris campaign, she was looking at, what, a 28 percent corporate tax rate. And obviously. That's not the direction that's going to be the approach that the Republicans take, but just for comparison's sake, Trump was looking at reducing that corporate tax rate compared to, um, what, uh, uh, vice president Harris was, uh, was proposing. Um, another big area for, uh, policy in the, in the presidential campaign cycle. This was something that, um, uh, vice president Harris specifically targeted in her attacks of, um, uh, the Trump campaign. Um, but the tariffs, uh, Erica, we've done a lot of work on tariffs over the year. Um, over the years, what, what are you looking at with respect to these potential proposals from, uh, the, uh, from president elect Trump?

Erica York: 25:18

Tariff man is back. Um, Trump campaigned on a universal baseline tariff that policy itself was in the RNC platform. It was on his campaign website He talked about rates of 10 to 20 percent there. And then he also threatened and raised the idea of various other specific tariffs 60 percent tariffs on imports from Mexico of 25 percent to 100 percent and then various company specific tariffs There's really two camps, um, on, on the approach that, that Trump will take. The first camp is that a lot of this was just campaign bluster. This is mainly a negotiation tactic. Trump doesn't really want to impose these tariffs. He just wants to sound tough and get tough on trade to get better deals. The other camp is Trump loves tariffs. He thinks they're the most beautiful word in the dictionary. And, and, uh, His first term in office, he imposed, uh, tariffs and, and really changed the trajectory of U. S. trade policy, invited retaliation from around the world, and a return to office he would just build on that. I obviously fall in this latter camp. I think that the threat of tariffs is, is very real. I think Trump is very serious about pursuing them. Um, For, for their own sake, also for the potential revenue that they could raise. Um, I think he really views them as an important revenue raising tool. Um, we, of course, in our modeling show that they're not a good revenue raising tool. They, they do generate revenue, but they do that at a great cost and they invite retaliation that further harms the U. S. economy. Um, so, so it makes it a, a really distortive way to, to raise revenue. Um, but I, I think the threat is very real. It's just a matter of seeing, you know, how quickly, um, he, he pursues this. And when he takes office,

Daniel Bunn: 27:07

Yeah. And I think that's a good point to pivot to kind of our general assessment of the proposals. Like I mentioned at the beginning, we have a model that we use, it's our tactics, taxes and growth model to evaluate changes in federal tax policy, and we can evaluate changes in tariff policy as well. Okay. Cool. Um, Will, can you give us a summary of what we're looking at on the positives and negatives on the economic impacts of Trump's, uh, approach?

