Natasha Sarin (Yale; Google Scholar) presents The Coming Fiscal Cliff: A Blueprint for Tax Reform in 2025 (with Kimberly Clausing (UCLA; Google Scholar)) at Columbia today as part of its Davis Polk & Wardwell Tax Policy Colloquium hosted by Michael Love:
At the end of 2025, almost all of the individual, estate, and pass-through provisions of the Tax Cuts and Jobs Act (TCJA) will expire. This looming expiration creates an important opportunity to improve tax policy along multiple dimensions at the same time that TCJA provisions are evaluated for possible extension. In this paper, we suggest four key principles to guide tax policy choices in 2025: first, reforms should raise revenue on net, improving fiscal sustainability; second, reforms should respond to persistent inequalities by increasing the progressivity of the tax code; third, reforms should work to reduce tax-based inefficiencies in the code, and finally, reforms should address global collective action problems such as climate change and tax competition. Using these principles as a guide, we then evaluate possible TCJA extensions and consider a menu of revenue-raising reforms that together have the potential to raise about $3.5 trillion over the coming decade, while improving the progressivity and efficiency of the tax system.
In our view, the policy changes made in this proposal and summarized in table 1 would be an enormous step forward for U.S. tax policy: they would improve the revenue potential of the tax code, the progressivity of tax burdens, the efficiency of the tax system, and the country’s ability to address global collective action problems.
While this menu is just one vision for tax reform, the proposals we discuss are largely ready to implement and could garner support, in our judgment, among a broad swath of lawmakers. Even if election outcomes support consideration of these reforms, it will not be easy. Tax increases are very difficult to enact politically, and the concentrated interests that would be harmed by tax increases (particularly corporate interests, fossil fuel interests, small businesses, and those representing affluent taxpayers) will attempt to obstruct many of these proposals.
Furthermore, elections are unpredictable, and one can easily imagine a 2025 environment with a split Congress. In the event that bipartisan consensus is required for new legislation, we suspect many (but not all) of the items above may fall off the table. Still, we can imagine some sources of compromise, and this is an important area of additional thought in the months ahead. Consider one illustrative example: Under current law, U.S. multinational companies are subject to a vast array of minimum taxes both at home and abroad, including the GILTI, the CAMT, the BEAT, and (soon) foreign under-taxed profits rules. Greater alignment of the U.S. tax system with the international agreement reforms has the potential to both raise revenue and reduce complexity for U.S. businesses, while lowering the pressures of tax competition.
There are dials to all the proposals that we detail. We hope that the set of proposals we offer illustrates our main thesis: There is much to be gained from approaching tax reform in 2025 with the goals of raising revenue, increasing progressivity, enhancing efficiency, and improving global cooperation. Should policymakers choose to take it, this is a moment that will offer a chance to reverse the dominant trends of recent decades, which have reduced fiscal sustainability due to increases in spending without commensurate revenue-raising.