Tax Policy, Part 1: Kyle Pomerleau

Summary

Podcast Summary: One on One with Robert Doar: Tax Policy, Part 1 (w/ Kyle Pomerleau)

Date: December 18, 2024
Host: Robert Doar (AEI President)
Guest: Kyle Pomerleau (AEI Tax Policy Expert)

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Episode Overview

This episode dives into the critical tax policy debates set to dominate Washington as provisions of the 2017 Tax Cuts and Jobs Act (TCJA) near expiration. Robert Doar sits down with AEI’s Kyle Pomerleau to explore what’s at stake as lawmakers grapple with extending or redesigning tax cuts, the fiscal implications, regressive and progressive tax policies (including tariffs), and the lasting impact of temporary tax reforms. The conversation is rich in both context and technical detail—ideal for listeners seeking to understand the nuances and stakes of U.S. tax reform in an era of deficit anxiety and political polarization.

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Key Discussion Points & Insights

1. Who Pays Federal Income Tax: Progressivity and Comparisons with Europe

• The U.S. individual income tax is highly progressive, meaning high-earners pay a much higher share of their income compared to low-earners.
• “[L]ow-income households actually have a negative tax rate because we have a lot of social policy built into the tax code. These are your favorite provisions, the Earned Income Tax Credit and the Child Tax Credit.” (B, 02:25)
• Those earning ~$50,000/year pay an effective rate of ~8%; high earners ($500,000+) pay about 25%. (B, 03:08)
• European countries often have less progressive overall tax systems due to regressive value-added taxes (VATs), which the U.S. lacks.

2. Tariffs as Regressive Taxes and Revenue Sources

• Tariffs, like those proposed by Donald Trump, are taxes on imports and regressive—meaning lower-income households bear a heavier burden.
  • “Tariffs are a tax... they apply to goods that are imported... Unlike a sales tax, which is about raising revenue, [tariffs] can encourage other countries to retaliate.... doubles the economic harm.” (B, 05:04)
• A hypothetical 10% across-the-board tariff + 60% tariff on Chinese goods would raise an estimated $2.8 trillion over a decade—averaging $1,800/year per household (citing Tax Policy Center). (A, 07:53)
• However, tariffs would not raise enough revenue to cover major tax cut extensions (e.g., $5T needed for full TCJA extension), and have significant drawbacks compared to broad, domestic consumption taxes like a VAT.

3. The Looming Expiry of TCJA Individual Tax Cuts

• The corporate tax rate cut to 21% is permanent, keeping the U.S. competitive globally.
  • “Prior to [TCJA], we were at around 35%... that was the highest rate among developed countries.... Biggest one, of course, is companies are encouraged to shift profits to low tax jurisdictions...” (B, 10:44)
• Individual provisions were made temporary for budgetary reasons (reconciliation rules require no long-term deficit increase).
• If not extended, January 2026 would see a $400–$500 billion/year increase in household taxes—a “tax cliff.” (B, 12:13)

4. Evaluating the Growth Impact of Tax Policy

• There’s little evidence that extending individual TCJA provisions would be “pro-growth.”
  • “That revenue loss is going to be from reduced statutory tax rates... going to encourage some work from households... but not all that much.... the additional borrowing is going to crowd out domestic investment...” (B, 15:15)
• The “growthy” (pro-growth) pieces, like the lower corporate tax rate, are now permanent; critical temporary investment incentives are phasing out.

5. Three Most Important Pro-Growth Provisions At Risk

• 100% Bonus Depreciation: Lets businesses immediately write off equipment—encourages investment, should be made permanent.
  • “The single most important provision... is 100% bonus depreciation... allows businesses to fully deduct the cost of new short-lived investments... What this does... is eliminate the tax burden on that investment.” (B, 17:28)
• Expensing of R&D Costs: Reverting to amortization is negative for long-term growth; urgent to restore immediate expensing.
• International Tax Regime Simplification: Rules for taxing multinational profits are set to change, with complexity and uncertainty dampening U.S. investment.
• The permanent extension of these three provisions would cost about $1T over a decade, versus $4–$4.5T for all individual tax cuts. (A/B, 23:16–23:35)

6. Politics and Budget Rules: How Congress Might Pay (or Not Pay) for Tax Cuts

• Under reconciliation, only costs outside a 10-year budget window need to be offset—so lawmakers can make cuts “temporary” to sidestep pay-fors.
• “[T]hey could do the same thing all over again.” (A/B, 25:54–25:59)
• Tariff revenue is off the table if enacted via executive order before reconciliation; “They can't raise the revenue anymore. So even though they want to do this, it’s a challenge.” (B, 28:45)
• Claims that tax cuts “pay for themselves” through growth are persistent but largely rhetorical, not supported by official CBO scoring.

7. Revenue-Raising Options and Political Realities

• Base broadening—ending some deductions, e.g. limiting state and local tax (SALT) deduction—are among preferred offsetting policies, but also politically contentious:
  • “Capping [SALT] made sense to me.... close, close to a trillion dollars over a decade.” (B, 34:42)
• Expanding child tax credits, eliminating tax on tips/overtime/Social Security—all pitched as further tax relief—would cost trillions more.

8. Child Tax Credit and Family Tax Policy

• TCJA expanded the Child Tax Credit (CTC) and made it more generous and somewhat more refundable for working families.
• Pomerleau views the CTC as a “step forward in tax policy as far as you’re concerned,” primarily as an adjustment for household size and a simplification of earlier, more complex rules. (B, 41:23–41:38)
• Both expect the expanded CTC to be continued as-is.

