Now that folks have had a chance to digest the Election Nakba… what are you all forecasting for tax policy? This is one of the few areas of federal policy where we could productively change our behavior given a change in the policy.
My guess is that the Trump Big Bang tax law that went into effect 2018 gets extended, more or less unchanged, thus revoking the expiration dates of 2025 and 2028 for various individual and business tax provisions. My basis for this prediction is that Congress hates cutting spending, but enjoys cutting taxes. That’s how we get the deficit spending that started in earnest when Congress refused to implement Ronald Reagan’s proposed spending cuts, but did oblige him on the tax rates that he suggested.
My first prediction for a change is that the limit on state/local (SALT) tax deductibility will be raised or eliminated in order to get some cooperation from the Party of the Economic Elite (i.e., the Democrats). My second prediction is that there will be some sort of enhancement of the current system for extracting money from the childless (the “drones”) and giving the cash to those with children, e.g., via tax deductions or tax credits or “refundable tax credits” for those who don’t bother to work and instead enjoy playing Xbox with their children for all after-school hours. There is nothing that American politicians love more than making the childless work another few hours every week so that parents can enjoy time with their kids.
What would I do about taxation if I could be dictator for a day?
- no change to current tax rates (I assume these are already the revenue-maximizing rates and the federal government needs at least $36 trillion just to pay back debt)
- no change to the mechanisms that Donald Trump put in place to keep multi-national companies from parking all of their profits offshore
- the IRS prepares a draft tax return for every American income taxpayer (i.e., about half of us) with all of the information that it has received and enables us to edit it
- eliminate the estate tax, which generates a huge amount of unproductive legal and accounting activity and hardly any revenue (about $20 billion/year against a federal budget of $7 trillion)
- eliminate the Generation-Skipping Transfer Tax, which is a complicated add-on to the estate tax
- eliminate the step-up in basis that assets get upon an owner’s death (so capital gains liability would increase on inherited assets once they’re sold)
- index capital gains taxation to inflation so that fictitious (inflation-driven) “gains” aren’t taxed (see Uncle Joe’s capital gains tax (what could have been, unburdened by what was) for an example of what would happen to a long-term investor in GE stock who actually lost money in real dollars and then loses more to a tax on inflation)
- eliminate charitable donation deductions (this prevents multi-billionaires from escaping taxation by giving money to the foundations that their kids control, etc.; Warren Buffett has already announced that the U.S. Treasury will get bupkis after he croaks because 99.5% of his money will go “to a charitable trust overseen by his daughter and two sons when he dies.” (USA Today))
Despite the elimination of the estate tax, note that the above changes would result in a huge increase in revenue from dead people and their heirs. Right now someone can inherit a $20 million house from two parents, completely tax free (estate tax exemption for a married couple is about $28 million), and the basis is $20 million, not the $1 million price that they paid in nominal dollars way back when or the $3 million price that is the $1 million adjusted for inflation. Thus, the heir could sell the $20 million house and pay no tax at all because the basis was stepped up to $20 million. If the above changes were implemented, an immediate sale of the inherited house would subject the heir to capital gains and Obamacare tax on a $17 million inflation-adjusted gain or 0.238 * $17e6 = $4 million. Same deal with a $2 million house (i.e., a Biden starter home!), but it would be perhaps $400,000 in revenue for the Federales rather than the current $0. (States that impose a capital gains tax (i.e., not Florida!) could be similarly fattened by these changes.)
Since my ideas are never popular with anyone else, I guess we can say for certain that none of the above changes will ever happen!
Readers: What do you think will happen?
Background…
and what if Congress can’t agree on any bill?
Current tax code HUGE and unnecessarily complex, the only way to simplify is to gut it and go to a simple flat tax. The change you are suggesting and what congress is going to do are small cosmetic changes and basically status quo. I am more worried about stock market, which is trading at 209% over the GDP.
