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2024 Election Guide to Federal Tax Proposals
The election for president is weeks away. Each candidate and each party has a vision for the next four years that includes specific spending and tax proposals. This guide to the competing tax and revenue plans clarifies each party’s positions and their potential impact on the growing debt crisis.
by Robert E. Duquette, CPA
Sep 5, 2024, 22:46 PM
Many important issues are being debated as the 2024 election for president nears, not the least of which are economic.
Jobs, the price of gas, or the stock market performance are common attack-ad fodder, but the competing parties’ tax proposals may largely go unnoticed by many voters due to their complexity. This feature provides key tax points from the Democrats and Republicans to help you measure the differences.
First, I will set the stage and discuss the state of the economy and the expiring provisions of the Tax Cuts and Jobs Act (TCJA), then I will outline the tax proposals proposed by both parties. No matter who wins the presidency, remember that tax legislation must first start in the House as mandated in the Constitution, and then usually needs 60 votes to avoid filibuster and pass in the Senate (unless a budget reconciliation is used).
U.S. Finances
The most recent numbers for annual real growth domestic product (GDP) growth were 2.8% in the second quarter (Q2) of 2024, 1.4% in Q1 2024, and 3.4% in Q4 2023.1 Total annualized GDP is $28.6 trillion.2 Inflation has been more of a concern this election cycle compared to other recent elections. As this issue went to press, consumer price index (all items) and core inflation (without food and energy) were 3% and 3.3%, respectively.3 Nonfarm unemployment stands at 4.3%, with an average net job growth slowing to 114,000 in July and an average monthly growth of 215,000 year-to-date in July 2024.4
Entitlement funding is always a source of electoral contention, with Democrats and Republicans often proposing conflicting solutions. The country, it seems, is in an untenable middle ground between two visions.
Per the most recent actuaries report, as of Jan. 1, 2024, the net present value liability of the combined federal entitlement trust funds (i.e., Social Security, Disability, and Medicare) is $78 trillion. Reserves are expected to be depleted in about 10 years. Without action, Social Security will have to cut benefits in about 10 years to 83% of current promised levels, and Medicare to 89%.5
Over the next 10 years, Social Security and Medicare spending is expected to increase by 1% of GDP, raising federal debt levels. The cost of maintaining that debt (interest) is a vital concern.6
The federal debt and the resulting interest expense consume vast amounts of fiscal resources. The total debt is $35 trillion (125% of GDP) including $7 trillion owed to other federal trust agencies. (The ratio would be 100% if that were ignored.) The projected level of only public debt and the related debt-to-GDP ratio in 10 years is $57 trillion, or 122% of GDP (assuming current policies, but excluding the debt owed to other federal agencies). Rising rates and growing deficits increase interest expense on the federal debt (expected to be the second-largest budget item after Social Security), which has ballooned from $350 billion (fiscal year 2021) to $900 billion.
The International Monetary Fund, Federal Reserve, Wall Street leaders, and the Peter G. Peterson Foundation have all warned that the projected debt levels will lead to higher interest rates, significant inflation, and depressed economic conditions.7
Expiring Provisions of the TCJA
When the TCJA was passed in 2017, it was done with almost all provisions tied to an expiration date. Many are ending soon, so a look at the expiring provisions is an important element in the assessment of each party’s tax platform. Generally, Democrats want to allow most of the following provisions to expire as scheduled, except to the extent any would impact those making less than $400,000 (single filers) or $450,000 (married filing jointly - MFJ). Republicans have promised to renew the TCJA expiring provisions. The following positions are set to expire in 2025.8
- Individual tax rates were reduced with new brackets (resulting in tax breaks for many).
- The child tax credit was doubled from $1,000 to $2,000 and an additional dependent credit allowed $500.
- The personal exemption deduction was repealed (had been $4,150), the standard deduction was doubled, and the state and local tax deduction was capped at $10,000.
- The mortgage interest expense deduction loan limitation was capped at $750,000 (had been $1 million). The home equity loan interest deduction, which had allowed interest expense deduction on up to $100,000 was repealed.
- The medical expense deduction threshold was reduced from 10% of adjusted gross income (AGI) to 7.5%.
- The miscellaneous itemized deductions limitation was repealed. Previously, it was only deductible to the extent they exceed of 2% of AGI. The total itemized deductions limitation also was repealed. The prior law limited total deductions only to the extent they exceeded 3% of AGI.
- The estate tax exemption threshold rose from $5.6 million to $11.2 million (currently $13.6 million after inflation).
- The alternative minimum tax (AMT) was adjusted to provide higher exemption amounts.
- Section 199A created up to a 20% qualified business income deduction.
- Bonus depreciation had originally provided 100% immediate expensing before its phase out (currently at 60% for 2024).
- The family leave employer credit was a new provision that covers 12.5% to 25% of wages paid for family leave.
- The excess business loss limitation created new limits on deductions for excess business losses.
Should all of the above (instead of just a select few) be extended, there will be a significant economic impact. GDP would increase about 1% over 10 years, which would add almost 1 million jobs (per the Tax Foundation). However, the estimated cost of extending all expiring provisions for 10 years would be $3.5 trillion to $4 trillion, using a “dynamic scoring” basis and conventional “static” basis, respectively. The estimated increase in debt-to-GDP ratio is another 20 to 25 points over that period of time, with resulting pressures on interest rates and inflation.