9. Budget Controls and Structural Fiscal Challenges

• Attempts to pay for extensions will be difficult given current debt/deficit and political gridlock.
• Executive branch management alone has little impact on fiscal balance because most spending is mandatory (Social Security, Medicare, debt). (B, 45:11)
• “We are paying something like 4% of our GDP in interest... much worse debt and deficit situation. And the costs are much higher.” (A, 27:15; 43:20)

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Notable Quotes & Memorable Moments

• On Progressivity:
  “Low income households actually have a negative tax rate because we have a lot of social policy built into the tax code.”
  —Kyle Pomerleau (02:25)

• On Tariffs as Taxes:
  “Tariffs are a tax... what makes them worse than a sales tax... is that they only apply to certain goods from certain countries... Unlike sales tax, which is about raising revenue, these can encourage other countries to retaliate.”
  —Kyle Pomerleau (05:04)

• On Corporate Tax Rates Pre-TCJA:
  “Prior to the Tax Cuts and Jobs Act... we were at around 35%... that was the highest rate among developed countries... That creates a lot of problems. Biggest one, of course, is companies are encouraged to shift profits to low-tax jurisdictions.”
  —Kyle Pomerleau (10:44)

• On the Real Cost of Extending Tax Cuts:
  “So extending all three [pro-growth provisions]... that's closer to a trillion dollars over a decade... The cost of the individual tax cuts being extended is closer to four, four and a half trillion.”
  —Pomerleau (23:16–23:35)

• On Policy Rhetoric vs. Reality:
  “There’s the official score, but then I'd say there's the unofficial score, the rhetorical score... Republican lawmakers said... it doesn't cost anything because... economic growth which would bring us a trillion dollars... You could see the same thing happening this time around.”
  —Pomerleau (29:21–30:36)

• On Political Trade-offs:
  “This is not the extension of the Bush tax cuts. So the Bush tax cuts, those were just tax cuts and you can just extend them, no tradeoffs necessary. Everyone’s getting a tax cut. Here, we're talking about a tax reform that's both raising and cutting taxes in different places. You also have a slim Republican majority with different... And a much worse debt and deficit situation.”
  —Robert Doar (43:00)

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Important Timestamps

• 02:19: Do the rich pay their fair share?
• 05:04: The regressive burden and economic impact of tariffs
• 07:00: Potential revenue from tariffs versus a VAT
• 10:28: Corporate tax rate reduction context
• 12:13: Individual TCJA provisions—temporary and at risk of expiring
• 15:15: CBO analysis—little or no growth from individual cut extension
• 17:28: 100% bonus depreciation as #1 pro-growth priority
• 23:16–23:35: Cost comparison of pro-growth vs. individual tax extenders
• 25:54–25:59: Temporary policy tactics to avoid “pay-fors”
• 29:21–30:36: Political maneuvers: tariffs and growth claims as offsets
• 34:42: SALT deduction cap—policy and politics
• 41:23–41:38: Child Tax Credit simplification and permanence
• 43:00–43:20: Why extending TCJA is far harder than past tax cut debates
• 45:11: The limited fiscal impact of “good management” in the executive branch

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Conclusion

This episode of “One on One with Robert Doar” offers a nuanced, detail-rich roadmap for navigating U.S. tax policy at a pivotal moment. Pomerleau emphasizes the importance of making pro-growth business tax provisions permanent while noting the steep costs and dubious growth impact of extending all individual tax cuts. The risks of relying on tariffs, political maneuvering over “pay-fors,” and the real threat posed by America’s rising deficit round out a sobering, realistic assessment of what Congress faces in the year ahead.

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For listeners:
If you want a clear-headed guide to what should happen versus what may happen as America’s tax debate intensifies, this episode is required listening.

Transcript

[A]

Hello and welcome to One on One with Robert Doar. I'm your host, Robert Doar, and thanks for tuning in. Today, as president of the American Enterprise Institute, I have the unique privilege of working with America's greatest policy experts. These scholars focus on policy issues in the fields of education, economics and energy, foreign defense, and so much more. Subscribe to this podcast for exclusive access to in depth discussions on the most pressing policy issues. Together with my guests, we'll challenge political preconceptions, explore innovative ideas, and create, I hope, a freer and safer world. Joining us this week is Kyle Pomerlow, America's premier tax policy expert. And he's at AEI, been now maybe a couple years.

[B]

Yep. Since 2019.

[A]

Since 2019. And he's very young. But if you go over to the Hill and you go into any office that's focused on tax policy, they all know him. They have him on speed dial. And that's a great thing. We're very proud of that, Kyle. And that's because you know more about the tax code than maybe anybody I've ever met, except for the possible exception of Alan Viard, and he retired from aei. So look at that.

[B]

Thank you very much.

[A]

Those are big shoes to fill. All right, so we're going to go through where you are. We got big, big time coming up because it's time to redo the tax cuts.

[B]

Exciting time in tax policy. Next year there's going to be a big debate on what to do with the expiring individual provisions of the Tax Cut and Jobs Act. The end of next year, households are going to face potentially a 400 to $500 billion annual tax increase. And lawmakers, I don't think want that to happen.

[A]

Apparently not. Even though we have a big debt and deficit problem.

[B]

Right.

[A]

Well, we'll get to the debt and deficit in just a minute. But first, let's just set the stage for federal taxes, federal taxes and federal income taxes, which is what we're talking about. And I always like to just tell me, you tell me, do the rich in America pay their fair share of federal income taxes?

