Revenue Implications of Tax Cut and Jobs Act Provisions in 2025

As the U.S. presidential and congressional election frenzy has subsided, policymakers face critical decisions regarding the fate of tax provisions enacted through the Tax Cuts and Jobs Act (TCJA) of 2017. The bill, introduced by then-representative Kevin Brady (R-TX) on November 2, 2017, with 24 Republican cosponsors, represented the most significant tax policy overhaul since the Reagan administration’s 1986 reform, introducing sweeping changes to individual, business, and international taxation. The $1.5 trillion deficit-financed bill faced criticism from Democrats, who raised process complaints regarding closed-door meetings, the release of a 500-page bill just days before the final vote, last-minute changes to the proposed law, and insufficient opportunity for debate or expert testimony. Despite these concerns, the Republican-controlled Congress passed the bill as Public Law No. 115-97, which was signed by then-president Donald Trump on December 22, 2017, with a final vote of 224–201, without a single Democrat’s vote.

The bill was passed through a reconciliation process, which allowed making significant changes to the tax code with limited debate in the Senate and required only a simple majority for the passage of the bill, rather than the typical 60-vote threshold. To comply with the Byrd Rule, which prevents legislation from increasing the budget deficit beyond 10 years, the bill’s architects included several sunset provisions pertaining to individual and business taxation, which are set to expire at the end of 2025. This expiration deadline presents an opportunity for policymakers to reassess and potentially recalibrate the tax code based on the TCJA’s observed impacts and evolving economic needs.

How Americans Reacted to the Tax Cuts and Jobs Act

Whereas Democrats decried the new law as a bane for middle-class Americans, the ruling Republican Party touted the act as a key to U.S. economic prosperity, envisioning Americans on course to derive twin benefits of higher wages and tax cuts. Business groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, hailed the policy as being favorable for American families and businesses. This sentiment was shared by anti-tax conservative groups like Americans for Tax Reform and Americans for Prosperity. However, representative organizations of local and international labor unions, the American Federation of Labor and Congress of Industrial Organizations, AARP (formerly the American Association of Retired Persons), and the National Education Association vehemently opposed the legislation. The act elicited poor public approval, with 46 percent of Americans disapproving of the legislation and viewing it as pro-rich legislation, as elicited from the results of five polls conducted by Quinnipiac University, ABC News/Washington Post, CNN, Morning Consult, and YouGov.

Pre- and Post-TCJA Tax Policy Landscape

Table A-1 in the appendix shows the position of tax provisions nearing expiration in 2025 before and after the TCJA.

The TCJA was expected to raise $4 trillion in tax revenues, extend $5.5 trillion in tax breaks, and create a $1.5 trillion deficit over a 10-year period. Republican lawmakers emphasized the self-paying potential of the act to the extent of $1.8 trillion through economic growth. TCJA tax reforms in 2017 boosted consumer spending and business production through individual tax rate cuts and capital investment incentives in the short run. This economic stimulus propelled annual gross domestic product (GDP) growth from 2.4 percent in 2017 to 2.9 percent in 2018. However, as the initial surge in low-income household spending subsided, growth moderated to 2.3 percent in 2019. The onset of the Covid-19 pandemic in early 2020 disrupted this trajectory, causing economic growth to falter. Subsequent legislation and broad economic stimulus measures implemented by the Biden administration made it difficult to isolate the specific impact of the 2017 tax reforms on U.S. economic growth in the long run.

Winners and Losers

The TCJA introduced significant changes to the U.S. tax system, affecting various aspects of taxation. For individuals and small businesses, the impact varied across income groups. Low- and middle-income individuals and families saw an increase in the standard deduction ceiling across filing status and an enhanced child tax credit (CTC), which provided some relief on their tax bills. However, the effects of rate cuts did not significantly benefit these taxpayers. On the other hand, high-income taxpayers were the primary beneficiaries of lower individual tax rates. They also gained from an inflation-adjusted increase in the estate and gift tax exemption, which rose from $5.6 million per decedent for 2018 to $10 million, effectively reducing their estate taxes. However, wealthy taxpayers faced a new limitation of a $10,000 cap on state and local tax (SALT) deductions, which replaced their previous entitlement to an unlimited deduction. Based on these policy changes, the distributional effects of the TCJA were notable. In 2018, 83.7 percent of households in the top 0.1 percent of the income distribution had their taxes reduced by $193,380 on average, while the middle 20 percent of households saw average tax cuts of only $930, clearly illustrating the skewed benefits of the legislation.

