Many provisions of President Trump’s 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. He’s promised to make the Trump tax cuts permanent and cut taxes even more.
I spoke to three economists who specialize in corporate taxes, pass-through business taxes, and individual taxes. They were asked: What effects did the 2017 tax cuts have? And what happens if they expire?
Corporate Taxes and Economic Growth
In 2017, the TCJA permanently reduced the top corporate income tax rate from 35% to 21%, putting the U.S. more in line with other G7 countries. There was a modest increase in corporate investment as a result of firms paying lower taxes.
Harvard economics professor Gabriel Chodorow-Reich co-authored a study on the impact of lower corporate tax rates. Trump’s Treasury Secretary at the time, Steven Mnuchin, claimed the tax cuts would generate enough economic growth to offset lost revenue, even helping to pay down debt.
However, Chodorow-Reich’s study found that didn’t quite happen. In 2018 and 2019, corporate tax revenues dropped significantly, reducing government income, while corporate investments slightly increased.
The increased investment wasn’t enough to offset the revenue loss. It remains to be seen whether other parts of the 2017 tax bill, such as the reshoring of corporate profits, could have mitigated the decline.
In 2017, White House economic advisors estimated that corporate tax cuts would give households an average income boost between $4,000 and $9,000.
Chodorow-Reich and his co-authors, using data from 2018 and 2019, found a much lower wage boost of about $750 per full-time employee. While $750 per person is not insignificant, it came at the cost of a substantial loss in tax revenue.
Pass-Through Businesses and the 199A Deduction
Most small to medium business owners file taxes as pass-through businesses, meaning their taxes are filed through individual income tax returns. Unlike corporations, they didn’t get a permanent tax cut.
Economist Elena Patel studied the 199A provision, a deduction created in the 2017 bill that’s set to expire in 2025. This provision allows a temporary 20% tax cut on qualified income for millions of business owners.
While some argued this helped business growth, Patel found little evidence that it boosted investment or employment. Instead, it largely benefited high-income business owners, disproportionately favoring the top 1%. Critics argue this tax cut was mainly aimed at the wealthiest Americans.
Republican lawmakers have pushed for renewing the 199A deduction, warning that failing to do so could lead to higher taxes for small businesses. If extended, the deduction is estimated to reduce federal revenue by nearly $700 billion over the next decade.
Impact on Individuals and Government Spending
When it comes to tax cuts for individuals, Democrats have largely criticized the 2017 tax bill for favoring the wealthy. Williams College economics professor John Bakija says the reality is more nuanced.
The top 1% of earners saw a tax cut equal to about 2% of their income, while middle-class and lower-income earners received smaller percentage cuts. For the bottom 20%, the tax cut was about 0.5% of their income.
While these percentages seem small, the difference in dollar amounts is significant. The average tax cut for the top 1% was over $60,000 more than for the bottom 20%.
The Congressional Budget Office estimates that extending individual income tax cuts would cost over $3.25 trillion over the next decade, with an additional $400 billion in interest.
The key question is how much of this cost will be offset by spending cuts. Those cuts could significantly impact lower and middle-income Americans.
Democrats warn that extending the tax cuts could come at the expense of critical programs like healthcare and social safety nets.
In February, House Republicans passed a budget plan calling for at least $1.5 trillion in spending cuts and up to $4.5 trillion in tax cuts over the next decade.
The Committee for a Responsible Federal Budget estimates that Trump’s tax priorities could reduce government revenue by between $5 trillion and $11 trillion over the next ten years.
It remains to be seen how Trump and Republican lawmakers plan to bridge that gap. Fully extending all provisions would cost an estimated $5.5 trillion, a significant amount of money.