[B]

I can't answer that, but I can tell you that the individual income tax in the United States is highly progressive.

[A]

Which means.

[B]

Which means that high income households pay a larger share of their income than low income households. In fact, if you just look at the individual income tax, low income households actually have a negative tax rate because we have a lot of social policy built into the tax code. These are your favorite provisions, the earned income tax credit and the Child tax

[A]

credit, earned income tax credit for sure is a favorite provision because it rewards work. Child tax credit is not always as good rewarding work. Some people want to have it not reward work and discourage work. But we're not going to talk about that today. We're going to focus on. But let's going back to what you said, is that so a person making $55,000 a year is not really paying federal income taxes, isn't that right?

[B]

So if you're earning around $50,000 a year and we're not in a pandemic where the government is sending transfer payments out to households to prop the economy up, they're paying roughly single digit effective tax rates around 8%. Now you can contribute contrast that with very high income households, say 500,000, 500,000. They're paying roughly a quarter of their income in individual income taxes.

[A]

And that's the progressivity. The more you make, the more you pay. The less you make, the less you pay.

[B]

Yes.

[A]

And the fancy European countries or Europe as a whole is not any more progressive than us.

[B]

They're probably less progressive if you account for other taxes. The, the U.S. tax system is still progressive. Now we have a payroll tax that is roughly proportional with labor income or wages with a cap. So very high income households aren't paying above that threshold. We also have the corporate tax, excise taxes, but all in, it's very progressive system. Now we go over to Europe, they have one tax that we don't have, which is the value added tax. And this is a broad based consumption tax. Everyone's paying that. If you're consuming goods or services.

[A]

Some people call that a sales tax.

[B]

A sales tax, yes, similar to a sales tax. Better, easier administration than a sales tax, but economically very similar. And those types of taxes are, they tend to be regressive, meaning that low income households pay higher share of their income in value added tax than very high income households.

[A]

Okay, so let's talk about another regressive tax I think you believe, because I saw you write about it in Los Angeles Times recently, and that is the tax that falls on people because of tariffs. Why do you call President Trump's tariff proposals proposed taxes?

[B]

Tariffs are a tax. They look very much like a tax because they are a tax. So they apply to goods that are imported into the United States just like a sales tax would. Now, what makes them say worse than a sales tax or a value added tax is, is that they only apply to certain goods. They only apply to certain goods from certain countries. And because they are intertwined with international trade and international relations. Unlike sales tax, which is about raising revenue, these can encourage other countries to retaliate against the United States and erect their own trade barriers, which doubles the economic harm of these taxes.

[A]

Okay, but if I make a product in the United States and I sell it in the United States, and the sales tax or tariff tax or whatever you want to call it doesn't apply to my product because I made it in the United States, but it does apply to my friend's product that's made in Mexico. That's good for me.

[B]

Yeah. So tariffs are good for the industries that they protect. So if you are successful in your lobbying efforts to incoming President Trump to get a tariff on your import competition, you will be happy. But that's at the cost of a lot of unhappy consumers and a lot of unhappy producers that might be downstream from you.

[A]

Okay, One aspect of these sales taxes or consumption taxes or tariffs, they're all sort of blending together. I know they're different, but they are. But one aspect about them that that's also true, and that is that they are often a source of large quantities of revenue. Is that correct? Isn't a consumption tax sort of the cash cow of all time?

[B]

If it is a broad based domestic consumption tax, it could raise a lot of revenue at a relatively low rate. So if you enacted something like a fundamental 5% value added tax, we're talking about two or three trillion dollars over a decade and relatively efficient source of revenue, meaning it would not harm the economy as much as an income tax. Now, while you can create analogies between a VAT and a tariff, a tariff only applies to imported goods. So that's a much narrower base. And it only applies to goods, not services. So we also have a lot of services that we consume. And tariffs traditionally only apply to goods. So after you consider all of that, the base narrows quite significantly. So you would have to raise the rate quite drastically to raise any meaningful amount of revenue.

[A]

Well, but I want to read from your column. Contrary to what Trump and many of his supporters claims, these taxes would end up placing a significant burden on American households. You write just that is only a 10% across the board tariff plus a 60% tariff on Chinese imports could raise more than $2.8 trillion over a decade. Now, you go on to say for an average tax increase of $1,800 per household, but let's go to the 2.8 trillion. That's not a small change.

[B]

Yeah, it's because the rate is so high. If you did the equivalent rate on all domestic consumption, you'd raise quite a bit more than that and you wouldn't cause trade wars.

[A]

And one last thing. On your estimates in this column, 10% across the board tariff, which is everybody, plus 60% tariff on Chinese imports, could raise more than 2.8 trillion over a decade. When you calculated that, did you calculate it taking into effect change in behavior?

[B]

Yes. So this estimate comes from the Tax Policy center. And when they estimate the revenue implications of tariffs, they consider changes in consumer behavior. So there would certainly be a shifting from consumption of imported goods in the tradable sector towards domestically produced goods to avoid the tax. And in the case of Chinese goods, and I'm not sure if this is accounted for in their estimate or not, there could be potentially rerouting of imports to countries that aren't subject to the tax to avoid it.

[A]

But the point. But the underlying point that you made in your column was it would be a heavy burden on households, including the poorest households. That's what the sales tax would do. And it would also potentially raise quite a lot of money. $2.8 trillion is not a small amount.