Will McBride: 27:34

Right, at a very high level, as Erika described, there's two components. One is very positive for economic growth, that is the tax cuts. That Trump has proposed, um, in mainly in the form of the extending the tax, uh, the TCJ, uh, expiring provisions, including the business provisions. Uh, but there's a whole, uh, several other, uh, tax cuts that, um, uh, Trump has proposed including, uh, lifting the, uh, the, the cap, the current cap on the state and local tax deduction. Um, and, uh, various exemptions for, um, overtime pay, uh, tips, uh, et cetera, um, as well as this lower corporate tax rate, uh, I, I mentioned down to potentially 15%, uh, for some companies, um, that, uh, those are all pro growth measures, not all well structured, um, uh, or neutral, perfectly neutral, uh, approaches to, uh, tax reform, but they are tax cuts that do matter. They affect, they reduce marginal tax rates on, um, labor and capital. And, uh, our model does indicate that they boost economic growth considerably. I think we've got a, um, a picture on that, that we were, uh, we can show here that, um, indicates that those tax cuts that Trump has proposed, um, uh, we estimate would increase long, long run GDP by 2. 4 percent. That's, uh, quite a, quite a large boost there. Um, and, uh, probably, probably the largest, uh, uh, uh, couple of, a couple of large components there. One is the, um, as I mentioned, those business provisions, uh, from, uh, the expiring TCJ, uh, items. That's a major boost to GDP if those are extended, uh, and then there's the, um, the individual provisions, uh, primarily the lower. And uh, that's going um, tax rates, uh, that also boosts GDP. Um, as well that, that, uh, cap, fully lifting the cap on the state and local tax deduction, that actually by reducing top marginal tax rates effectively, that has a strong effect on GDP as well. Um, but then we've got this other half of Trump's proposals that Erica went over, which is very damaging in economic growth, that is the tariff proposals and their They're kind of all over the map, um, as Erica discussed, it's hard to pin down exactly what rate, um, to choose, um, but, you know, in our, in our assessment, um, you know, we, we, we, we looked at a scenario in which there's a, uh, Trump combines all these tax cuts with a set of tariffs that include a 20 percent universal tariff on all goods, imports, and then a, um, an additional, uh, 50, uh, 50 percent tariff on top of Our current, uh, tariffs on China and that has a large negative effect on the economy. We estimate, um, that those, those tariffs, uh, would reduce long run GDP by 1. 3%, okay? And as with, as we know from the long history of, uh, tariffs and trade wars in this country and all over the world, they come with retaliation. That's what happened when Trump, uh, with Trump's first round of Uh, tariff increases in 2018, there was a very, very quick response from other countries that, uh, were affected and they introduced their own tariffs that reduced, that applied to U. S. exports to those countries, so, uh, reducing demand for those exports and hurting the U. S. economy. So we estimate those, uh, our, our modeling of a retai a possible retaliation scenario to those tariffs would reduce U. S. GDP further by 0. 4%. So in total, about two thirds of the Uh, beneficial economic growth that would result from Trump's tax cuts would be offset by these, uh, these tariff proposals.

Daniel Bunn: 31:49

that, that's pretty huge. That's pretty huge. Um, and I, I imagine that, um, as Congress considers these things, they're, they're going to want to think about those economic, um, benefits and also those economic costs. And I really hope that, um, there's an opportunity for folks to kind of. Let's take a step back and take stock of those negative, uh, economic consequences. I, I, I, you know, as, as these things, uh, progress will of course be updating those numbers with more, uh, specific policy proposals, um, but that, that's a really helpful kind of summary of where we're looking at the kind of Trump policy landscape on. Uh, taxes, tariffs, and of course, retaliation, um, let's, let's zoom out or, or Erica, did you have anything you wanted to add to that before we move on?

Erica York: 32:36

Yeah, I think another important element to think about is the, the distribution of tariffs. They tend to create a larger tax burden on lower and middle income households. And of course, a lot of what Trump talked about on the campaign trail was. Helping working class families. But if you are, um, continuing tax cuts only to pay for them with something that falls even harder on that group of taxpayers, then you, you could actually be increasing taxes on them. And that's what we find in our modeling, that with this combination of tax cuts and tariff hikes, um, the bottom 40% of taxpayers actually see a tax increase.

Daniel Bunn: 33:11

Yeah. And that's not something most politicians are super interested in. So we'll, we'll, we'll see where this, uh, this lands, but, um, let's, let's zoom out a little bit, uh, and, and get a taste of, uh, where things. Um, uh, might land on different, uh, in, in, in different jurisdictions. So, um, Sean Bray, who is, uh, leading our research effort with tax foundation Europe, um, an office we opened up earlier this year. Sean, why don't you give us a sense of things like how other countries, particularly in Europe might be viewing. The policy landscape in the U. S. And I mean, we'll mention retaliation. I'm curious whether you think that's actually on the table or if people are just going to find other ways. I saw recently, uh, you know, uh, a leader in Europe say, well, maybe we'll buy more Um, uh, L. N. G. From the U. S. And not have to deal with the tariff. So curious your thoughts on the on the policy landscape.