Other projections indicate that making the expiring provisions permanent would cost in the range of $4 trillion to $4.6 trillion (see CBO and Penn-Wharton Budget Model respectively) over 10 years, with the upper range reflecting dynamic scoring and additional interest on higher national debt.
Democratic Platform Proposals
Democrats, now being led by Vice President Kamala Harris, have proposed several revenue-raising measures beyond expiring TCJA provisions. They are primarily aimed at higher-income taxpayers and large corporations.9 As we went to press, the Harris campaign made additional proposals regarding the child tax credit, affordable housing, and a repeal of taxation on tips. I’ve separated the party’s proposals into individual/estate and business taxes.
Individual Income and Estate Taxes – The party supports a partial expiration of TJCA’s individual tax provisions, which would reset the top rate at 39.6%. However, the 39.6% rate would only apply to incomes above $400,000 (single) and $450,000 (MFJ). The current lower rates for those under the above income thresholds would remain. While vague, the Democrats also propose reviewing other expiring TCJA provisions and addressing those that impact anyone making less than the above thresholds. As noted above, the Harris campaign is proposing a repeal on the taxation of tips, similar to the Republican proposal (see page 20).
The party proposes taxing long-term capital gains and qualified dividends at ordinary income tax rates for those with taxable income above $1 million. The top rate could be as high as 44.6% – a new top rate of 39.6% plus a Net Investment Income Tax (NIIT) of 5%. (The party wants to expand the base of the NIIT to include nonpassive business income and increase the rate from 3.8% to 5%.) They are also considering taxing unrealized capital gains at death, or when gifted, for gains over $5 million ($10 million for joint filers), with exceptions provided for transfers to spouses and charities. It is not clear from the General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, also known as the Green Book, which tax rate would apply, but it could be the new top rate of 39.6% plus the newly increased 5% NIIT.
Long discussed among some members of the Democratic Party, the platform includes a wealth tax, which would impose a minimum tax of 25% on total income, generally inclusive of unrealized capital gains, for those with wealth (assets minus liabilities) greater than $100 million. (See the Federal Tax Column on page 6 for how the Supreme Court may view the constitutionality of both a tax on wealth and unrealized appreciation.)
Also being considered is an increase in the Medicare tax of 0.9% to 2.1% applicable to taxpayers over $400,000. When added to the regular 2.9% Medicare tax, it would bring the total to 5%.
“Backdoor” Roth IRA conversions for high-income taxpayers ($450,000 MFJ and $400,000 if single) would be limited, and a mandatory 50% distribution of vested amounts over $10 million.
Carried interest would be taxed as ordinary income instead of capital gains, and they expect to repeal Section 1031 like-kind exchanges on real estate.
The American Rescue Plan Act’s (ARPA) child tax credit (which expired after 2021) would be renewed and expanded to $3,000 per qualifying child between ages 6 and 17, and $3,600 per qualifying child ages 2 through 5, and $6,000 for newborns through their first year. It would be fully refundable. Likewise, they would renew the ARPA’s Earned Income Tax Credit (EITC) expansion (which also expired after 2021) for workers without qualifying children, for older workers 65 and older, and for young adults age 18 to 24.
Democrats want to create a new program that, for working families with incomes up to $200,000, guarantees “affordable, high-quality child care from birth until kindergarten, with most families paying no more than $10 a day.” They also want to expand the Employer-Provided Childcare Credit to encourage businesses to provide child care benefits to their employees.10
A mortgage relief program would provide a credit and down payment assistance of up to $25,000 for first-time homebuyers, and a one-year credit of up to $10,000 for families selling their starter home. The Harris campaign is also proposing tax incentives for builders of affordable rental housing and starter homes for first-time homebuyers.
The party wants to permanently extend the ARPA health insurance tax credit expansion. And when it comes to Social Security and Medicare funding and payments, they reject all efforts that would result in benefit cuts. Although not in the budget proposal, watch for suggestion to lift the payroll tax cap considering the financial status of these two funds.
Business Taxes – Since the passage of the TCJA, most Democrats have considered the tax cuts given to corporations to have been too steep. Thus, the party proposes raising the corporate income tax rate from 21% to 28%. In addition, they would increase the Inflation Reduction Act’s corporate minimum tax on the largest corporations (GAAP income exceeding $1 billion) from 15% to 21% and would expand the Section 162(m) limitation on executive compensation deductions to $1 million per any employee, from the smaller group currently covered, and to all corporations, including those privately held. For public companies, the stock buyback tax would go up from 1% to 4%.
The party’s platform has a proposal for depreciation recapture, which would increase recapture on real property to 100% and tax it at ordinary rates. This would apply to all C corporations and to pass-throughs for individuals with AGI above $400,000. They also want to make permanent the excess business loss limitation for pass-throughs on high-income taxpayers.
To encourage new construction and the substantial rehabilitation of homes, Democrats propose a Neighborhood Homes Credit. They also want to enhance and expand the Low Income Housing Credit.
When it comes to international corporations, the platform contains incentives for moving jobs to the United States. A new general business credit equal to 10% of the eligible expenses in connection with onshoring a U.S. business. To discourage moving jobs outside the United States, the plan disallows deductions for expenses connected to offshoring.