[B]

Yeah. And so everything's relative now going back to the Tax Cuts and Jobs Act. It's good to compare here. Now, that's a significant tax increase, but it is not enough to cover the extension of the Tax Cuts and Jobs act, which clocks in at closer to $5 trillion over the same period.

[A]

Okay, that's what I wanted to get to next. So now we're going to talk about the issue that you started out with. And then I brought up, which is the reauthorization of the Tax Cuts and Jobs Act. And the most famous component of that was the reduction in the, in the corporate tax rate down to something like, what is it, 15% or what is it?

[B]

It's 21%.

[A]

21%. Sorry, corporations. It's 21%. But it was a big reduction. It put us into sort of the middle compared to other countries around the world. And I think corporations liked it, and I think it's good tax policy to lower the corporate tax rate. You agree?

[B]

I agree. And prior to the Tax Cuts and Jobs act, it's good, it's good to have context for where this, this tax cut came from is a 14 percentage point cut. And prior to the cut, we were at around 35%, closer to 40% once you account for state and local corporate income taxes. And that was the highest rate among developed countries. And that creates a lot of problems. Biggest one, of course, is companies are encouraged to shift profits to low tax jurisdictions. So even though we had a high rate, we're not raising very much revenue because the profits are all being booked in Ireland or the Caymans. So bringing that rate down, paired with other reforms to the taxation of corporations really helped alleviate that issue.

[A]

Yes, and that took place in the first Trump administration. But they also decided to go beyond that and make big changes in the individual tax rates. They made other changes too, which we'll get to maybe, but. But those are not permanent because their impact on the deficit and debt was too great. So they phased them out at 10 years, which ends this year. So that's where we go back to what you said at the beginning. If they do nothing, corporations will still have this lower tax rate because that's permanent, but individuals will see a very large tax increase that if we don't do anything, we'll increase revenues by the, the big number you said we have to. We have to pay for.

[B]

Yeah, so. So if the Tax Cuts and Jobs act, individual provisions expire and we hit January 1, 2026, taxes will go up roughly by 400 to $500 billion that year, and it will be faced directly by households. And I mean, how did we get here? I mean, you've, you hinted at this, is that it was for budgetary reasons. They used budget reconciliation, which is kind of a fast track process that Republicans can use to pass a partisan bill. And one of the rules states that a reconciliation bill can't increase the budget deficit in the long run. So how do you pass a tax cut in budget reconciliation? Well, you have to make it temporary. Now, one of the reasons that I think is overlooked as to why they did the individual provisions and not the corporate provisions is because the way the corporate tax rate cut is scored, so the joint committee, when they score corporate rate cuts that are temporary, they assume corporations change their behavior in ways that would reduce revenue in the long run. So they really only had the option to cut taxes for individuals if they were going to use this budget maneuver. So that's okay.

[A]

But the outcome is that they've got to extend these tax cuts or Americans will face a big tax increase and the federal government would receive a sort of windfall of new revenue if they were allowed to remain in place relative

[B]

to the current policy. Now, when the Congressional Budget Office projects our dire fiscal situation, they are already assuming these go away. So I think the right way to think about it, or the way I'd think about it is that if these are extended, they are going to reduce revenue for the federal government and make our fiscal situation worse than it's being projected currently?

[A]

Yes, yes, I got that. I got that. But on the other hand, you know, no, Congress likes to allow a huge tax increase to fall into on individuals.

[B]

Everyone is going to view it the way you have put it, that it is a tax increase increase, not just the expiration of something we were already expecting.

[A]

Okay, okay. So let's go to that part of it. Do you think that those you often talk about pro growth tax policy? I think we've agreed that lower corporate tax rate from where it was to where it is now is pro growth tax policy. And there's some evidence that it led to some growth in this period of time has been in place. But that's in the tax code and that's not going away. So do you believe that cutting the taxes on all the people or cutting the expected taxes on all the people who would face a tax increase if we let this just expire without changing it is pro growth tax policy

[B]

not really compared to the revenue implications? So we, we're talking about a $5 trillion reduction in revenue compared to what CBO is projecting now. That revenue loss is going to be from reduced statutory tax rates. That's going to encourage some work from households and that's pro growth, but not all that much. So the Congressional Budget Office recently released a new study estimating the macroeconomic effects of the changes in tax policy over the next decade. And they found that on net, the this cliff that we're going to face is not really going to change economic output one way or the other, implying that if we were to extend to these tax cuts, it wouldn't really be pro growth. And that's because although it's going to encourage people to work, it's really not going to do much for domestic investment. And the additional borrowing is going to crowd out domestic investment and actually offset any of those pro work benefits that from the lower statutory rates.

[A]

Okay. So listeners, I hope you heard that clearly because what Kyle is saying, and I think he's correct, is that the tax cuts Congress is going to work hard to put in place to prevent this from happening are not necessarily going to enhance the growth or prosperity of the American economy.

[B]

Yeah. And you set this up well, all the growthy parts of the tax Cuts and jobs act are either permanent features of the tax code, the lower corporate tax rate, or are not part of the individual provisions. So there are other business provisions that were very pro growth that are starting to phase out. And if lawmakers don't extend those as well, you're leaving a lot of potential growth sitting there.

[A]

That so as a pro growth tax advocate that you are, those are the things you're most focused on is making sure those pro growth aspects of the tax code that are going to expire because they're not the corporate tax thing that's permanent. And give us one example of those that you're really worried about and that if we don't get that extended, it's going to have a negative impact on growth.