Sean Bray: 34:05

Yeah, thanks Daniel. Um, I think there's, uh, there's probably good reason to take a step back, uh, because as we've seen since the first Trump administration until today, um, a lot of these debates in the international space, tax, tax, international tax space. Could be characterized in different ways. So my first main question, I think we could start by just posing some questions that policymakers should be considering. Um, the first is really what are the priorities or objectives of tax and trade policy in the United States, in the EU, um, and then, of course, with the work at the OECD and the UN on the international tax front. Um, are they to set standards, uh, which has been, I think, uh, that was a theme in the Obama administration. Rather, should we fix the WTO? Should we have a free trade agreement between the EU and the US TTIP, um, with the goal of setting international standards, uh, as kind of a, uh, confronting China and their rise in the international system? Um, are the priorities and objectives of tax and trade to raise revenue? Uh, I think from a tax foundation perspective, we would hope that tax policy is viewed through the lens of raising revenue efficiently and looking at that, uh, angle of things. But of course, There are other objectives that one might prioritize. Um, another priority or objective of tax and trade going forward might just be decoupling and de risking. Um, and so I think the first main question is, what are policymakers in Europe and the United States thinking about the objectives? What are they trying to achieve with some of these policies? The second question then, of course, leads to, well, to what extent will the U. S. and the E. U. work together or not work together on achieving those objectives? Um, so, can we align ourselves transatlantically on the objectives, and if we can, how would we go forward? Um, and if we can't, how do we go forward? Um, I think that's the second big question. Um, a kind of side note on the E. U. side is, who actually decides, uh, politically in, in these regards? It's not always clear between the Commission and member states, even within the Commission. We've been seeing with some of their hearings, it's not quite clear exactly who in the Commission would be making these decisions about whether to cooperate or, uh, to fight against some of the U. S. in terms of retaliation. So, um, That's my second kind of big question. And the third one I think, uh, policymakers specifically in Europe should be thinking about is what is the EU's approach to competition generally? So, um, that's been a big topic with the Letter Report and the Draga Report of recent. Um, there's kind of two camps. One is, well, should we double down on industrial policy and subsidies and, uh, go that route, government intervention? Or should we be taking more of a, an efficient approach, looking at our tax rates, our tax base, how can we be more neutral and competitive through our tax code in that sense? Um, so the, this kind of question is a broad question, I think, for all European policymakers at member state level and at the EU level. Um, but of course, For this webinar, the question is, well, what impact does the U. S. election and potentially, you know, our tax reform, our trade policy, given that, what should Europe do? Um, I think some, some highlights to point out are, one, uh, if Trump is serious about reducing our corporate tax rate to 15%, that would make, uh, investment decisions towards the United States from Europe that much more attractive. Um, and that could be worrisome for, for EU policymakers. Um, another thing is the IRA and the CHIPS, uh, the CHIPS Act. Those are sort of our industrial policy here in the U. S. And it's not clear to me that Congress will necessarily be on board with gutting a lot of those subsidies or, uh, some of those, uh, attractive, uh, money handouts to, to companies who may want to come over from Europe to invest here. So there's a real possibility that the United States essentially has a very competitive corporate tax rate. And on top of it, some kind of industrial policy that's, that's targeting specific sectors to bring business over to the United States. Um, so that's truly the case. Uh, it really does come down to your piece, European policymakers and their questions of how did they become more competitive? How did they respond in that type of a scenario? Uh, and what policies should they be looking at?

Daniel Bunn: 38:26

I think that's a really helpful kind of, uh, view from, uh, from, you know, where things stand in the U. S. And the critical questions for the EU. I mean, honestly, that, you know, European landscape, the policy landscape has been at a pivotal point for a number of years without clear direction on many of those questions. raising Sean. So in this coming in, that's very di policy and even a shift i trade front that's lasted Uh, it's going to be crit Uh, policy makers in Europe kind of respond to these things. There's opportunities for them to go, um, to really lean into that competitiveness and growth angle. But we'll see whether that's, uh, that's actually the case. Um, I think one of one of the things that is critical, let's come back to the U. S. A little bit, um, is to talk about the process for these policy changes next year. So I think people who understand the U. S. System understand that. Um, uh, legislation needs to come out of Congress, um, before it gets to the president's desk. Um, but specific to, uh, different fiscal legislation, there are special procedures that can be used, uh, to limit, uh, kind of the policy landscape that can be considered and to be able to expedite policy, especially through the United States Senate. I was working in the Senate, um, in 2017 during, um, the Tax Cuts and Jobs Act, and we used a lot of these. Um, uh, these tools, this tool specifically called Reconciliation, but I, I'll pitch things over to Will to talk through kind of a general summary of what this process looks like and how it could impact what policy, uh, actually comes out of Congress next year.

