Most Americans support the Trump-era tax cuts, but Congress now faces the difficult task of deciding what taxpayers might have to sacrifice in order to maintain them.
The Tax Cuts and Jobs Act of 2017, championed by then-President Donald Trump, delivered significant tax reductions, particularly for corporations and high-income earners.
However, many of these cuts are set to expire at the end of this year. With Trump and the Republican Party back in power, there’s a clear path for an extension of these cuts.
But at what cost? According to the nonpartisan Congressional Budget Office, extending the tax reductions for the next decade would add $4.6 trillion to the federal deficit.
As of 2024, the federal deficit stands at $1.8 trillion, meaning the government spent $1.8 trillion more than it earned in the last fiscal year.
Overspending already has tangible consequences, particularly for Social Security. Social Security is on track to face funding shortages, which could result in a 17% benefit reduction by 2035.
With this financial reality in mind, Republicans in Congress have compiled a 50-page proposal outlining potential measures to offset the cost of extending the tax cuts. It was reported that the aim is to draft legislation that balances tax reductions and immigration enforcement without deepening the deficit further.
Proposals for cost-cutting include:
- A 10% tariff on all imports: This measure could generate $1.9 trillion over 10 years, though economists caution it would likely pass costs onto American consumers.
- Eliminating the mortgage interest tax deduction: This change would increase taxes for homeowners but could reclaim $1 trillion over a decade.
- Replacing Health Savings Accounts with Roth-style accounts: Savings from this shift are estimated at $110 billion.
- Mandating work requirements for many Medicaid recipients: This could save $100 billion.
- Ending the head-of-household tax-filing status: While this would save $192 billion, it would disproportionately affect taxpayers with children.
- Cutting Pell Grants: Reducing aid to low-income college students, which was expanded under the Biden administration, could save an undetermined amount.
These suggestions aim to identify which cuts might be acceptable to Republicans and their constituents in exchange for preserving lower tax rates.
Limited Options for Cutting Spending
However, the scope for significant spending cuts is narrow.
“Two-thirds of all government spending is nondiscretionary,” explained Don Leonard, an assistant professor of practice in city and regional planning at The Ohio State University. “This includes Social Security, Medicare, and debt payments on the deficit itself.”
That leaves only a third of the budget for potential reductions, half of which is allocated to defense spending.
Tax cuts remain broadly popular. When President Joe Biden took office, he pledged to retain most of the Trump tax cuts while raising taxes only on the wealthiest Americans. A 2024 poll by the conservative Americans for Prosperity found that 90% of voters favor keeping current tax rates.
However, Americans are also concerned about the deficit and Social Security. A recent Suffolk University poll showed that a majority of voters believe Congress should prioritize deficit reduction, even if it means letting some tax cuts expire.
“You’d think people would recognize that changes to tax rates must be paid for somehow,” said Chester Spatt, a finance professor at Carnegie Mellon University’s Tepper School of Business.
Both the Trump and Biden administrations oversaw steady deficit growth, aside from pandemic-related surges.
Trump’s Optimistic Projections
Trump originally claimed his tax cuts would pay for themselves by stimulating economic growth. But the economic impact of those cuts remains unclear, especially after the disruptions caused by COVID-19.
Biden has sought to increase revenue and reduce the deficit by targeting wealthy tax evaders and raising taxes on the rich. While this initiative has generated new revenue, it has not been sufficient to cover spending or reduce the deficit meaningfully.
Republicans have long advocated for fiscal discipline. Many congressional conservatives opposed efforts to eliminate the federal debt ceiling, arguing that it would remove an important check on government spending. This stance put them at odds with Trump, who supported abolishing the ceiling.
“Conservative Republicans do care about the deficit,” Spatt said. “One frequent criticism of Trump is that he doesn’t.”
Despite these concerns, Republicans in Congress may struggle to agree on enough spending reductions to significantly address the national debt.
The proposed cuts have been ranked by lawmakers based on their “viability.” However, the list includes several contentious items, said William Hoagland, senior vice president at the Bipartisan Policy Center.
“If there were political will, reducing the deficit wouldn’t be an issue,” said Steven Hamilton, an economist at The George Washington University. “The challenge lies in the lack of agreement.”
Republicans will need a majority to pass any legislation, leaving no room for defections.