[B]

Yeah. The single most important provision that lawmakers should focus on that would be most pro growth that also wouldn't reduce revenue very much is 100% bonus depreciation. So this provision was enacted temporarily in 2017 as part of the Tax Cuts and Jobs Act. It allows businesses to fully deduct the cost of new short lived investments like machinery and equipment against their taxable income. What this does in effect economically is eliminate the tax burden on that investment. So traditional corporate tax we think of as disincentivizing investment by placing a burden on it or with expensing. That's not the case. Kind of wipe that out of the, of the base of the corporate tax. Unfortunately, this started phasing out in 2023 and by 2027 it will no longer be part of the tax code. So what lawmakers can do to ensure that there is some pro growth, pro investment parts of this extension is to focus on getting 100% bonus depreciation and want to underscore this permanently, not just extending it temporarily. Because if you want the long term growth effects, you have to have a long term policy.

[A]

So 100% bonus depreciation on investments by corporations.

[B]

Corporations and non corporate businesses.

[A]

And non corporate businesses is enormously good tax policy. And it's kind of shocking to me. Why isn't it permanent? If it's so good, why isn't it permanent?

[B]

Budgetary reasons. So I, I won't get into the, the math because it's a little complicated. But if just the way that we score keep over the 10 year window in the United States, when you extend expensing temporarily, it looks free. It looks like it doesn't reduce revenue at all. The upfront cost is then reversed at the end and it looks like the government's collecting revenue and that nets to almost zero. So, so there's a perverse incentive where lawmakers will say well we'll extend it but just temporarily and it's a freebie. So we get into this situation where they thought they were going to be able to extend it potentially before 2023. But they never got to it. So we're actually facing the negative consequences of that initial decision.

[A]

All right, so give us another pro growth tax policy that you want the Congress to accomplish in this next go around.

[B]

Yep. I'd hear from some of my followers on Twitter if I didn't talk about this one. But this is very similar to 100% bonus depreciation. That's the expensing of research and development costs. This was another provision that unfortunately was added to the Tax Cuts and Jobs act for budgetary purposes that the law in 17 scheduled in 2022, a change to the tax treatment of research and development. So this is the development of new technologies, software, things that encourage economic growth in the long run. They change the tax treatment from expensing to what's called amortization, where businesses have to deduct that over a set number of years and that introduces a tax burden on that activity. And that is not pro growth. That's the, that, that is the, the polar opposite. And reversing that is another important thing that lawmakers should focus on next year.

[A]

Reversing and making permanent.

[B]

Yes, reversing. Permanently reversing amortization of research and development. So we go back to the system we had since the 1950s, which is expensing of research and development.

[A]

Okay, so we got to do those two. What is, what's the third?

[B]

Another third one that they should focus on too is the tax treatment of multinational corporations. So this is the tax treatment of the foreign profits of U.S. multinationals. The tax rate on the foreign profits are scheduled to rise at the end of next year at the same time as the expiration of the individual provisions. And those could have some negative economic consequences themselves. And so lawmakers should think about both simplifying those provisions because when they were enacted, they were pretty complex. They remained so. But also they should figure out what they actually want from those provisions and lock them in place. A problem with temporary policy in general, but also a big problem with it in the realm of corporate tax policy is that uncertainty is not great for investment. Investment is a forward looking activity. Companies that want to invest today need to look forward and think, what is the regulatory regime? What is the tax regime going to look like five to ten years from now? And if you constantly have these temporary tax policies, that's going to be a negative for investment even today.

[A]

So 1, 2, 3, 3 very key actions Congress needs to take to increased growth for all Americans. What's your. What don't you feel pretty good that those three things are going to happen.

[B]

I think there's a lot of uncertainty right now. Not that they won't necessarily be addressed, but they're not going just how they're going to be addressed. So ideally I'd like, you know, robust reforms, permanent reforms, but it's not clear that's gonna happen.

[A]

Okay.

[B]

The political pressure is on the individual side.

[A]

Yeah, we're get to that in a minute. I'm gonna get to that right now. But before I do that, let's take, you take all three of those and let's take the projected cost of those to the American taxpayer because they are tax cuts or tax reductions in some sort. What is that?

[B]

So extending all three of those and again, it's going to depend on what the reforms to multinationals look like. But that's closer to a trillion dollars over a decade if you were to just extend those provisions permanently.

[A]

And the cost of the individual tax

[B]

cuts being extended is closer to four, four and a half trillion.

[A]

Okay, so it's $1 trillion in pro business, pro growth tax cuts and four or maybe $4.5 trillion in individual tax cuts that are not pro growth may actually be harmful to growth.

[B]

Yes.

[A]

So that's pretty, pretty simple thing, but okay. And I think you're right, I think you're probably right on that. But I guess I have to say that's sort of the elitist view of someone who doesn't care about what they pay in taxes. I mean, I do care. I care a great a lot. It probably would be a tax increase for me if you don't get those individual tax cuts done also. But just what will people say about the impact of the increase in the marginal tax rates on individuals? Give me a reason or a worst case scenario of its impact on individuals?

[B]

Yeah, so it's going to be a direct increase in their tax liabilities. So the burden is going to be more significant for high income households because the tax rates were reduced proportionally more for those households and rates matter more for high income households. But they're also going to impact middle income households as well. And some of the changes to family benefits, the larger standard deduction, the larger child tax credit, those are important for families and there are families that are more moderate income families that will face tax increases if those revert back to the way they were prior to the tax cuts and jobs Act.