Will McBride: 40:13

Sure. Thanks. Um, so yeah, reconciliation is looking more, very likely at this point as the way in which this, uh, tax legislation will be passed. Uh, I think as we discussed earlier, that's what happened in 2017. That was the process Republicans use. We can look at that episode and, and, uh, as a guide as to what might happen. Uh, we can look at, um, how it was used by Democrats, uh, in 2021 for the, um, American Rescue Plan Act, and then in 2022 for the Inflation Reduction Act. Um, essentially reconciliation is a process, uh, that allows, uh, for budget legislation to be passed, uh, by a simple majority. Uh, in both the House and the Senate, so it, uh, really, really that matters, uh, in the Senate. It, it allows for, um, you know, an avoidance of the normal, uh, threshold of a, a 60 vote majority in the Senate for, uh, such budget legislation. So it can include, uh, tax and spending. Um, it can as well dress, uh, address the, the debt ceiling, uh, that is coming up. That's another. That's another thing to, uh, confront in the new year, actually, uh, the first, first day of the new year, January one, uh, the current, uh, extension on the debt ceiling expires. And so we will engage in a long, another long protracted debate about what to do about that while we're, uh, debating what to include in a, in a, uh, reconciliation package. So that matters because, and again, the last time we did the debt ceiling negotiation was just last year. We've done it about 40, 40 some odd times in history. We can look at what typically happens there. What happened last year was, uh, there was, um, uh, particularly the Republicans, uh, in the house, um, uh, Uh, uh, negotiated a, uh, a set of conditions, uh, to lifting the debt ceiling, um, that, uh, put caps in place that, uh, capped, uh, discretionary spending, uh, in particular, uh, uh, for two years. So that, that is a, that is one among many indicators that House Republicans in particular with their current slim majority, uh, as we understand it may be a similar majority that they had. Uh, in this, in, in the current Congress, very slim, like, uh, four, four vote majority, most likely. Um, they will make debt and deficits a primary concern and, uh, you know, they're not going to, like, forget what they did, you know, last year and, and, and say to, to heck with the debt. They're going to, to really be concerned about it, make it, um, that means that in a reconciliation process. That is likely to happen in the early in the new year. Republicans have talked about trying to pass a reconciliation bill in the first hundred days of the new Congress. Uh, it's going to be, I think, two, two issues that, uh, two, two primary issues that Republicans will be trying to balance much as in 2017. they'll be trying to balance a desire to boost economic growth. Um, uh, and with a desire to, uh, keep the deficit impact to a minimum. And what is that minimum? Well, that's, uh, unknown. In 2017, that number was one and a half trillion dollars over 10 years that came about. Uh, Daniel, as you know, because of a Senate negotiation, the house actually wanted to do a. deficit neutral bill. Um, and then when that, that effort initially failed, uh, the Senate, uh, picked the 1. 5 trillion number, uh, through a negotiation again over those competing concerns about economic growth and impact on the debt. What's happened since 2017? Well, in 2017, the debt, uh, publicly held debt was about, uh, three quarters the size of the U. S. economy. It's now about, uh, 100 percent of the, uh, of GDP, and it's heading higher every year, uh, forever in the CBO. It's heading to unprecedented levels just, um, about three years from now under the current projection, uh, and, and headed to an unsustainable trajectory. So I think that points to, uh, a number, Um, a deficit number in this bill that, um, I would think would be less than one and a half trillion, uh, given that the debt has gotten so much worse and so much, and we've gotten to a so much more precarious, um, uh, situation with the debt. Um, Another indicator, we've got interest on the debt, the federal debt that is about, running about a trillion dollars a year now. That exceeds spending on defense for the first time ever. Uh, it's going, uh, to a, a new record level of, uh, as a share of GDP in the new year. So I think all these things point to a reconciliation bill that will be, uh, actually, uh, closer to deficit neutral, uh, I would think than a several trillion dollar. deficit impact. Um, and that's real challenge. You know, that's, that's, you know, 180 degree, uh, change from what we heard on the campaign trail, particularly from Trump, who was, as we've discussed, um, you know, every week literally was mentioning a new tax cuts, some of which cost a trillion dollars or more. Um, I think, you know, it's going to be interesting to see how that, that those set of proposals survive in a reconciliation process.

