How Will Trump's Tax Proposals Impact the National Debt?

As of December 2024, the U.S. national debt has surged past $36 trillion, now exceeding 106% of the nation's GDP. This alarming figure has prompted urgent discussions among lawmakers regarding the sustainability of current fiscal policies. During a recent House Committee on the Budget hearing, Chairman Jodey Arrington emphasized the critical nature of the national debt crisis, while former Comptroller General David Walker highlighted that federal liabilities have escalated to over $125 trillion. [51a906be]

Next year could be pivotal for federal tax reform as President-elect Donald Trump aims to extend the Tax Cuts and Jobs Act (TCJA) of 2017, which is set to expire at the end of 2025. Extending these tax cuts could increase the deficit by approximately $5 trillion through fiscal 2035. Trump's proposed corporate tax cut could add an estimated $400 billion annually to the deficit, while eliminating taxes on tips and Social Security income might increase it by another $150 billion. [574d440e]

The committee's discussions have centered around several proposed solutions to address the growing debt. Among these, passing the Fiscal 2025 appropriations bills and establishing a Fiscal Sustainability Commission have been suggested as necessary steps. Douglas Elmendorf, a prominent economist, stressed the importance of a balanced approach that includes both tax increases and spending cuts to mitigate the fiscal crisis. [51a906be]

In the context of these discussions, the Congressional Budget Office (CBO) has projected that extending the TCJA could cost about $4 trillion over the next decade. With the TCJA set to sunset in 2025, average taxpayers may face a 22% tax hike if its provisions expire, and 90% of taxpayers could see their deductions cut by half. U.S. Rep. Jason Smith (R-Mo.) has argued that around 40 million families will have their Child Tax Credit halved if the TCJA is not extended. He contends that the CBO's assessments do not accurately reflect the costs of pro-growth policies. [0c696b39]

Looking ahead to 2025, Trump has nominated Scott Bessent for Treasury Secretary and Billy Long to head the IRS. Long has a controversial history with tax credits and has proposed scrapping the federal tax code in favor of a national sales tax. The IRS has improved enforcement and customer service under President Biden, and the GOP is urged to support IRS reform to effectively implement tax changes. [574d440e]

As the fiscal year 2025 begins, recent reports indicate that the U.S. government has already incurred a deficit of $624 billion over the first two months, with total spending reaching $1.25 trillion against revenues of only $628 billion. Projections suggest that the deficit could exceed $3.5 trillion by the end of the fiscal year, surpassing the $3.1 trillion deficit recorded in 2020. This trend raises concerns about fiscal sustainability, especially as public sentiment leans towards increased spending in areas like education and healthcare, while cuts to military spending remain unpopular. [d217be44]

Critics, including U.S. Rep. Brendan Boyle (D-Pa.), have pointed out that tax cuts have contributed to a $10 trillion revenue shortfall since 2001, with the fiscal year 2024 ending with a $1.8 trillion deficit. Republicans, however, advocate for tax cuts as a means to alleviate inflation impacts, arguing that approximately 26 million small businesses could face a 43.4% tax rate if the TCJA expires. U.S. Rep. Ron Estes (R-Kan.) has emphasized the need to maintain beneficial tax provisions to support these businesses. [0c696b39]

In a recent opinion piece, Winston Fritsch argued that the failure to signal a credible deficit cut could severely impact the U.S.'s ability to roll its debt, which in turn would affect the global economy. He noted that the U.S. Treasury deficit reached $1.8 trillion, with a debt-to-GDP ratio exceeding 120%. The rising interest rates, particularly the doubling of 10-year Treasury Bill rates since 2016, have further complicated the situation. Emerging economies are already facing inflation and higher borrowing costs due to a strong dollar, which Fritsch believes the U.S. has a moral obligation to manage for global stability. He advocates for multilateral discussions at the G20 to address these pressing issues, cautioning that waiting for a natural adjustment is not a viable solution. [7c948244]

As the political climate shows little chance for significant budget cuts despite rising deficits, the path forward for U.S. fiscal policy remains complicated. Treasury Secretary Janet Yellen has expressed concern over the rising debt and its implications for interest rates, which are expected to increase, potentially leading to more bankruptcies and economic strain. However, her tenure has also been criticized for contributing to the current fiscal challenges. [d217be44]