Multinational base erosion efforts would be modified. Democrats want to repeal the base erosion and anti-abuse tax (BEAT) and replace it with an undertaxed profits rule (UTPR)11 consistent with the Organisation for Economic Co-operation and Development (OECD)/G20 global minimum tax model rules. (Green Book page 34.) When it comes to global intangible low-taxed income (GILTI), there would be a jump from 10.5% to 21% and the tax would be calculated on a jurisdiction-by-jurisdiction basis. The foreign-derived intangible income deduction would be repealed. Interest expense deductions for multinationals would be limited for multinational groups that have over $5 million of aggregate group interest expense. (Green Book page 44.)
CPAs know first-hand that cuts to IRS funding have had detrimental effects. Democrats want to keep the IRS’s budget boosted with an additional $20 billion over 10 years, bringing it to the $80 billion agreed to under the Inflation Reduction Act. Funds, however, cannot be used to target those making under $400,000 ($450,000 MFJ). The increased funding through 2031 is expected to offset the 20% decline in funding and 30% decline in enforcement staffing since 2010.12
The 10-year forecasted impact of these proposed changes range from a net reduction in cumulative deficits of $1.7 trillion to $4 trillion.13 The predicted reduction in GDP from these proposals range from 1% to 1.6%, while redistributing resources from high earners to lower earners. Some models did not consider several proposals due to insufficient explanations in the Green Book. None evaluated the impact of extending expiring TCJA provisions to those making under $400,000, nor do they account for the proposals made in August regarding expansion of the child tax credit, affordable housing, and elimination of the tax on tips.
Republican Platform Proposals
The Republican Party tax plans can be gleaned via Donald Trump’s Agenda 47 website, the GOP Platform, and possibly Project 2025 (which represents the views of many conservative groups).14
Agenda 47 posts what it calls the “Trump Reciprocal Trade Act,” which imposes tariffs on each country equal to the tariff rate they impose on U.S. goods. Trump has proposed an additional 10% tariff on all imports, and a 60% tariff on Chinese imports.
To potentially offset agency budget cuts, there is a call for increased impoundment action, which would “direct federal agencies to identify portions of their budgets where massive savings are possible through the Impoundment Power.”
Agenda 47 proposes the foundation of the American Academy, a free-of-charge education program available to disseminate the “full spectrum of human knowledge” to every citizen. It would be paid for through taxation of university endowments. Also in education, Republicans would expand Section 529 plans to pay for homeschooling. It would give homeschool parents a $10,000 per year tax credit per child to spend on homeschooling costs.
The GOP platform’s position on the TCJA expirations is to “make the Trump tax cuts permanent.” In addition, the platform proposes a plan to eliminate taxes on tips for restaurant and hospitality workers.
The party’s statement on entitlement programs simply says they would “restore economic stability to ensure the long-term sustainability of Social Security,” and would “strengthen Medicare for future generations…with no cuts, including no changes to the retirement age.” And, recently, Trump proposed the elimination of taxing Social Security benefits.
The proposals contained in Project 2025 are both more numerous and more detailed than the GOP platform and Agenda 47. What follows is what the architects of Project 2025 term “intermediate reforms,” with a few “fundamental reforms” at the end.
One of the boldest proposals is the elimination of the progressive tax code and the implementation of a two-rate individual tax system of 15% and 30%. The plan would eliminate most deductions, credits, and exclusions. The 30% bracket would begin at or near the Social Security wage base. In addition, capital gains and qualified dividends would be taxed at 15% and capital gains taxes would be indexed for inflation.
The corporate income tax rate would drop to 18%. Trump proposed in an interview this summer that he will push for a cut to 15%. In addition, Project 2025 says businesses should be allowed to fully carry forward net operating losses and that there should be an immediate expensing for capital expenditures.
To encourage entrepreneurship, the plan says, the business loss limitation should go up to at least $500,000.
Project 2025 wants to repeal all tax increases that were passed as part of the Inflation Reduction Act, including the corporate minimum tax, stock buyback excise tax, coal excise tax, reinstated Superfund tax, and excise taxes on drug manufacturers. Likewise, they want to fully repeal subsidies, credits, and tax breaks for green energy companies. Also on the chopping block are BEAT, NIIT, and deductions related to educational expense, and energy efficient tax preferences and credits.
Estate and gift tax rates are expected to be reduced to no higher than 20%, and the TCJA’s exemption amount of $12.9 million (adjusted for inflation) would be permanent.
GILTI, they propose, should be no higher than 12.5%, with the 20% “haircut” on related foreign tax credits reduced or eliminated.
Regarding all nonbusiness tax deductions and exemptions temporarily suspended by the TCJA in 2017, they should be permanently repealed, says the proposal. These would include the bicycle commuting expense exclusion, nonmilitary moving expense deductions, and miscellaneous itemized deductions. Also, the individual state and local tax deduction, which was temporarily capped at $10,000, should be fully repealed.
On employee fringe benefits, Project 2025 would cap (no higher than $12,000 per year per full-time-equivalent employee) untaxed benefits that employers can claim as deductions. Employers should also be denied deductions for health insurance and other benefits provided to employee dependents if aged 23 or older.
