The tax reductions introduced during Trump’s initial term in office are mostly set to lapse by the end of 2025. Trump, alongside his Republican allies, is keen on extending these cuts. However, if they proceed without balancing those cuts with spending reductions, it could swell deficits by over $5 trillion by 2035.
So, how could policymakers fund the continuation of these 2017 tax cuts? Sources indicate that the new administration is exploring significant cuts to several spending programs such as Medicaid and the Supplemental Nutrition Assistance Program, commonly known as SNAP or food stamps. This approach could potentially leave nearly all low-income households at a disadvantage, along with many families in the middle and upper income brackets.
The distribution of these extended cuts leans heavily towards being regressive. Just 1.7% of the benefits would be allocated to the lowest 20% of households by income, compared to nearly 65% for the top quintile and over 23% for the top 1%. In stark contrast, while the average tax savings for the bottom quintile would be merely $130 annually, the top 1% would receive $70,000 a year. The super-wealthy top 0.1% would see an average annual tax break exceeding $275,000.
Insights from the Urban-Brookings Tax Policy Center’s microsimulation model highlight these disparities. Should the tax cuts be financed by equally slashing federal assistance across families, more than three-quarters of households would end up worse off. Within the bottom two income quintiles, over 99% of households would fare worse, facing an average yearly tax increase of $1,515. Even among the middle-income group, 76% would be negatively impacted.
Moreover, if spending reductions specifically target safety net programs as rumored, rather than more general spending, it is the poorer households that would feel the most pain. Even if the spending cuts were adjusted in proportion to income, 63% of households would still find themselves worse off.
Advocates for tax cuts often claim these measures drive economic growth and benefit everyone across the income ladder. Nonetheless, a recent analysis from the Congressional Budget Office found that keeping the expiring tax provisions would only yield a minimal, short-lived boost to gross domestic product. After around four years, the resultant increase in the federal budget deficit would even bring about marginally reduced GDP growth compared to letting the cuts expire.
On top of this, several studies focusing on long-standing policies across the affluent nations of the Organization for Economic Co-operation and Development revealed no significant impact on economic growth from reducing taxes for the wealthy. Yet, such cuts do notably amplify income inequality.
There is ample evidence today indicating that investments in children’s health, education, nutrition, and other resources bring long-term benefits, impacting both individuals and the broader economy positively. This signals that Congress might consider letting the tax cuts expire to invest in initiatives that benefit lower- and middle-income children and families instead. Opting to renew the 2017 tax cuts and covering the cost with spending cuts seems sensible only if the aim is to widen the wealth gap further, making the poor poorer and the rich richer.
William Gale serves as a co-director of the Urban-Brookings Tax Policy Center and previously worked as a senior economist for President George H. W. Bush’s Council of Economic Advisers.
