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Tax

Dec. 30, 2024

Can Trump's tax plan support both an aging infrastructure and population?

As Trump eyes extending his 2017 tax cuts, a $35 trillion national debt and mounting social costs pose critical challenges, creating a tension between his tax reduction goals and our nation's pressing needs.

Selwyn D. Whitehead

Founder, The Law Offices of Selwyn D. Whitehead

Shutterstock

Introduction 

As Donald Trump prepares to take office again, his ambitious plans to extend the Tax Cuts and Jobs Act (TCJA) of 2017 face significant challenges: the national deficit, which has ballooned to more than $35 trillion, according to the U.S. Treasury Department's Fiscal Data service, coupled with the need to fund our nation's ongoing fiscal obligations, including our financial commitments to our youth and our aging senior populations. This article explores the tension between Trump's goals of reducing taxes and the pressing need to address the soaring deficit while providing the ongoing needs of "we, the people."

The expansion of the TCJA 

Trump's proposal to extend and expand the TCJA aims to maintain lower tax rates for high-income individuals and corporations. Building on the TCJA, as I explained in my 2021 "Lawyer Issue" article, "A Review of the Tax Cuts and Jobs Acts of 2017 in the Lull Before the Biden Administration's Promised Redux," Trump aims to extend and expand these measures, impacting both individuals and businesses.

Key tax issues related to Trump's proposed TCJA expansion

1. Extension of the TCJA: The TCJA, a hallmark of Trump's first term, introduced substantial tax cuts set to expire on Dec. 31, 2025. Trump plans to extend these cuts, maintaining higher standard deductions and lower income-tax rates, which have benefited many well-healed taxpayers.

2. Corporate tax rate reduction: Trump proposes reducing the corporate tax rate from 21% to 15%. This change could make C corporations more attractive compared to pass-through entities like S corporations and LLCs, prompting business owners to reconsider their entity structures.

3. State and local tax (SALT) deduction: The current $10,000 cap on SALT deductions has been a contentious issue, particularly in high-tax states, such as California and New York. Trump's administration may attempt to raise or eliminate this cap, providing relief to affected taxpayers.

4. Child tax credit and family benefits: The child tax credit, currently up to $2,000 per child, may see an increase to $5,000. This expansion aims to support families and stimulate economic growth by increasing disposable income for working-class Americans.

5. Elimination of certain taxes: Plans to eliminate taxes on tips, Social Security benefits, and overtime pay are on the agenda. These changes could significantly impact small businesses and workers in the service sector, altering their financial landscape.

6. Qualified Business Income Deduction (199A): The 20% deduction for pass-through entities is crucial for small businesses. Though set to expire, Trump supports its extension, providing stability and continued tax relief for business owners.

7. Regulatory and fiscal considerations: Balancing tax cuts with deficit concerns remains a challenge. Internal Republican debates focus on fiscal responsibility, with some advocating for spending cuts, including a not-so-secret plan to privatize or eliminate Social Security and Medicare, to offset the cost of tax reductions.

While these measures promise economic stimulation, they also risk further reducing federal revenues.

The deficit dilemma 

The national deficit, exacerbated by pandemic spending and rising interest rates, poses a formidable obstacle. According to the Peter G. Peterson Foundation, servicing the debt is projected to reach $1 trillion in 2025, and will eclipse our nation's projected Department of Defense FY 2025 Defense Budget of $849.8 billion, limiting the government's fiscal flexibility. Trump's tax cuts, while popular, could deepen the deficit by decreasing government revenue.

Economic promises vs. fiscal reality

Trump's economic agenda, including tariffs and spending cuts, aims to offset revenue losses. However, analyses by economists of all stripes suggest that these measures may not sufficiently counterbalance the deficit increase. The Penn Wharton Budget Model projects a $5.8 trillion increase in the national debt over the next decade due to Trump's policies.

The political and economic implications 

Balancing tax cuts with deficit reduction while adequately funding infrastructure repairs for aging buildings, roads, airports, and bridges, as well as providing disaster relief, while meeting the economic needs of an aging citizenry requires navigating complex political and economic landscapes. Trump's plans face skepticism from both parties, with concerns about favoring the wealthy and reducing funds for essential programs like maintaining the solvency of the Social Security Trust Fund. The challenge lies in achieving economic growth without exacerbating fiscal instability.

Conclusion 

Trump's dual goals of tax reduction and deficit control present a paradox when viewed against the nation's needs. While tax cuts may spur short-term growth, the long-term fiscal health of the nation remains at risk. Expanding and enhancing the TCJA while addressing the deficit and providing essential government services to Americans requires a comprehensive strategy that balances economic incentives with sustainable fiscal policies. Unfortunately, as shown by Trump's role in the FY 2024-2025 Congressional budget negotiations imbroglio, a very real fiscal crisis is unfolding like a slow-motion train wreck as government funding nears exhaustion, threatening a looming governmental shutdown, including federal courts. As such, I don't know that Trump and his team of fiscal advisors led by Elon Musk are up to the task.

#382645


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