The plan includes a new tax credit, similar to the current EITC for parents who must pay child support, and a new on-the-job-training employer credit of up to $10,000 per worker.
When it comes to IRS funding, the plan wants Congress to reverse the $60 billion in additional 10-year funding achieved by the Biden administration.
Project 2025 opposes the comprehensive reporting regime for all businesses and personal accounts with more than $600 (proposed by President Biden) due to the additional work required by banks to collect taxpayer identification numbers and file revised Form 1099-K for all affected payees.
The “fundamental tax reforms” proposed by Project 2025 include a consumption tax, which could take the form of a national sales tax, business transfer tax, flat tax, or a cash-flow tax. They also propose instituting a 60% vote needed in both the House and the Senate to raise tax rates. Finally, a new Trump administration, the plan proposes, should not support the OECD or its base-erosion initiatives because the plan authors believe it is intended to shift taxation onto U.S.-based companies.
There have been two analyses done by the Tax Foundation that looks at funding the cost of the Republican proposals.15 One found that the 10-year projected cost of reducing the corporate tax rate to 15% would cost approximately $700 billion. The other study found that the new tariffs proposed by Trump would raise annual tax revenues of $500 billion a year, but it would lead to about a 1 point drop in GDP and the loss of several hundred thousand jobs. Several academic and governmental studies have found that the original Trump tariffs, continued by Biden, have raised prices and reduced output and employment, producing a net negative impact on the U.S. economy.16
Conclusion
This election, regarding tax policy and its impact on the economy, is substantially more important than the pre-TCJA days of 2016. There are several reasons for this:
- The impact on the federal debt of extending TCJA’s expiring provisions, or not extending them, is much greater than eight years ago. The debt has become more precarious, not less.
- Our national debt levels have triggered increasingly more alarms and at even higher levels of the Federal Reserve, the Treasury, and Wall Street.
- Within the rest of the parties’ platforms, the short- and long-term tax policy agendas will have massive implications affecting every American for years to come.
Note that both party platforms promise to not touch entitlement programs, the biggest driver to the national debt and its related interest expense. Something has to be done at some point. The longer we wait, the greater the pain will be. It is my hope that after the election both parties will reach a consensus about which expiring provisions of the TCJA make the most sense to extend and which options Americans can accept to stabilize our entitlement programs. This needs to be done before the markets start giving up on the quality of U.S. Treasury bonds, triggering higher interest costs and greater inflation.
1 www.bea.gov/data/gdp/gross-domestic-product
2 https://fred.stlouisfed.org/series/GDP
4 www.bls.gov/news.release/pdf/empsit.pdf and https://data.bls.gov/timeseries/ces0000000001
5 www.cms.gov/oact/tr/2024 and www.ssa.gov/oact/trsum
6 www.pgpf.org/blog/2024/06/cbo-new-report-shows-worsening-fiscal-outlook
7 www.foxbusiness.com/economy/imf-sounds-alarm-ballooning-us-national-debt-something-will-have-give; www.wsj.com/livecoverage/stock-market-today-dow-jones-12-01-2023/card/powell-calls-fiscal-path-unsustainable--7Eo2ZQzkZCnPE33CunyA; www.cnn.com/2024/05/16/business/jamie-dimon-ray-dalio-us-government-debt/index.html; and www.pgpf.org/blog/2024/06/cbo-new-report-shows-worsening-fiscal-outlook
8 https://crsreports.congress.gov/product/pdf/R/R47846; www.cbo.gov/publication/60271; and www.jct.gov/publications/2024/jcx-1-24
9 www.whitehouse.gov/wp-content/uploads/2024/03/budget_fy2025.pdf; www.whitehouse.gov/briefing-room/statements-releases/2024/03/11/fact-sheet-the-presidents-budget-for-fiscal-year-2025; https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf; and https://taxfoundation.org/research/all/federal/biden-budget-2025-tax-proposals
10 www.irs.gov/businesses/small-businesses-self-employed/employer-provided-childcare-credit
11 https://taxfoundation.org/taxedu/glossary/undertaxed-profits-rule-utpr
13 https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf; https://budgetmodel.wharton.upenn.edu/issues/2024/5/22/president-bidens-fy2025-budget-proposal; https://taxfoundation.org/research/all/federal/biden-budget-2025-tax-proposals
14 www.donaldjtrump.com/agenda47; https://rncplatform.donaldjtrump.com; and https://static.project2025.org/2025_MandateForLeadership_FULL.pdf
15 https://taxfoundation.org/blog/trump-corporate-tax-cut; https://taxfoundation.org/research/all/federal/trump-tariffs-biden-tariffs
16 https://taxfoundation.org/research/all/federal/trump-tariffs-biden-tariffs
Robert E. Duquette, CPA, is a teaching full professor in the College of Business at Lehigh University and a retired EY tax partner and Philadelphia transactions tax leader. He is a member of the Pennsylvania CPA Journal Editorial Board and Federal Tax Thought Leadership Committee. The views and opinions expressed here are of the author, not Lehigh University. He can be reached at red209@lehigh.edu. The information in this article is general in nature and is not intended to be legal, accounting, or tax advice, and is only up to date as of the publishing deadline and subject to change. It should not be relied upon in connection with any specific situation or client. Please refer to professional tax and legal advisers for specific advice.
