April is months away, so perhaps the last thing people want to hear about is tax season. And yet, some people are thinking about it right now, namely Congress.
Republicans on Capitol Hill are currently laying the groundwork for extending the Tax Cuts and Jobs Act of 2017. Major provisions in the law, including the higher standard deduction, lowered income tax brackets and a deduction for small business income are set to expire by the end of 2025.
But despite having an incoming Republican-controlled House, Senate and White House, it might still be an uphill battle to see an extension through, according to Owen Zidar, an economics professor at Princeton University. He joined “Marketplace” host Kimberly Adams to talk about the upcoming fight over tax reform. An edited transcript of their conversation is below.
Kimberly Adams: Set the table for us. Why is 2025 going to be such a big year for tax policy?
Owen Zidar: 2025 is going to be quite important because the last major reform in 2017, the Tax Cuts and Jobs Act, set a lot of provisions that are going to expire in the end of 2025, and so if the administration and Congress doesn’t do anything, a lot of us will have tax increases starting in 2026. And so that’s a big impetus to try to create new tax legislation that either extends a lot of the cuts that are going to expire or brings back things that were left out and almost happened in recent legislative debates, like the child tax credit or incentives for research and experimentation, and research and development in the tax code that a lot of people think might make sense in a tax reform.
Adams: Republicans control the White House, the House and the Senate, and yet, a lot of folks are predicting some pretty big fights over how this is going to play out. How would you break down the different camps when it comes to what they are trying to get out of any new tax law?
Zidar: It’s quite interesting. There’s a few different groups in terms of what people want to prioritize. You know, you hear some members who focus on deficit reduction and the debt saying, “We can’t afford any of this. Why are we talking about this?” A second camp is kind of “It’s Christmas and everyone wants a present.” You can understand the appeal of that, where there’s trillions of dollars from extending the Tax Cuts and Jobs Act, plus a range of promises that were made over the campaign that were also quite costly. That adds trillions of dollars more to the overall price tag. But still, the big picture on what’s going on with 2025 is just how expensive it’s going to be because just extending it is going to be something like $4 trillion. Adding a lot of things that were promised in the campaign, or depending on who’s counting, up to $10 trillion, and the numbers are just staggering. So the tension between tax reform like it’s Christmas and the deficit camp, what that ultimate cost will be will kind of tell you something about who won.
Adams: Let’s take that deficit slice on its own, because the U.S. budget deficit is upward of $1.8 trillion, and a lot of Republicans — or, I should say, some Republicans — are claiming that tax cuts pay for themselves and won’t add to that figure. Many economists respectfully disagree with that. What role do you see the deficit playing in this debate over what happens with taxes moving forward?
Zidar: I think it’s a real key player in the debate going forward. We’re in a much worse fiscal position than we have been in prior discussions in 2017, for example. So investment is a key driver of growth, and if we have big deficits, it’s going to be hard to encourage a lot of private sector investment if the government is paying high interest rates because we have to do that to finance a really big debt. So I think the deficit camp is worried about our fiscal health and overall what the effects on growth will be if we treat this tax reform like it’s Christmas.
Adams: How do you see members of Congress kind of prioritizing what should be the most important consideration when shaping tax policy? Is it to stimulate growth in the economy? Is it to reduce the deficit? Is it to, kind of, you know, reward people who voted for them and interests that support them?
Zidar: I think all of those are reasonable things. I mean, from a policy point of view, the goal is to have a big pie with equitable slices. And so we want economic growth, and we want it to be broadly shared, and hopefully, representatives recognize that a thriving economy that’s doing a lot of investment and generating growing wages for people in the middle and the bottom of the income distribution is really what will pay off most. And so I hope that we see reforms oriented towards growth more so than things that pay off narrow constituencies, even if they are basically just adding to the deficit and not really adding much to the overall well-being of America.