For businesses, the TCJA was largely viewed as beneficial. It lowered the corporate tax rate from 28 percent to 21 percent, bringing it in line with other Organisation for Economic Cooperation and Development countries. This move was estimated to reduce corporate tax revenues by $100–$150 billion annually through 2027. The act also allowed corporations to claim full depreciation for new investments that were intended to stimulate economic growth. While businesses increased investment in equipment due to the full-expensing provision, its indirect effects on payroll tax and income tax failed to compensate for the 40 percent reduction in corporate tax revenue over the 10-year budget period.

Additionally, the law provided a 20 percent deduction of pass-through income for certain noncorporate businesses such as sole proprietorships, partnerships, limited liability companies, and S corporations, which lowered their tax burden.

The TCJA also introduced several provisions related to international taxation. These included an exemption from U.S. taxation for dividends paid by foreign subsidiaries to U.S. parent entities and the introduction of Global Intangible Low-Taxed Income (GILTI)—a minimum tax on foreign earnings from intangible assets like copyrights, patents, and trademarks owned by U.S. corporations but held abroad—a move aimed at addressing the issue of tax avoidance. The act also established a preferential tax rate of 13.125 percent on Foreign-Derived Intangible Income derived from the sale of U.S. patented and trademarked products in foreign markets. Furthermore, it implemented a 10 percent minimum tax on large domestic and foreign corporations, known as the Base Erosion and Anti-Abuse Tax, to discourage profit shifting abroad. These provisions of the TCJA will not expire in 2025 but deserve mention for changing the taxation landscape for international businesses. Following the introduction of the TCJA, foreign direct investment (FDI) stocks in the top 30 U.S. FDI destinations were examined. Outbound FDI stocks decreased by $192 billion in the tax havens. They increased by $251 billion in countries with “normal” or higher tax rates, signifying a lower incentive for profit shifting to low-tax jurisdictions. In contrast, no significant shift in inbound FDI trends was observed. After the introduction of the TCJA, the decade-long exodus of multinational corporations, which previously averaged 10 multinationals’ corporate headquarters moving out of the United States each year, came to a complete halt.

Future Policy Options

As 2025 approaches, lawmakers are tasked with determining the future of the sunset provisions of the TCJA. Despite a Republican-leaning Congress and reelection of Donald Trump, this pivotal decision sits at a critical juncture of intensified debate on the direction of U.S. tax policy. U.S. president Joe Biden, a Democrat, focused on ensuring that the corporate sector and wealthy taxpayers contribute their fair share to federal tax revenue through proposed rate increases while advocating for tax relief for middle- and low-income taxpayers. Biden’s tax plan included raising the corporate tax rate from 21 percent to 28 percent, increasing the GILTI tax rate from 10.5 percent to 21 percent, and implementing new regulations pertaining to international taxation, including the undertaxed profits rule.

Additionally, Biden pledged to raise individual tax rates from 37 percent to 39.6 percent for income over $400,000 for single filers and $450,000 for joint filers while also seeking to maintain the individual tax rates from the TCJA for income below this threshold in his 2025 budget proposal. To support middle- and low-income taxpayers, Biden had signaled his intention to raise the CTC from the current level of $2,000 per qualifying child to $3,600 for young children and $3,000 for older children, in addition to expanding the Earned Income Tax Credit for workers without qualifying children to incentivize work participation across all demographics. President-elect Donald Trump, a Republican, has fervently advocated for the extension of the TCJA and further tax cuts, which would add a projected $4.7 trillion to the deficit over the next decade.

The groundwork for TCJA extension has already been laid by Rep. Vern Buchanan (R-FL) as he introduced the TCJA Permanency Act (H.R.976) on February 10, 2023, in tandem with 103 Republican lawmakers. This initiative underscores the unwavering commitment of the Republican Party to the extension of the TCJA. With the Republican Party holding the reins of both Congress and the White House, lawmakers are once again contemplating to resort to the reconciliation process to expedite the extension of the legislation. This is particularly significant in light of the projected spillover from the 2017 TCJA, which is estimated to cost the U.S. government $155 billion in 2028, surpassing the budget window of 2027 in violation of the Byrd Rule. Amid these developments, the International Monetary Fund has urged the United States to address its fiscal deficit concerns, which surged to 8.8 percent of GDP in 2023, up from 4.1 percent in 2022, whereas the income tax revenue dropped by 3.1 percent of GDP.