Daniel Bunn: 46:00

I totally agree. The, the, the challenge is going to be, um, you know, if all this tax legislation is going to result in, um, different, uh, you know, deficit outcomes in it, if, as you say, will that there's going to be pressure on that, like, where does the money come from, you know, bigger, um, you know, offsets in the tax code, you know, expansions of the tax base, um, or spending cuts. And we'll certainly have to wait and see how Congress Um, deals with that. Let me, let me go back to, to Erica, um, uh, briefly, um, before we get into some questions we've received, uh, from the audience, Erica.

Erica York: 46:38

Yeah. Sean, one thing I wondered your opinion on, um, you know, in the first trade war, we saw the EU respond with retaliatory tariffs on some US exports, but we are now seeing reporting that like they're, they're already prepared to retaliate faster and harder this time around. What's your take on that? And kind of how, how do you anticipate, you know, let's say we are in a world where the US does impose this just baseline tariff on basically everything we import from the EU? What, what does the EU do in response?

Sean Bray: 47:06

Yeah, that's a really good question. Um, I think it goes back to kind of my original question of to what extent will we work together or not. Um, and I think there were, there were a few lessons that were learned in the first Trump administration from the EU side. Um, for one, I think it's, uh, the EU has kind of built out a lot of its toolbox to potentially respond to some of these things. So, to your question of, is it, uh, possible that they can respond quicker, or is that just kind of a negotiating tactic? I think it's certainly possible that they could respond much quicker than they did the previous time. The other thing that I would, uh, but, but again, the question is, who decides? And politically speaking, is it, who, who makes that choice? Economically speaking, is it on net worth it? Uh, so the question then, of course, is yes, you can retaliate, yes, you can do all these things. Economically speaking, how does that affect the EU? How does it affect each member state? And then, of course, it's back to the political question of depending on who's winning and losing from those situations, uh, how does the politics end up? So I think it's certainly possible. I think they have built a toolbox to be able to respond. Um, it's just a question of who decides and, uh, who's, who's winning and losing from that situation. I think it also brings together another thing that we learned during the first Trump administration was that, uh, kind of the geoeconomic question, right? So, there's a very narrow focus on tax, or on trade, or on standards, or on defense, but ultimately when you get into these negotiations, uh, specifically with a transatlantic aspect, All of these things can come together. Um, and so for example, in the tax space, you know, we have pillar one and pillar two and DSTs, uh, and UTPR, uh, from a trade perspective, we have the tariffs of course, and we have CBAM. I'll put that in that category. Um, from a standards perspective, the EU, one of the lessons they, I think learned was that, uh, after the TTIP negotiation fell apart under the Obama administration was that actually to, to. Allow Europeans to believe in the process and to believe in a potentially a free trade agreement with the United States in the future They would have to have high and strong European standards to start. So a few examples are the AI Act, GDPR, the Green Deal ultimately. These were all setting into European law kind of their standards and what they thought would be the proper way to converge with the United States. Um, and of course on defense, uh, it's NATO spending and it's how we handle Ukraine and other issues in the Middle East. So, what's different this time from an EU perspective from the first time is that, for example, within CBAM, uh, they actually, they actually have a, a tool where, uh, they can retaliate within CBAM if other countries are not pricing carbon the same way that the EU is. Um, they can place, uh, essentially an external border tariff on incoming products, uh, that are not carbon priced, uh, under the same as the EU. Uh, when it comes to Pillar 2, um, you know, UTPR kind of serves the same function, where if other countries are not playing by the Pillar 2 rules, the EU does have the option to, uh, to use UTPR to, uh, essentially penalize countries who are not, uh, signed up to that. Um, so there are, they've built into their policies, their tax and trade policies, kind of these. Uh, retaliatory mechanisms, um, in the, in the case that in the future they needed to negotiate with the United States or any other country, um, and so within their policies, these things are already built in. So I think kind of the, the big picture is on tariffs. There's a question of how that might work from the EU side and how quickly or not that might happen. Um, but within the policies that already exist, uh, in tax and trade in the EU, um, and even standards, uh, that's already kind of baked in. So they could certainly. Uh, exercise their right to those, uh, to those mechanisms if they choose so.