“a simple flat tax” on what? A lot of the complexity in the tax code relates to how income is calculated. Maybe you’re talking about a European-style VAT on consumption. Changing the rate structure from graduated to flat won’t by itself reduce the complexity of preparing taxes in the U.S. (there would still be a myriad of capital asset depreciation schedules, for example, and tax credits of various sorts, and infinite deferrals and exemptions for venture capital (one reason why Silicon Valley elites love the Democrats and higher taxes… they don’t pay tax!).
Maybe they could increase the capital loss carryover to cover a small amount of the inflation since 1980.
Very likely that we get a tax penalty on employing remote workers & tax credit for having office space. Also, if social security taxation really goes away or more likely gets reduced, blue states will most certainly start taxing it for revenge. Calif* dug in & flipped 1 more congress seat to democrat.
Lol, CA is counting until almost a month after the election. I knew that public education in CA was in shambles, but to that degree! What a country!
My prediction is the tax cuts expire, with no renewal or extension. The House majority will be 217-215 (Waltz, Stefanik, and Gaetz out). Last time, 13 GOP (mostly CA, NY, NJ) voted against the tax cuts, due to the cap on SALT deductions.
While it is true that one should never underestimate the ability of Congress to blow out the deficit, reinstating unlimited SALT deductions will cost money in reconciliation which will have to come out of something else.
During the honeymoon period, it has become conventional wisdom that Trump will get whatever he wants. I don’t see how that is possible. Only a two seat majority in the House, plus six aggressive “resistance” Senators in Collins (ME), Murkowski (AK), McConnell (KY), Thune (SD), Graham (SC), and Curtis (UT).
Maybe they will whip their way to a deal, but I don’t see how.
Steve: If the 2018 tax rules expire that would mean that people who voted Republican in 2024 got hugely cheated, as the Brits who voted for Conservatives in the UK did (they voted to reduce low-skill immigration and instead it soared). Although immigration was likely a bigger store, Republicans getting into power and then presiding over a huge (even if by-default) tax increase seems like a recipe for big losses in 2026 and 2028.
Phil, I agree in theory.
But how does one get to Yes? Maybe they increase the SALT deduction to $20k to get the (very few) remaining reps from CA/NJ/NY? Then sunset the tax cuts in 2033 to get through reconciliation? But there’s also an AMT problem…
Perhaps Trump is flushing out the RINOs (Curtis, Collins, etc.) with his early picks (Gaetz, Hegseth) so he can play hardball later. But that is way too 4-D chess for me to believe it.
I think Trump noticed how US House of Representatives will look, few weeks before election. He stated that he was going to restore state deductions but his statement got lost in so-called media so-called reporting, change from his previous policy. I watched his talks.
Good suggestion to replace estate tax with fake do -goodness foundations tax. I think that tax amount collected will be about the same but rich bastards will buy yachts instead of screing everyone’s lives. And yes, all taxes should be both start at transaction completion date and be inflation-adjusted.
A value added tax is coming. Not a very fair tax, but taxes don’t need to be fair.
https://en.wikipedia.org/wiki/Value-added_tax
Tax revenues need to increase (I don’t remember who said recently that Musk is going to find going to Mars a lot easier than cutting government expenses).
Off topic, but deficit related. An idea for Mr. Musk to save a few billion. A law preventing people with VA coverage from signing for Medicare Advantage.
https://www.wsj.com/health/healthcare/veterans-medicare-insurers-collect-billions-bfd47d27?mod=hp_lead_pos7
Wow. I had no idea about the Feds paying double for health care for veterans in what is already the world’s most expensive country in which to buy health care. On the other hand, I don’t see anyone agreeing to cut this super expensive benefit because veterans are sacred even if, like the guy in the article, they never got anywhere near combat.
I would keep capital gains taxes low but I would create an inverted marginal income tax rate where income between $100k-$500k is taxed very heavily (say 50-60%) and then the marginal rate for over $500k is low again. It will prevent capital flight since the middle class who will get punished is unlikely to move.