2024 Election Guide to Federal Tax Proposals
The election for president is weeks away. Each candidate and each party has a vision for the next four years that includes specific spending and tax proposals. This guide to the competing tax and revenue plans clarifies each party’s positions and their potential impact on the growing debt crisis.
by Robert E. Duquette, CPA
Sep 5, 2024, 22:46 PM
Many important issues are being debated as the 2024 election for president nears, not the least of which are economic.
Jobs, the price of gas, or the stock market performance are common attack-ad fodder, but the competing parties’ tax proposals may largely go unnoticed by many voters due to their complexity. This feature provides key tax points from the Democrats and Republicans to help you measure the differences.
First, I will set the stage and discuss the state of the economy and the expiring provisions of the Tax Cuts and Jobs Act (TCJA), then I will outline the tax proposals proposed by both parties. No matter who wins the presidency, remember that tax legislation must first start in the House as mandated in the Constitution, and then usually needs 60 votes to avoid filibuster and pass in the Senate (unless a budget reconciliation is used).
U.S. Finances
The most recent numbers for annual real growth domestic product (GDP) growth were 2.8% in the second quarter (Q2) of 2024, 1.4% in Q1 2024, and 3.4% in Q4 2023.1 Total annualized GDP is $28.6 trillion.2 Inflation has been more of a concern this election cycle compared to other recent elections. As this issue went to press, consumer price index (all items) and core inflation (without food and energy) were 3% and 3.3%, respectively.3 Nonfarm unemployment stands at 4.3%, with an average net job growth slowing to 114,000 in July and an average monthly growth of 215,000 year-to-date in July 2024.4
Entitlement funding is always a source of electoral contention, with Democrats and Republicans often proposing conflicting solutions. The country, it seems, is in an untenable middle ground between two visions.
Per the most recent actuaries report, as of Jan. 1, 2024, the net present value liability of the combined federal entitlement trust funds (i.e., Social Security, Disability, and Medicare) is $78 trillion. Reserves are expected to be depleted in about 10 years. Without action, Social Security will have to cut benefits in about 10 years to 83% of current promised levels, and Medicare to 89%.5
Over the next 10 years, Social Security and Medicare spending is expected to increase by 1% of GDP, raising federal debt levels. The cost of maintaining that debt (interest) is a vital concern.6
The federal debt and the resulting interest expense consume vast amounts of fiscal resources. The total debt is $35 trillion (125% of GDP) including $7 trillion owed to other federal trust agencies. (The ratio would be 100% if that were ignored.) The projected level of only public debt and the related debt-to-GDP ratio in 10 years is $57 trillion, or 122% of GDP (assuming current policies, but excluding the debt owed to other federal agencies). Rising rates and growing deficits increase interest expense on the federal debt (expected to be the second-largest budget item after Social Security), which has ballooned from $350 billion (fiscal year 2021) to $900 billion.
The International Monetary Fund, Federal Reserve, Wall Street leaders, and the Peter G. Peterson Foundation have all warned that the projected debt levels will lead to higher interest rates, significant inflation, and depressed economic conditions.7
Expiring Provisions of the TCJA
When the TCJA was passed in 2017, it was done with almost all provisions tied to an expiration date. Many are ending soon, so a look at the expiring provisions is an important element in the assessment of each party’s tax platform. Generally, Democrats want to allow most of the following provisions to expire as scheduled, except to the extent any would impact those making less than $400,000 (single filers) or $450,000 (married filing jointly - MFJ). Republicans have promised to renew the TCJA expiring provisions. The following positions are set to expire in 2025.8
- Individual tax rates were reduced with new brackets (resulting in tax breaks for many).
- The child tax credit was doubled from $1,000 to $2,000 and an additional dependent credit allowed $500.
- The personal exemption deduction was repealed (had been $4,150), the standard deduction was doubled, and the state and local tax deduction was capped at $10,000.
- The mortgage interest expense deduction loan limitation was capped at $750,000 (had been $1 million). The home equity loan interest deduction, which had allowed interest expense deduction on up to $100,000 was repealed.
- The medical expense deduction threshold was reduced from 10% of adjusted gross income (AGI) to 7.5%.
- The miscellaneous itemized deductions limitation was repealed. Previously, it was only deductible to the extent they exceed of 2% of AGI. The total itemized deductions limitation also was repealed. The prior law limited total deductions only to the extent they exceeded 3% of AGI.
- The estate tax exemption threshold rose from $5.6 million to $11.2 million (currently $13.6 million after inflation).
- The alternative minimum tax (AMT) was adjusted to provide higher exemption amounts.
- Section 199A created up to a 20% qualified business income deduction.
- Bonus depreciation had originally provided 100% immediate expensing before its phase out (currently at 60% for 2024).
- The family leave employer credit was a new provision that covers 12.5% to 25% of wages paid for family leave.
- The excess business loss limitation created new limits on deductions for excess business losses.
Should all of the above (instead of just a select few) be extended, there will be a significant economic impact. GDP would increase about 1% over 10 years, which would add almost 1 million jobs (per the Tax Foundation). However, the estimated cost of extending all expiring provisions for 10 years would be $3.5 trillion to $4 trillion, using a “dynamic scoring” basis and conventional “static” basis, respectively. The estimated increase in debt-to-GDP ratio is another 20 to 25 points over that period of time, with resulting pressures on interest rates and inflation.