Daniel Bunn: 50:51

Yeah. And on, on the, the pillar to the global minimum tax stuff, uh, Sean, the, the, um, Republicans in Congress have been very clear in their opposition to some of those policy tools. And it's going to be. Uh, back and forth, I imagine pretty quickly, especially once, uh, President elect Trump has his treasury team in place, um, we'll be able to see how some of that's going to pan out, but, um, people are already very much dug in on their positions and it's not clear how, uh, how, how things break loose. Um, uh, we, we do have a couple of questions from the audience. Thank you for submitting these. Um, I'm going to, uh, uh, pitch this one over to Erica on the question of social security as part of the income tax base. Can you run through some of the logic, um, of current policy and the approach that, uh, President Trump, uh, President elect Trump was mentioning during his campaign?

Erica York: 51:45

Yes, this is actually a policy that was put into place by reforms that, that President Reagan, um, oversaw and helped, uh, fend off a, a funding shortfall in, in the eighties for social security. And essentially there's, there's a formula, um, taxpayers can kind of get tripped up with it, but it can subject, um, part of social security benefits to income tax. Um, either 50 percent or 85 percent depending on how that formula shakes out. Um, and that helps fund the social security trust fund. The idea that Trump talked about was completely exempting all of those social security benefits from the income tax, um, that. would not happen if, if reconciliation is the route because, um, reconciliation doesn't allow changes to the funding of social security. And so that policy would be off of the table for, for a reconciliation bill.

Daniel Bunn: 52:37

That's, that's really helpful context, especially as it relates to reconciliation. Okay. Um, Will, you talked a lot about, uh, debt and deficits. I'm, I'm curious, you know, I know you've done some research in the last year or so on different ways to address the long term, um, debt, but just maybe quickly summarize some of those policy levers that if you were, you know, treasury secretary for a day or chairman of the Ways and Means Committee, like where, where would you look for revenue that would be substantial but not, uh, really impact, uh, long term growth?

Will McBride: 53:08

Right. Uh, so I, I think that'll be, um, part of the debate. Uh, they'll, they, these two concerns, as I mentioned, the debt concern and then, you know, uh, concerns about how to reinvigorate economic growth over the longterm. It will naturally lead to, um, a, a real hard look at, you know, Ways to raise revenue efficiently, basically. So what are those? Those, those are not mysterious. Actually, those are well, well known. They've been known for decades. It's essentially comes down to taxing consumption. Um, is a, you know, that's a very broad tax base, uh, something like 70 percent of our GDP, um, We don't have currently a broad based consumption tax at the federal level. Um, we're the only developed country in the world that does not have one. We instead rely heavily on income taxes, um, uh, to fund the federal government. That's, that's, uh, incredibly rare actually, um, and so you might say it's, we're imbalanced relative to other countries and it's actually, this feeds into the whole debate about trade and, um, you know, how, uh, goods are produced, uh, outside the U. S. and then consumed in the U. S. Um, and so I think the, the, the debate, which periodically pops up, um, about moving to a consumption. Base tax system, uh, we'll come back and it'd be a, it'll be a good development because, uh, the last time we really heard about that was maybe 20 years ago when there's a vigorous debate, um, uh, if you might recall, about flat taxes. Um. The old Hall or Bush flat tax approach that was developed in the eighties and debated for, uh, you know, 10 or 20 years after that, um, uh, you know, as opposed to other approaches to getting towards a consumption tax system that is, you know, ultimately, again, going to produce revenues, substantial revenues, um, more efficiently, uh, with less damage to the economy than we currently do with the income tax.

