President-elect Trump and Republican lawmakers will face pressure to find a way to cover the cost as they prepare to pass a massive tax cut bill through Congress next year.
While Mr. Trump and many of his Republican colleagues argue that carefully crafted tax cuts will pay for themselves, a vocal group of fiscal hawks in the party are pushing for serious spending cuts.
The $36 trillion federal debt is now a point of contention for many Republican lawmakers, who are beginning to weigh the top-line numbers for budget reconciliation, a key step toward pushing through an eventual tax cut.
Here's a look at ways Republicans could consider paying for the tax cuts.
customs duty
President Trump's economic pitch has centered on tariffs, which were a key pillar of economic policy during his first administration.
He proposed imposing general tariffs of 10% and 20% on imports, as well as a 60% tariff on products specifically from China, the United States' major trading partner.
According to one quote According to the Conservative Tax Foundation, a 10% general tariff would raise federal revenue by $300 billion a year.
Tariffs are imposed on importers and importers can respond in a variety of ways.
Imports of goods can be stopped unless the exporter lowers the price. They can keep their margins stable and pass on price increases to retailers. You can keep your prices the same even if your margins take a hit. Companies can also order additional products to increase their inventory before tariffs are imposed, as they already do.
price of consumer price index There was no noticeable increase in 2018 after the first part of the Trump tariffs, and it never reached the magnitude of post-pandemic inflation.
There are conflicting studies on whether consumers bore the brunt of President Trump's first round of tariffs.
Research on one of them The New York Federal Reserve and Columbia University found that the tariffs were “almost entirely passed through to U.S. domestic prices, with the entire tariff incidence being imposed on domestic consumers and importers.”
Another study from Harvard University and the University of Chicago Business School found that “tariffs affect retail prices.'' [was] It suggests that “many U.S. retailers have reduced sales margins on affected products.”
The study noted that less is known about how economies respond to tariffs in the real world, “particularly when it comes to trade policies involving large countries that can affect prices.” .
China could also devalue its currency to cushion the impact of tariffs. Sébastien Breteau, CEO of supply chain company QIMA, told The Hill that Chinese people are not concerned about tariffs and that currency adjustments could account for 3% to 4% of the impact. spoke.
Inflation Control Act Reductions
Republicans have expressed interest in cutting the Inflation Control Act (IRA), the Democratic Party's sweeping climate technology law passed in 2022.
If the climate provisions of the Act were completely repealed, Generate approximately $369 billion. But that is unlikely, as the IRA is popular in many Republican districts across the country.
In August, 18 Republican members of Congress sent a letter to House Speaker Mike Johnson (R-Louisiana) calling for the law to be repealed, saying it would “undermine private investment and discourage development already underway.” I asked them not to.
Prime Minister Boris Johnson has spoken with varying degrees of strength about the possibility of cutting the IRA, indicating it is a sensitive topic within the meeting. As part of President Trump's plan for his first 100 days, Johnson said he wants to “repeat wasteful Green New Deal tax credits and anti-energy regulations.”
But he told CNBC in September that he wanted to use “a scalpel, not a sledgehammer” to remove energy transition subsidies, “because there are some provisions that will help overall.”
President Trump is reportedly planning to eliminate the IRA tax credit for electric vehicle purchases, which would require approval from Congress.
International business tax changes
The international tax system updated in President Trump's 2017 tax law could also be a source of increased revenue for domestic cuts, tax experts told The Hill.
“There are a lot of potential offsets in the international arena as well, and people are looking at them and building arguments.” [about]That could be a big change,” Mark Prater, managing director of tax policy services at accounting firm PwC, said in an interview.
Personal taxes that can be toggled up or down range from Global Intangible Low-Taxed Income (GILTI) to the alternative minimum tax for corporations, known as the Corporate Alternative Minimum Tax, recently introduced by Democrats.
“These are all levers that can be used in different directions,” Martin Fiore, vice chairman of Americas tax at accounting firm EY, said at a recent online event.
Other tax experts believe that widespread changes to the GILTI regime, such as country-by-country implementation, are off the table due to the potential for pushback from industries with different tax interests.
“At the end of the day, GILTI is a Republican administration,” said Jose Murillo, EY's international tax leader. “For me, it’s unlikely we’ll see anything change over the next four years.”
Employee Retention Tax Credit
The tax deal, which passed the House with broad bipartisan support earlier this year but failed to pass the Senate in the summer due to Republican opposition, was largely paid for by canceling the Employee Retention Tax Credit (ERTC). I was disappointed.
The pandemic-era credit, designed to help businesses keep employees on payroll during the economic shutdown, is valued at more than $70 billion.
The IRS says the program was aggressively promoted to businesses by advertisers in the tax and accounting industry, but it has since been rife with fraud and remains on the minds of lawmakers as a potential revenue source. There may be some left.
Ways and Means Committee Chairman Jason Smith (R-Missouri) and panel member Rep. David Schweikert (R-Ariz.) wrote to the IRS last year about problems with the program, saying, asked about the authorities' plans to resolve the outstanding balance. ERTC's claim [and] Prevent fraud. ”
Growth and dynamic scoring discussion
A common argument from Republicans in Washington about tax cuts is that they pay for them because they spur economic growth. They argue that the loss in linear revenue is offset by the fact that it is gained from greater total output.
Official tax accounting by government agencies like the Congressional Budget Office and the Joint Committee on Taxation doesn't take this into account, so Republicans often rely on a broader, informal metric known as “dynamic scoring.”
Tax experts agree that some growth is related to tax cuts, but most say the effects are not as significant as political rhetoric suggests.
“My experts all agree that tax cuts have a dynamic effect. They reduce deficits and reduce static costs. But 99.9 percent of economists agree that tax cuts have a dynamic effect. I don't think we're going to see that much growth,” Marty Sullivan, chief economist at Tax Note and a former member of the Joint Committee on Taxation, told The Hill.
In 2019, the Congressional Research Service (CRS) estimated that the 2017 Trump tax cuts produced less than 5% of the growth rate needed to fully offset the revenue losses.
According to CRS, gross domestic product would have needed to grow 6.7% in 2018 to offset the losses, but the actual growth rate was just 0.3%. Growth forecasts from financial firms such as Goldman Sachs, Moody's Analytics and Barclays range from 0.1% to 0.5%.
“Sorry, folks. A massive tax cut would have a huge negative impact on the budget deficit,” Sullivan added.
