Politics

Democrats, for all their promises, didn’t dare repeal the Trump tax cuts after all

President Joe Biden signed the Inflation Reduction Act into law last month, adding to a long history of legislation that will achieve the opposite of what its name claims. Consider the quality of K-12 education after the No Child Left Behind Act, or the affordability of health care after the Affordable Care Act. Already, the Congressional Budget Office projects that the law will have zero impact on inflation. This will not surprise Americans, who, by a three-to-one margin, expect the law to increase inflation, not reduce it.

Yet one surprise about the new tax law is not yet making headlines. In passing their own version of tax reform, the Democrats left the 2017 Tax Cuts and Jobs Act completely intact, despite five years of promises to repeal it. No less than President Biden himself made a campaign promise that “on Day 1, I will move to eliminate Trump’s tax cuts.”

Deference to the TCJA reveals that it is, in fact, good policy with bipartisan appeal. The most obvious thing to fix about the TCJA is to make its key provisions permanent.

Republicans passed the TCJA through budget reconciliation in 2017. Democrats decried the law as “tax cuts for the rich,” funded by a middle-class tax hike. Yet the Joint Committee on Taxation found that the TCJA made the tax code more progressive. And the Congressional Budget Office found that the law cut tax rates across the board, not just for the wealthy. Even The Washington Post belatedly reported that most households got a tax cut.

Former President Donald Trump
Former President Trump speaks at a rally in Pennsylvania on September 3. Spencer Platt/Getty Images

The TCJA reformed individual and business taxes. Income tax rates were cut for all income levels, with the top rate falling from 39.6% to 37%. The law nearly doubled the standard deduction and the child tax credit. To pay for these revenue reductions, the TCJA eliminated the personal exemption, capped the deduction for state and local taxes and limited deductions for mortgage interest and charitable contributions.

The law’s business-tax reforms were far more important for American global competitiveness. The corporate rate was slashed from 35% to 21%, and businesses were allowed full and immediate expensing for investments in short-lived (20 years and less) capital assets. The tax code’s business net-interest deduction was limited. Combined with full expensing, these changes removed the code’s bias for debt financing over equity financing. The TCJA also modernized the US corporate-tax system by moving to territorial taxation, coupled with provisions to prevent profit off-shoring. Finally, smaller pass-through businesses received a 20% deduction against taxable income.

In all of this, congressional Democrats found nothing to change in their quest to raise taxes. Perhaps they’ve conceded the reality that the TCJA, though imperfect, significantly improved the American tax system.

Biden’s IRA, on the other hand, raises tax revenue by imposing a 15% tax on corporate book income (the income that corporations report on financial statements to shareholders). This strange policy outsources the definition of taxable income from the Internal Revenue Code — written by the people’s elected representatives to Congress — to the private, unelected Financial Accounting Standards Board, a professional organization that sets accounting standards.

Tax revenue is also expected to increase through increased IRS enforcement and a new 1% tax on stock buybacks.

The TCJA was a fiscal white whale that Democratic leaders promised to harpoon. Yet they left it unscathed. One explanation for why comes from Manhattan Institute senior fellow Brian Riedl, who argues that despite its party-line vote, the TCJA was more bipartisan than Democrats want to admit. As a Senate staffer, Riedl listened to Democrats concede that lower corporate rates, full expensing and a territorial business-tax system were commonsense policies — but they worried about angering progressive activists.

A Metro line in Los Angeles displays the message "Beat Inflation."
A Metro line in Redondo Beach, California, displays the message “Beat Inflation.” PATRICK T. FALLON/AFP via Getty Images

Perhaps Democrats became trapped by their own successful messaging campaign against the TCJA, which prevented them from publicly admitting its merits. As two New York Times columnists wrote in a 2019 synopsis: “To a large degree, the gap between perception and reality on the tax cuts appears to flow from a sustained — and misleading — effort by liberal opponents of the law to brand it as a broad middle-class tax increase.”

The TCJA does have one obvious flaw: Some critical provisions will expire in coming years. The law should be made permanent, which would enhance US competitiveness and encourage reshoring American supply chains.

That work belongs to a future Congress. For now, the TCJA remains intact.

Michael Lucci is a senior fellow at the Cicero Institute. From the Manhattan Institute’s City Journal.