Other projections indicate that making the expiring provisions permanent would cost in the range of $4 trillion to $4.6 trillion (see CBO and Penn-Wharton Budget Model respectively) over 10 years, with the upper range reflecting dynamic scoring and additional interest on higher national debt.
Democratic Platform Proposals
Democrats, now being led by Vice President Kamala Harris, have proposed several revenue-raising measures beyond expiring TCJA provisions. They are primarily aimed at higher-income taxpayers and large corporations.9 As we went to press, the Harris campaign made additional proposals regarding the child tax credit, affordable housing, and a repeal of taxation on tips. I’ve separated the party’s proposals into individual/estate and business taxes.
Individual Income and Estate Taxes – The party supports a partial expiration of TJCA’s individual tax provisions, which would reset the top rate at 39.6%. However, the 39.6% rate would only apply to incomes above $400,000 (single) and $450,000 (MFJ). The current lower rates for those under the above income thresholds would remain. While vague, the Democrats also propose reviewing other expiring TCJA provisions and addressing those that impact anyone making less than the above thresholds. As noted above, the Harris campaign is proposing a repeal on the taxation of tips, similar to the Republican proposal (see page 20).
The party proposes taxing long-term capital gains and qualified dividends at ordinary income tax rates for those with taxable income above $1 million. The top rate could be as high as 44.6% – a new top rate of 39.6% plus a Net Investment Income Tax (NIIT) of 5%. (The party wants to expand the base of the NIIT to include nonpassive business income and increase the rate from 3.8% to 5%.) They are also considering taxing unrealized capital gains at death, or when gifted, for gains over $5 million ($10 million for joint filers), with exceptions provided for transfers to spouses and charities. It is not clear from the General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, also known as the Green Book, which tax rate would apply, but it could be the new top rate of 39.6% plus the newly increased 5% NIIT.
Long discussed among some members of the Democratic Party, the platform includes a wealth tax, which would impose a minimum tax of 25% on total income, generally inclusive of unrealized capital gains, for those with wealth (assets minus liabilities) greater than $100 million. (See the Federal Tax Column on page 6 for how the Supreme Court may view the constitutionality of both a tax on wealth and unrealized appreciation.)
Also being considered is an increase in the Medicare tax of 0.9% to 2.1% applicable to taxpayers over $400,000. When added to the regular 2.9% Medicare tax, it would bring the total to 5%.
“Backdoor” Roth IRA conversions for high-income taxpayers ($450,000 MFJ and $400,000 if single) would be limited, and a mandatory 50% distribution of vested amounts over $10 million.
Carried interest would be taxed as ordinary income instead of capital gains, and they expect to repeal Section 1031 like-kind exchanges on real estate.
The American Rescue Plan Act’s (ARPA) child tax credit (which expired after 2021) would be renewed and expanded to $3,000 per qualifying child between ages 6 and 17, and $3,600 per qualifying child ages 2 through 5, and $6,000 for newborns through their first year. It would be fully refundable. Likewise, they would renew the ARPA’s Earned Income Tax Credit (EITC) expansion (which also expired after 2021) for workers without qualifying children, for older workers 65 and older, and for young adults age 18 to 24.
Democrats want to create a new program that, for working families with incomes up to $200,000, guarantees “affordable, high-quality child care from birth until kindergarten, with most families paying no more than $10 a day.” They also want to expand the Employer-Provided Childcare Credit to encourage businesses to provide child care benefits to their employees.10
A mortgage relief program would provide a credit and down payment assistance of up to $25,000 for first-time homebuyers, and a one-year credit of up to $10,000 for families selling their starter home. The Harris campaign is also proposing tax incentives for builders of affordable rental housing and starter homes for first-time homebuyers.
The party wants to permanently extend the ARPA health insurance tax credit expansion. And when it comes to Social Security and Medicare funding and payments, they reject all efforts that would result in benefit cuts. Although not in the budget proposal, watch for suggestion to lift the payroll tax cap considering the financial status of these two funds.
Business Taxes – Since the passage of the TCJA, most Democrats have considered the tax cuts given to corporations to have been too steep. Thus, the party proposes raising the corporate income tax rate from 21% to 28%. In addition, they would increase the Inflation Reduction Act’s corporate minimum tax on the largest corporations (GAAP income exceeding $1 billion) from 15% to 21% and would expand the Section 162(m) limitation on executive compensation deductions to $1 million per any employee, from the smaller group currently covered, and to all corporations, including those privately held. For public companies, the stock buyback tax would go up from 1% to 4%.
The party’s platform has a proposal for depreciation recapture, which would increase recapture on real property to 100% and tax it at ordinary rates. This would apply to all C corporations and to pass-throughs for individuals with AGI above $400,000. They also want to make permanent the excess business loss limitation for pass-throughs on high-income taxpayers.
To encourage new construction and the substantial rehabilitation of homes, Democrats propose a Neighborhood Homes Credit. They also want to enhance and expand the Low Income Housing Credit.
When it comes to international corporations, the platform contains incentives for moving jobs to the United States. A new general business credit equal to 10% of the eligible expenses in connection with onshoring a U.S. business. To discourage moving jobs outside the United States, the plan disallows deductions for expenses connected to offshoring.
