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Whoever wins the November election will be faced with an immediate challenge: Tax cuts worth more than $3 trillion are slated to expire at the end of 2025. That will hit at a time when money is tight. The national debt has topped $34 trillion, and the cost of servicing that debt is set to exceed $870 billion this year — more than defense spending and Medicare — which means less money to put toward anything else.
President Donald Trump and Republican lawmakers designed the Tax Cuts and Jobs Act that way, so that individual tax cuts, along with quite a few business reductions, evaporate suddenly. Democrats and Republicans are aligned in their view that at least some portion of those tax cuts should be extended. But how — and even if — the government should pay for those extensions is an open question.
That’s why one of the most important jobs in the United States is going to be a scorekeeper. Analysts at the Congressional Budget Office (CBO), the Joint Tax Committee and other groups “score” the cost of — and savings from — different policy options. How much money would a tax on the rich bring in? How much would eliminating the mortgage interest deduction save? The answers to these questions will impact tax policy for years to come.
A lot turns on these scores, as I saw firsthand in my time in the Biden administration. In negotiations over the Bipartisan Infrastructure Law, a provision on cryptocurrency tax reporting was ultimately included in part because scorekeepers said it would raise significant revenue (about $30 billion) to help pay for road and bridge repairs. During debates on Build Back Better in 2021, some legislators refused to vote on the legislation before seeing the score. Once it came in, the magnitude of the expenses was enough to sink that version of the bill.
It’s important to know how much government policies will cost us, especially in a time of high and rising deficits. But it’s equally important to see the full picture.
Take the case of the child tax credit. Scorekeeping merely sees this as a cost because the IRS pays out billions of dollars in benefits to families with children. But it turns out that much of this cost will be recouped by the government in the future. Researchers have found that children whose parents receive cash assistance are more likely to report higher earnings as adults — and pay higher taxes on those earnings. The problem is Congress focuses solely on a 10-year budget window, so the benefits aren’t taken into account.
Clean energy is another prime example. The Inflation Reduction Act introduced hundreds of billions of dollars in tax credits to firms and consumers to facilitate our energy transition. These investments will lead directly to emissions reduction that help the environment and save money later on. But, once again, our current budget process sees them only as short-term costs.
To be clear, I’m not saying scorekeepers provide faulty numbers. They don’t. But they are assigned a very particular task to produce revenue estimates over a 10-year horizon. But policies that “score” well today are not necessarily the best policies for America’s future.
Policymakers need to weigh the overall benefits of action — and inaction — against its true cost. This is akin to how businesses consider new projects through the lens of net present value (for example, balancing the costs of launching a new product line against the benefits of a broader customer base). That’s why I’m launching the Budget Lab at Yale with my former Biden administration colleagues Danny Yagan and Martha Gimbel to infuse policy debates in Washington with the fuller picture.
On the big debate over the more than $3 trillion in tax cuts, the Budget Lab’s preliminary analysis concludes that extending these cuts by deficit financing would lead to higher interest rates for households, making it harder to buy a home or car. In 30 years, the U.S. economy would be smaller — by about $240 billion in today’s dollars. And because these tax cuts provide benefits to those in the top 10 percent that are more than twice as large as they provide to the bottom 20 percent, extending them would make inequality worse.
There’s a better approach. A 2025 tax package that raises revenue and prioritizes simplicity can propel long-term growth, while savings taxpayers around 200 million hours spent on filing each year. Nearly 40 percent of filers could have pre-filled returns, eliminating their need to file taxes altogether. Such a system would move the United States toward peers such as Sweden, where taxpayers merely have to respond “yes” on an app or text message to fulfill their tax obligations.
The dollar costs of policies will always be a critical consideration. But long-term gains — for children, emissions reduction and tax simplicity, to name a few — have to be a bigger part of the debate.
Trump’s tax cuts expire soon. Let’s be smarter about what comes next.
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12.04.2024
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Whoever wins the November election will be faced with an immediate challenge: Tax cuts worth more than $3 trillion are slated to expire at the end of 2025. That will hit at a time when money is tight. The national debt has topped $34 trillion, and the cost of servicing that debt is set to exceed $870 billion this year — more than defense spending and Medicare — which means less money to put toward anything else.
President Donald Trump and Republican lawmakers designed the Tax Cuts and Jobs Act that way, so that individual tax cuts, along with quite a few business reductions, evaporate suddenly. Democrats and Republicans are aligned in their view that at least some portion of those tax cuts should be extended. But how — and even if — the government should pay for those extensions is an open question.
That’s why one of the most important jobs in the United States is going to be a scorekeeper. Analysts at the Congressional Budget Office (CBO), the Joint Tax Committee and other groups “score” the cost of — and savings from — different policy options. How much money would a tax on the rich bring in? How much would eliminating the mortgage........
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