Future Policy Alternatives and Their Implications

Amid change of political leadership in the United States, the incoming administration is confronted with a significant number of expiring tax provisions. The debate over whether to extend the TCJA or allow it to lapse continues to captivate stakeholders at every level, from the federal U.S. government down to individual residents. Here, three different policy options and their implications for the economy and across income groups are discussed:

Full Extension

One possible course of action for policymakers is to extend all expiring provisions of the TCJA beyond 2025. However, this approach will raise apprehensions about an increase in the federal budget deficit, heightened reliance on debt financing, and an elevated debt-to-GDP ratio. It is also anticipated to lead to a surge in debt servicing costs, a challenging prospect that cannot be completely mitigated by economic growth, job creation, and increased revenue. According to estimates by the Congressional Budget Office and the Joint Committee on Taxation, a full TCJA extension would result in a federal primary deficit of $1.2 trillion over a five-year period and $3.3 trillion over a decade, as shown in Table A-2 in the appendix.

Additionally, the economic impacts of this extension are projected to include a 1.8 percent increase in GDP, the creation of 829,000 full-time jobs, and a reduction of federal revenue by $3.7 trillion. The anticipated distributional effects of a full TCJA extension raise concerns, as it is expected to disproportionately favor the rich, with 71 percent of the policy benefits accruing to the top 20 percent of the wealthiest households in the United States, replicating the same distributional effect inequalities as observed in 2018. Only 1 percent of wealthy taxpayers residing in states like California, New Jersey, and New York are foreseen to experience a rate hike in the case that the TCJA’s provisions are extended, mainly due to the ceiling on SALT, which can be claimed as a deduction.

Partial Extension

Another option under consideration involves extending provisions that benefit low- and middle-income taxpayers while increasing the tax rate for wealthy individuals. This scenario envisions the expiration of the top two income brackets and reversing the top tax rate for individuals to 39.6 percent for incomes exceeding $400,000—a proposal emblematic of Biden’s proposed tax policy. This approach is anticipated to grow real GDP by 1.8 percent, generate 100,000 jobs, create a $1.9 trillion deficit, and decrease tax revenues by 0.4–0.5 percent of GDP. Notably, it would also result in a tax hike for the top 0.1 percent of taxpayers.

The Old and the New

Lastly, in an effort to curtail the deficit, enhance tax progressivity, combat tax avoidance, and address pressing global issues, a hybrid approach has been proposed that combines the extension of some TCJA provisions with the introduction of new reforms. These recommendations include the extension of TCJA provisions related to standard deductions; personal exemption removal; an increase in CTC with full refundability; maintaining the SALT cap, Alternative Minimum Tax, and home mortgage deduction while suggesting discontinuation of provisions governing individual tax rates; higher estate tax thresholds; and pass-through business income deductions. On the other hand, new tax proposals entail: a corporate tax rate hike of up to 28 percent; a 5 percent increase in the tax rate on long-term capital gains and dividends; the restoration of the estate and gift tax provision to the 2009 level; the introduction of carbon taxes and border adjustment fees ranging from $15 to $65 over the budget window; a 3 percent increase in the financial transaction tax applied to stock, debt, and derivatives transactions; and additional funding for the Internal Revenue Service to reduce the annual tax gap caused by non-filing, underreporting, and underpayment of taxes (estimated at $496 billion for 2014–16). It is envisioned that these reforms would generate $3.5 trillion over a 10-year period, halve the primary deficit by $4.2 trillion, and improve the debt-to-GDP ratio. Importantly, these proposals aim to direct tax cuts to 60 percent of taxpayers in the bottom income quintile while increasing tax rates for 82–96 percent of taxpayers in the top quintile. Overall, the policy proposal indicates an uptick in real GDP by 1.9 percent but reduces job creation by approximately 200,000 jobs.