Multinational base erosion efforts would be modified. Democrats want to repeal the base erosion and anti-abuse tax (BEAT) and replace it with an undertaxed profits rule (UTPR)11 consistent with the Organisation for Economic Co-operation and Development (OECD)/G20 global minimum tax model rules. (Green Book page 34.) When it comes to global intangible low-taxed income (GILTI), there would be a jump from 10.5% to 21% and the tax would be calculated on a jurisdiction-by-jurisdiction basis. The foreign-derived intangible income deduction would be repealed. Interest expense deductions for multinationals would be limited for multinational groups that have over $5 million of aggregate group interest expense. (Green Book page 44.)
CPAs know first-hand that cuts to IRS funding have had detrimental effects. Democrats want to keep the IRS’s budget boosted with an additional $20 billion over 10 years, bringing it to the $80 billion agreed to under the Inflation Reduction Act. Funds, however, cannot be used to target those making under $400,000 ($450,000 MFJ). The increased funding through 2031 is expected to offset the 20% decline in funding and 30% decline in enforcement staffing since 2010.12
The 10-year forecasted impact of these proposed changes range from a net reduction in cumulative deficits of $1.7 trillion to $4 trillion.13 The predicted reduction in GDP from these proposals range from 1% to 1.6%, while redistributing resources from high earners to lower earners. Some models did not consider several proposals due to insufficient explanations in the Green Book. None evaluated the impact of extending expiring TCJA provisions to those making under $400,000, nor do they account for the proposals made in August regarding expansion of the child tax credit, affordable housing, and elimination of the tax on tips.
Republican Platform Proposals
The Republican Party tax plans can be gleaned via Donald Trump’s Agenda 47 website, the GOP Platform, and possibly Project 2025 (which represents the views of many conservative groups).14
Agenda 47 posts what it calls the “Trump Reciprocal Trade Act,” which imposes tariffs on each country equal to the tariff rate they impose on U.S. goods. Trump has proposed an additional 10% tariff on all imports, and a 60% tariff on Chinese imports.
To potentially offset agency budget cuts, there is a call for increased impoundment action, which would “direct federal agencies to identify portions of their budgets where massive savings are possible through the Impoundment Power.”
Agenda 47 proposes the foundation of the American Academy, a free-of-charge education program available to disseminate the “full spectrum of human knowledge” to every citizen. It would be paid for through taxation of university endowments. Also in education, Republicans would expand Section 529 plans to pay for homeschooling. It would give homeschool parents a $10,000 per year tax credit per child to spend on homeschooling costs.
The GOP platform’s position on the TCJA expirations is to “make the Trump tax cuts permanent.” In addition, the platform proposes a plan to eliminate taxes on tips for restaurant and hospitality workers.
The party’s statement on entitlement programs simply says they would “restore economic stability to ensure the long-term sustainability of Social Security,” and would “strengthen Medicare for future generations…with no cuts, including no changes to the retirement age.” And, recently, Trump proposed the elimination of taxing Social Security benefits.
The proposals contained in Project 2025 are both more numerous and more detailed than the GOP platform and Agenda 47. What follows is what the architects of Project 2025 term “intermediate reforms,” with a few “fundamental reforms” at the end.
One of the boldest proposals is the elimination of the progressive tax code and the implementation of a two-rate individual tax system of 15% and 30%. The plan would eliminate most deductions, credits, and exclusions. The 30% bracket would begin at or near the Social Security wage base. In addition, capital gains and qualified dividends would be taxed at 15% and capital gains taxes would be indexed for inflation.
The corporate income tax rate would drop to 18%. Trump proposed in an interview this summer that he will push for a cut to 15%. In addition, Project 2025 says businesses should be allowed to fully carry forward net operating losses and that there should be an immediate expensing for capital expenditures.
To encourage entrepreneurship, the plan says, the business loss limitation should go up to at least $500,000.
Project 2025 wants to repeal all tax increases that were passed as part of the Inflation Reduction Act, including the corporate minimum tax, stock buyback excise tax, coal excise tax, reinstated Superfund tax, and excise taxes on drug manufacturers. Likewise, they want to fully repeal subsidies, credits, and tax breaks for green energy companies. Also on the chopping block are BEAT, NIIT, and deductions related to educational expense, and energy efficient tax preferences and credits.
Estate and gift tax rates are expected to be reduced to no higher than 20%, and the TCJA’s exemption amount of $12.9 million (adjusted for inflation) would be permanent.
GILTI, they propose, should be no higher than 12.5%, with the 20% “haircut” on related foreign tax credits reduced or eliminated.
Regarding all nonbusiness tax deductions and exemptions temporarily suspended by the TCJA in 2017, they should be permanently repealed, says the proposal. These would include the bicycle commuting expense exclusion, nonmilitary moving expense deductions, and miscellaneous itemized deductions. Also, the individual state and local tax deduction, which was temporarily capped at $10,000, should be fully repealed.
On employee fringe benefits, Project 2025 would cap (no higher than $12,000 per year per full-time-equivalent employee) untaxed benefits that employers can claim as deductions. Employers should also be denied deductions for health insurance and other benefits provided to employee dependents if aged 23 or older.