Daniel Bunn: 55:13

Yeah, I think that would be a key opportunity for legislators that are looking for ways to offset some of these long term fiscal costs with revenue that isn't going to harm, um, or have much less harm on the future trajectory of the U. S. economy. One more question, um, uh, before we start to wrap things up here, um, Erica, you mentioned towards the beginning about what happens if the Tax Cuts and Jobs Act expires. I, I think it'd be a way. Worthwhile to wrap things up around this kind of a crystal point, because again, you know, this is kind of the, the motivation for action next year, regardless of what that action actually entails. But what's the tax hike look like maybe, um, you know, for folks in the lower half of the income, uh, spectrum, um, or the way that you're thinking about the, the, um, uh, the way the tax cuts and jobs act was put together, um, and how that might look if, uh, if the tax cuts and jobs act were allowed to expire.

Erica York: 56:13

So if the TCGA expires, um, like I said, we've estimated about 62 percent of taxpayers would see their taxes go up. We've actually got a cool tool on our website, a tax calculator that lets you input some information and see an illustration of how your own tax burden can change. Um, the dollar amounts are of course going to vary by taxpayer, by their own situations, by what types of income they are in, whether they have dependents or not. Um, but we've estimated that the, the Average tax increase across all congressional districts for all of the expiring individual and business provisions is about 2, 600. Lower income taxpayers will see a smaller amount, higher income taxpayers a higher amount, but that gives you a general ballpark. And it's not just tax increases. It's also that the tax system will become more complicated. So the TCGA simplified things by expanding the standard deduction, by really limiting the bite of the alternative minimum tax. If those reforms go away, millions more people will have to also file the alternative minimum tax forms. We'll go back to taking itemized deductions, which is a more complicated filing process. And so it's higher taxes and a more complicated filing system. Which I don't think anybody wants, and I don't think Congress will allow to happen in full, um, but that's what's on the line.

Daniel Bunn: 57:30

it's, it's, it's a huge tax cliff. Um, uh, Sean, Will, Erica, any last words before I start to wrap things up here?

Sean Bray: 57:38

I think one thing just to, to point out, well, two things just to point out. One is I think, uh, kind of to Erica's point earlier about whether Trump is just using tariff, the threat of tariffs to negotiate or whether it's a real, a real threat. Um, I think in either case, uh, I think it's, I think it's maybe both. I think honestly he's trying to use it to get a better deal and will actually carry it out in some, in some respects. Thanks. Um, so I think that's something obviously to pay attention to, but the flip side of that is, um, I think it, it will come down to a negotiation and I think other countries, uh, for example, with the pillars, um, it was actually under the Trump administration that the, the pillars were being negotiated at the OECD, um, so I wouldn't necessarily just write off any kind of transatlantic cooperation, uh, even if it might sound like there's a lot of doom and gloom out there on, on the future of the EU and U. S. kind of tax and trade relations. Um, I think there are deals to be made and there are ways in which the U. S. and Europe can work together on tax and trade. Um, and potentially president elect Trump might be interested in negotiating that. So, um, I wouldn't say that it's all doom and gloom and hopefully, uh, technocrats like us can, can come in and try to help, uh, where we can and point out where, where there might be opportunities to work together.

Daniel Bunn: 58:51

to make a joke that's been made hundreds and hundreds of times over over the last eight years. It's maybe not doom and gloom, but more a little bit on the art of the deal. Um, uh, and with that, uh, thank you so much for joining today. Please follow our work. You can subscribe to our newsletter at taxfoundation. org. Also, uh, you will be posting additional content, uh, here on our YouTube, and we'll be having events, uh, over the course of the coming months. We have a lot of numbers to crunch and certainly we'll be paying attention to this fast paced policy debate as it develops. Uh, and uh, thank you so much for attending today and we look forward to talking to you again soon.