[A]

Okay, so let's say they try to do it. All right, the $1 trillion in pro growth business tax reductions and the $4.5 trillion in not pro growth individual tax reduction. Let's say they try to put it all in. How much of it do they have to say they paid for under reconciliation rules?

[B]

So under reconciliation rules they have to say that they've paid for all of it. Now, how they do that is a separate question. And what they did last time is that they paid for the individual provisions by making them temporary. They just said that they are just going to stop after a certain point in time and they could do that again.

[A]

So they only need to pay for them if they make them permanent. They don't have to pay for them if they're under 10 years.

[B]

That's right.

[A]

Oh, so if they put everything temporary, they don't pay for any of it.

[B]

Right.

[A]

So they're, they could do the same thing all over again.

[B]

Yes, yes. And that'll put us in the same situation, you know, four years from now or six years from now. Now it doesn't really save any money.

[A]

Why do you say four and six year? Why wouldn't you say ten? I thought it was a ten year window.

[B]

Well, so the way these things are scored, you have to account for some of the revenue effects that may happen after expiration. Like businesses, for example, might shuffle their income or deductions around and that could lose revenue outside of the 10 years and that would violate this Byrd rule in reconciliation. So it's going to be shorter than that. But I'd say it's even shorter than eight years because lawmakers also have to vote on a budget resolution that has a number attached to it and it is not 2017 anymore. Our debt is starting at more than 100% of GDP. Our deficit is running at close to 6% of GDP and we're paying something like 4% of our GDP in interest. Where back when we initially passed the Tax Cuts and Jobs act, we were paying something like 1 1/2% of GDP in net interest. So political costs of borrowing are higher. So are they going to be able to pass a resolution with a 5 or 6 trillion dollars price tag? I don't know. It might be smaller than that. You just have to do the math.

[A]

Okay, okay. But it's a big cost to extend all these tax cuts. Big, big cost. And under any scenario they're going to pay for some portion of it. So you're over there in Capital A, you're talking to all those people and paying for it is also tax policy. It's revenue. What are they coming up with? And I should. Now you might want to bring up the issue, the tariffs, what are they coming up with besides are they coming, Are they saying, we'll pay for them with tariffs A and B, what else are they coming up with?

[B]

Yeah. So current discussion is evolving, but temporary policy we already talked about. Tariffs are another one. Now, tariffs, they have a unique budgetary challenge because tariffs are generally enacted by the executive branch. But if they are done by, say, Donald Trump next year, they can't be counted in a reconciliation package. They have to actually be legislated to be counted as revenue to offset these.

[A]

Really? Are you sure about that?

[B]

I am sure. In fact, it's even worse than that. If Trump enacts the tariffs prior to the passage of the budget reconciliation, which

[A]

he wants to do and says he's going to do right away. And some people, I read a column today that says he has pretty much absolute authority on tariffs.

[B]

Yes, he does.

[A]

And so he. And he's going to do that.

[B]

He's going to do that. And what that does is if lawmakers,

[A]

it takes it off the table.

[B]

Takes it off the table. It's part of the baseline. They can't raise the revenue anymore. Anymore. So even though they want to do this, it's a challenge.

[A]

Okay, the tariffs are off the table because let's assume he's going to do it without congressional authority. It's not done through the tax.

[B]

So there's temporary policy, there's tariffs. And the third one is economic growth. Now, we just went through why I don't think the individual provisions produce very much economic growth. But lawmakers are going to be making the case that some of their tax cut cuts are going to produce economic growth, and this growth will broaden the tax base and offset some of those costs.

[A]

Okay, but doesn't that put us back to the Congressional Budget Office? Because aren't they, isn't their score going to be really confining?

[B]

So there, there's going to be the official score, but then I'd say there's the unofficial score, the rhetorical score. So they, they did this just to demonstrate what I mean by this is they did this back in 2017. The 2017 Tax Cuts and Jobs act was scored officially as a $1.5 trillion tax cut. Now, Republican lawmakers said at the time, that actually doesn't cost anything. And it doesn't cost anything because one, we are enacting business tax cuts that, against a current policy baseline, don't cost $500 billion less because we were going to extend these anyway. So they don't cost anything. And economic Growth which would bring us a trillion dollars, so 500 billion of current policy baseline, a trillion from growth that gets you to zero. And you could see the same thing happening this time around that they put a budget resolution together that's a $2 trillion tax cut officially and they do some combination of temporary policy arguments about growth and tariffs to get them to zero.

[A]

But there's no. And they can just do that because they, the Congressional Budget Office isn't going to do that for them. They're going to just say it's the truth.

[B]

They need the votes from other Republicans. So they will make the case and that's how they could make the case to say that this is fiscally responsible.

[A]

Okay, but what you're explaining to me is that some things they really do have to comply with, for instance, the ten year rule and that sort of thing. Yes, they can't just use rhetoric to wave that away. But others they don't. And so having the pay fors is not something that is controlled by some previous policy that requires them. Like for instance, if there was a constitutional amendment on no deficits. They're not controlled by anything like that, can just do what they want right

[B]

within that budget window. As long as they comply with the Byrd rule, they can reduce revenue, revenue as much as they, they want to or as much as they can get votes for. And how many votes they get is going to depend on making that case, which is, you know, how much growth can you get, how much we can get from tariffs, etc.

[A]

Is there any other conversation about limiting the effect of these, extending these tax cuts, impact on our debt and deficit situation that you haven't mentioned?