The plan includes a new tax credit, similar to the current EITC for parents who must pay child support, and a new on-the-job-training employer credit of up to $10,000 per worker.
When it comes to IRS funding, the plan wants Congress to reverse the $60 billion in additional 10-year funding achieved by the Biden administration.
Project 2025 opposes the comprehensive reporting regime for all businesses and personal accounts with more than $600 (proposed by President Biden) due to the additional work required by banks to collect taxpayer identification numbers and file revised Form 1099-K for all affected payees.
The “fundamental tax reforms” proposed by Project 2025 include a consumption tax, which could take the form of a national sales tax, business transfer tax, flat tax, or a cash-flow tax. They also propose instituting a 60% vote needed in both the House and the Senate to raise tax rates. Finally, a new Trump administration, the plan proposes, should not support the OECD or its base-erosion initiatives because the plan authors believe it is intended to shift taxation onto U.S.-based companies.
There have been two analyses done by the Tax Foundation that looks at funding the cost of the Republican proposals.15 One found that the 10-year projected cost of reducing the corporate tax rate to 15% would cost approximately $700 billion. The other study found that the new tariffs proposed by Trump would raise annual tax revenues of $500 billion a year, but it would lead to about a 1 point drop in GDP and the loss of several hundred thousand jobs. Several academic and governmental studies have found that the original Trump tariffs, continued by Biden, have raised prices and reduced output and employment, producing a net negative impact on the U.S. economy.16
Conclusion
This election, regarding tax policy and its impact on the economy, is substantially more important than the pre-TCJA days of 2016. There are several reasons for this:
- The impact on the federal debt of extending TCJA’s expiring provisions, or not extending them, is much greater than eight years ago. The debt has become more precarious, not less.
- Our national debt levels have triggered increasingly more alarms and at even higher levels of the Federal Reserve, the Treasury, and Wall Street.
- Within the rest of the parties’ platforms, the short- and long-term tax policy agendas will have massive implications affecting every American for years to come.
Note that both party platforms promise to not touch entitlement programs, the biggest driver to the national debt and its related interest expense. Something has to be done at some point. The longer we wait, the greater the pain will be. It is my hope that after the election both parties will reach a consensus about which expiring provisions of the TCJA make the most sense to extend and which options Americans can accept to stabilize our entitlement programs. This needs to be done before the markets start giving up on the quality of U.S. Treasury bonds, triggering higher interest costs and greater inflation.
1 www.bea.gov/data/gdp/gross-domestic-product
2 https://fred.stlouisfed.org/series/GDP
4 www.bls.gov/news.release/pdf/empsit.pdf and https://data.bls.gov/timeseries/ces0000000001
5 www.cms.gov/oact/tr/2024 and www.ssa.gov/oact/trsum
6 www.pgpf.org/blog/2024/06/cbo-new-report-shows-worsening-fiscal-outlook
7 www.foxbusiness.com/economy/imf-sounds-alarm-ballooning-us-national-debt-something-will-have-give; www.wsj.com/livecoverage/stock-market-today-dow-jones-12-01-2023/card/powell-calls-fiscal-path-unsustainable--7Eo2ZQzkZCnPE33CunyA; www.cnn.com/2024/05/16/business/jamie-dimon-ray-dalio-us-government-debt/index.html; and www.pgpf.org/blog/2024/06/cbo-new-report-shows-worsening-fiscal-outlook
8 https://crsreports.congress.gov/product/pdf/R/R47846; www.cbo.gov/publication/60271; and www.jct.gov/publications/2024/jcx-1-24
9 www.whitehouse.gov/wp-content/uploads/2024/03/budget_fy2025.pdf; www.whitehouse.gov/briefing-room/statements-releases/2024/03/11/fact-sheet-the-presidents-budget-for-fiscal-year-2025; https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf; and https://taxfoundation.org/research/all/federal/biden-budget-2025-tax-proposals
10 www.irs.gov/businesses/small-businesses-self-employed/employer-provided-childcare-credit
11 https://taxfoundation.org/taxedu/glossary/undertaxed-profits-rule-utpr
13 https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf; https://budgetmodel.wharton.upenn.edu/issues/2024/5/22/president-bidens-fy2025-budget-proposal; https://taxfoundation.org/research/all/federal/biden-budget-2025-tax-proposals
14 www.donaldjtrump.com/agenda47; https://rncplatform.donaldjtrump.com; and https://static.project2025.org/2025_MandateForLeadership_FULL.pdf
15 https://taxfoundation.org/blog/trump-corporate-tax-cut; https://taxfoundation.org/research/all/federal/trump-tariffs-biden-tariffs
16 https://taxfoundation.org/research/all/federal/trump-tariffs-biden-tariffs
Robert E. Duquette, CPA, is a teaching full professor in the College of Business at Lehigh University and a retired EY tax partner and Philadelphia transactions tax leader. He is a member of the Pennsylvania CPA Journal Editorial Board and Federal Tax Thought Leadership Committee. The views and opinions expressed here are of the author, not Lehigh University. He can be reached at red209@lehigh.edu. The information in this article is general in nature and is not intended to be legal, accounting, or tax advice, and is only up to date as of the publishing deadline and subject to change. It should not be relied upon in connection with any specific situation or client. Please refer to professional tax and legal advisers for specific advice.
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