Highlights:
At the end of 2025, the provisions of the Tax Cuts and Jobs Act (TCJA) relating to the individual income tax will expire. This means that come midnight on December 31, 2025, the lower rates, expanded tax brackets, a doubled standard deduction, an expanded child tax credit, will revert back to pre-TCJA parameters. The expiration of these provisions would amount to an across-the-board income tax increase of $3.3 trillion. How to address these expirations will involve significant tradeoffs. One approach favored by progressives and some populists on the right would be to expand the child tax credit (CTC) in exchange for a higher corporate tax rate. A recent analysis demonstrates this is a bad deal for taxpayers and the economy in general.
It is likely that regardless of which candidate wins in November, a significant portion of the individual tax changes of the TCJA will be extended. Circumstances vary by taxpayer, but allowing these provisions to expire would amount to a significant tax hit to working Americans. The Tax Foundation has modeled some of these impacts, and for many families the increased tax bill would be 4 figures. No president, Republican or Democrat, is going to allow this. The debate then comes down to what else will change along the way.
Among the most conspicuous and significant elements of the TCJA – the 21 percent corporate tax rate – is permanent. Under current law, the U.S. corporate rate will be 21 percent in perpetuity. Yet observers should fully understand that the corporate rate will figure prominently in next year’s debate about how and to what degree lawmakers should extend the expiring provisions in the TCJA.
President Biden’s budget calls for raising the corporate tax rate to 28 percent. Vice President Harris has adopted this policy for her campaign. Increasing the rate to 28 percent would significantly harm America’s competitive position compared to other major economies. Progressives have serially assailed the corporate tax reduction in the TCJA, but the rhetoric has been largely context-free. Prior to the enactment of the TCJA, the U.S. had the highest corporate tax rate among major economies. The result was a tax environment that shipped U.S. firms and jobs overseas.
For some progressives and populists, this is a tradeoff worth making to finance an expanded CTC. Note that the TCJA doubled the CTC compared to prior law. But what’s worth doubling is surely worth tripling, by some lights. The American Rescue Plan provided a CTC of up to $3,600, compared to the TCJA level of $2,000, along with expanded eligibility.
To finance this expansion, according to an analysis performed by EY and commissioned by the American Action Forum, the corporate tax rate would have to be increased all the way to 31 percent. While this is still less than what prevailed prior to the TCJA, it would take the U.S. back to having the highest corporate rate among major economies.
Expanding the CTC is not without some benefit, and the EY analysis grapples with these benefits honestly. Higher CTC payments can relieve poverty and improve economic outcomes for children in lower income families. There are also some drawbacks, to the extent the CTC can alter incentives to work, but there is no consensus on this effect. But even under the most favorable assumptions, trading a corporate tax rate hike for a CTC expansion is an economic loser.
As the analysis shows, in the short term, families benefit from the CTC in the form of higher consumption and after-tax wages. But over the medium and longer-term, the drag from the higher corporate rate takes hold: Investment falls and wage gains reverse. Over the long term, this tradeoff is a clear loser: Labor supply falls, wages fall, consumption falls, and the economy shrinks. As ever, for populists and progressives, tax and spend policies may sound good, but leave the economy and taxpayers worse off.