[B]

I think on the Hill there are discussions about that, but I think that those are still early and not clear what those look like. Now I don't, I personally believe that they're not going to get to the point of finding $5 trillion in offsets to make this all permanent. But they could find money here and there from different reforms. We already mentioned the reforms to the tax treatment of foreign profits of multinationals. There could be some money there, there could be some money from tightening up itemized deductions on the individual side. There could be money from tightening up certain business provisions, but we don't know what that looks like. Now if stepping outside of Congress, I mean there's lots of things out there and many groups have already put forth all sorts of ideas to offset the cost of extension.

[A]

And which is your, what is your favorite?

[B]

Well, my favorite is the, the ideas that I put forth in a paper earlier, earlier this year. And I think what lawmakers should be looking at are ways to broaden the tax base. So looking at income that we currently do not tax, that should be taxed, for example, the interest from tax exempt municipal bonds, we should be looking at ways to further curb itemized deductions that narrow the individual tax base. We also should be looking at ways to broaden the corporate and business tax base by reforming the deduction for pass through businesses, the 20% business deduction. We should be looking at ways to tighten the deductibility of interest expense for corporations. I can go, I can go on and on, but there's lots of things that you could do to make it work. It's just, you know, as you add those things up, the, the challenge, the political challenges get greater and greater and

[A]

we just, so what you mentioned one of them there is there, there was one tax increase, maybe 2. I can't remember if this was also in that bill that fell on Americans as a result of the 17 Act. And that was the limiting on the deductibility of state and local taxes to $10,000. And wealthy Americans in New York and California faced a tax increase as a result of that, which means it must have raised revenue. And so where are you on that and where do you think Congress is going to end up?

[B]

So I think that that policy was a good policy. So there's some like high level tax theory about why you should not allow a deduction for state and local taxes. If you're also, if you on the other hand, not taxing the benefits you receive from state and local governments, otherwise you are effectively subsidizing the provision of state and local goods and services. I agree with, you know, the Republicans in general on this issue that we shouldn't be doing that. So capping it made sense to me. And it also was a very large base broadener, close, close to a trillion dollars over a decade.

[A]

That's a significant revenue. So if they try to tinker with that, they got an even bigger problem.

[B]

Yes. So that, that's, so the state and local tax deduction is one of the big political challenges they face. That there are Republicans on the House side in particular that want that cap of $10,000 raised in some way and that's moving in the wrong direction. That 5 trillion includes the $10,000 cap.

[A]

But there are Democrats who want to do that too. Senator Schumer for one, I think he's strongly supportive of that. But also President Trump mentioned during the campaign that he wanted to take a look at that too. Even though it's a favorite policy of Red State Republic Republicans, he still thought that it would was too, too burdensome on wealthy taxpayers in New York and California, I gather.

[B]

Yes. So Trump proposed lifting the cap in some way when he was in New York campaigning, which was a pattern of his campaign where.

[A]

And that's then there's no tax on tips that would also cost money added to what we've already talked about.

[B]

No tax on overtime and no tax

[A]

on Social Security benefits.

[B]

Yes.

[A]

If any of those get in, they just add to further.

[B]

Yeah, if you add all of those up, that's another 2.5 trillion at least.

[A]

Boy, oh boy, oh boy, oh boy, oh boy, oh boy, oh boy. Paying for the cost of the federal government, it's harder than you think. I was going to ask you one more question about. Oh, let's just talk about our favorite tax policy. So I get confused here, but I forgot that in the 2017 Tax Cuts and Jobs act they did enhance the child tax credit for lower income earners. I think they brought it down further and made it more generous, didn't they?

[B]

Yes.

[A]

And so that was the sort of thing that Democrats like too, because it's basically a refund to low income earners who don't pay any federal taxes and have children in the household. And so they did, they made. My contention is that we already do quite a lot for low income working families through the earned income tax credit and they sort of capped out on that. They couldn't touch that anymore and they wanted to do this other thing which is basically just an add on if there's. And, but they did insist that there had to be some work in order to get any of it. They did that. Right? Right. They did do that. They enhanced it. So they made the pro family people happy and they made the Democrats happy and they gave more of a tax cut to low income, non federal income tax paying working families. Correct.

[B]

The contours of the debate over the child tax credit in the the TCJA a whole lot different than the 20, the 2021 debate. Now the, the CTC expansion in the TCGA was part of a broader family tax reform.

[A]

Right.

[B]

Where they enhanced the child tax credit, but at the same time they eliminated the personal independent exemption which were previously deductions that households got for household size. So they, they in effect replaced a deduction with a credit. Now part of that was expanding the child tax credit so that it would be as generous or slightly more generous than the personal exemption but you're right. In terms of the other policies, they brought down the earned income threshold from $3,000 to $2,500. So that's. So earned income in excess of that would start phasing in at 15% to get the refundable portion. Refundable portion was increased from that full thousand dollars to $1,400. But then the total credit was increased to 2,000. So there's both a refundable and non refundable portion this time around. And then the last change they made is that the phase out of the credit was pushed way up the income scale to $200,000 for singles, $400,000 for married couples filing jointly. And that was to compensate for the loss of the personal independent exemptions.

[A]

Right. And it also allowed them to, when they do those charts that show who benefits from this tax policy or the overall tax policy of this tax bill, they could show more money going to the lower income quintiles than would otherwise. And so they had a good talking point. Look, a good share of these tax cuts are going to these families. Even though a lot of them, you know, they're already getting a refund on their tax credits. They just got more.

