Tax Extension: Implications for 6 Groups Post-Trump Overhaul

Funding Tax Extension: Challenges and Solutions

The practice of financing tax cuts through debt may no longer be viable. Since the 1980s, Congress has frequently reduced tax rates, with only brief periods of tax increases. However, this trend might be ending as the U.S. faces mounting healthcare costs and projections of increased spending on Social Security due to an aging population.

Rising interest rates and recent inflation pose a new challenge not encountered in decades. The expiration of much of the 2017 tax-rate reduction, particularly lower income-tax rates, is significant. In the past, tax cuts were often financed through debt, but there is now concern that further tax reductions could exacerbate inflation.

Both President Joe Biden and his predecessor, Donald Trump, aim to make most of these cuts permanent. However, there’s growing pressure to find ways to pay for them, including potential tax hikes or budget cuts.

Here’s a look at who might bear the brunt:

1. Wealthy taxpayers: Biden proposes tax increases for the top 2% of earners, potentially generating $1.4 trillion over the next decade.
2. Large corporations: The 2017 tax overhaul permanently reduced the corporate tax rate, but there’s talk of raising it to finance tax extensions.
3. Pass-through business owners: The deduction provision for these businesses, though beneficial, is expensive. Allowing it to expire could free up funds for other priorities.
4. Stock-market investors: Democrats may seek to raise taxes on various investment income sources, potentially affecting shareholder returns and corporate behavior.
5. Social Security and Medicare recipients: Maintaining these programs without tax increases could be challenging, leading to potential benefit cuts or program restructuring.
6. Bondholders and consumers: Continued deficit spending could increase inflation and interest rates, impacting consumers and holders of U.S. Treasury bonds the most.

Finding a balance between funding tax cuts and addressing fiscal challenges will be crucial in the coming years.