[B]

Yeah, the expansion of the refundable portion was somewhat modest. I mean, the phase in rate stayed the same. The threshold went down a tiny bit. The size of the credit went up. So yes, households that had earned income that previously were only receiving a ousand could receive 1400 instead. But you still had to get the full amount, the 2000. You had to have positive tax liability to offset.

[A]

So assume that that got to that point. It's also temporary. What do you think is going to happen on that?

[B]

I think that that is would. Is highly likely to be extended along with the other family, the other family

[A]

benefits just as they are.

[B]

Just as they are.

[A]

So I think that there will be sufficiently generous already.

[B]

Yeah, it's.

[A]

You could say it that way, sure.

[B]

I view the child tax credit in its current iteration as an adjustment for household size. Right. We have household based taxation. We want to make sure we're treating households of similar size similarly in the tax code. If you have more children, that's larger expense. So there's some sort of offsetting deduction

[A]

that was a step forward in tax policy as far as you're concerned.

[B]

And there was simplification previously. There was a child tax credit with its definition of a child. There was also a dependent exemption with its definition of child. You get rid of one, keep the other. You go from two to one.

[A]

Well, that's good.

[B]

That's some simplification there.

[A]

So let that go through just as it is. Let's not mess with that.

[B]

Yeah. So I do think that there will be some political pressure to expand it in the same way there might be political pressure to lift the salt cap. You may have some pro family Republicans

[A]

that I'm very pro family, but I don't think we should do that.

[B]

And they don't.

[A]

Don't be talking about pro family around me. Very pro family.

[B]

Yeah, there may be some pressure, but I like it. Like everything, it's just adding to the cost. It would be a challenge. I don't think that they should do that. I mean, if they are going to borrow, I think that they should focus on extending, extending some of many of the pro growth provisions that should have been made permanent in the first place.

[A]

So I think the way it's been characterized in the papers lately is in this wonderful sort of honeymoon for the Trump administration is that, is that it's all very easy. They've got to extend the tax cuts and they've got to do something on immigration and national defense and bang, bang, it's over and good public policy is made. But this is much harder as listening to you. It's much harder than we realize. And that they're gonna, they're gonna be casualties to whatever choice they make, including just extending them all.

[B]

This is not the extension of the Bush tax cuts. So the Bush tax cuts, those were just tax cuts and you can just extend them, no trade offs necessary. Everyone's getting a tax cut here. We're talking about a tax reform that's both raising and cutting taxes in different places. You also have a slim Republican majority with different.

[A]

And a much worse debt and deficit situation. And the costs are much higher.

[B]

Yes.

[A]

And we have a president who keeps telling everybody he wants to give Tom, Dick and Harry all a tax cut on top of the ones we already gave.

[B]

Yes. So the dynamics are different this time around. It's not going to be as simple. I think.

[A]

One other thing I think our listeners might be thinking about, can they, in the course of this, throw in estimates or results from the Doge initiative that says they're going to cut the spending side by a trillion dollars?

[B]

I believe it would have to be legislated in a reconciliation package. So if it's just a recommendation over from the executive branch, I think it's treated similarly to executive action on tariffs and that it would not be counted.

[A]

Last question. You're a tax policy expert, but you're also a budget expert and you focus on revenues to the federal fisc. And I've always been curious if you have a very prudent and spending conscious administration in the executive branch of the federal government and nothing else changes with legislation. You just have spenders on one side and tightwads on the other. And the tightwads are in charge. Do you ever see just by their executive branch management. Benefits to the fiscal situation of the federal government because there's more savings or there's more cash gets accrued and is unspent or that just has no effect whatsoever?

[B]

I look at the federal budget and most of the money going out the door is mandatory spending, Social Security, Medicare and interest on borrowing from previous spending. And that's driving the imbalance in the long run.

[A]

So different managers and different executive branch officers and lower headcount, it doesn't amount to anything.

[B]

Yeah, or. Well, it's, I don't think it amounts to nothing. In the Biden administration, for example, did a lot of, a lot on the student loan front, which ultimately has costs to the federal government. And I don't think you would have seen that if so if it was, you know, Trump's second term, those spending,

[A]

that spending would not have occurred.

[B]

Right.

[A]

Okay. And what about holding back IRA spending or CHIPS act spending? Any potential savings there?

[B]

So a lot of that are tax credits and that's just going to be based on the activity of taxpayers, you know, whether they are going to, you know, purchase different, you know, electric vehicles. Now there are, there are interactions but it's not clear, you know, those, it's not clear what Biden did with say EPA standards that boosted the cost of the EV credits was in service of making that more expensive. I think you just, they genuinely want, want the environmental goals. But you know, there are interactions there that, that could, that increase the cost. And you know, if they unwind those regulations under the Trump administration, perhaps you get a lower cost there. Now the downside is if Congress, if Congress wants to repeal those for a reconciliation package, they'd probably rather the, the executive branch not do that so they can get more money for those.

[A]

So the appeal of some of those things could be in the reconciliation bill. It's possible as papers pay fors.

[B]

Yes, it's it, it is possible. Now I, we've, we've seen comments from Congress already, Republican members that they're a little hesitant to get rid of some of the pro investment parts of the ira, the production tax credit, the investment tax credit, but the, the electrical, the electric vehicle tax credits. I. I could see them taking a close look at those.

[A]

Okay. Thanks very much, Kyle.

[B]

Thank you for.