Contrasting Tax Overhauls: Project 2025 Vs. Democratic Reform
Close-up shot of the word Tax Reform over IRS form 1040 -Kameleon007, Getty Images
Financial Advisor Magazine- As the 2024 elections approach, tax reform is once again a hot topic. Project 2025, spearheaded by the Heritage Foundation, offers a sweeping overhaul of the U.S. tax system and various federal policies. This ambitious plan, designed to be implemented by a future Republican administration, includes significant changes to tax laws and administration. On the other side of the political spectrum, Democrats and other left-leaning groups have also put forth their own tax reform proposals, aiming to address income inequality and generate revenue for social programs. This article provides a detailed look at these contrasting proposals and their potential impacts.
Project 2025: Proposed Changes To Tax Law And Administration
Income Tax Reform
• Simplified Tax Brackets: The current seven-bracket system would be replaced with just two tax rates: 15% for incomes up to $168,600 and 30% for incomes above that threshold.
• Elimination Of Deductions And Credits: Many existing deductions and credits would be removed. While this could simplify the tax code, it might increase the tax burden on middle-income earners.
• Capital Gains And Dividends: These would be indexed for inflation and taxed at a flat rate of 15%.
Corporate Tax Reform
• Lower Corporate Tax Rate: The corporate tax rate would be reduced from 21% to 18%, aimed at stimulating economic growth and attracting foreign investment.
• Expensing Of Capital Expenditures: Businesses would be allowed to write off capital expenditures in the first year, though the specifics for long-term depreciable assets are not clear.
Consumption Tax
• National Sales Tax: The plan explores introducing a national consumption tax, potentially replacing both individual and corporate income taxes.
IRS And Administrative Changes
• Budget Cuts And Increased Presidential Appointments: The IRS would face budget cuts, and more of its top personnel would be appointed by the president, potentially affecting the agency's ability to enforce tax laws.
• Three-Fifths Vote For Tax Increases: Future tax increases would require a three-fifths vote in Congress, making it more challenging to raise taxes.
Estate And Gift Tax
• Permanent Exemption Increase: The temporary increase in the estate and gift tax exemption amount from $5.5 million to $12.9 million would be made permanent, with a maximum tax rate of 20%.
Predicted Effects If Implemented
Economic And Social Impact
• Shift In Tax Burden: The proposed changes could shift the tax burden from wealthier individuals to middle-income earners, potentially increasing income inequality.
• Government Revenue: Reducing corporate taxes and simplifying the tax brackets could significantly reduce government revenue, affecting the government's capacity to provide essential services.
• Economic Growth: Proponents argue that lower corporate taxes and a simplified tax code could stimulate economic growth by encouraging business investment and job creation. However, the actual economic benefits are debated.
• IRS Efficiency: Budget cuts and increased political appointments within the IRS could hamper the agency's efficiency and effectiveness in tax collection and enforcement.
Historical Context And Political Feasibility
Large-scale tax reform proposals during election years by Republicans are not new. Here are two notable examples:
• The 2017 Tax Cuts And Jobs Act (TCJA): Proposed during the 2016 election by then-candidate Donald Trump and Republican lawmakers, the TCJA was enacted in December 2017. It included a reduction of the corporate tax rate from 35% to 21%, adjustments to individual tax brackets, nearly doubling the standard deduction, elimination or capping of several deductions and exemptions, and introducing a new deduction for pass-through business income.
• The 2012 Romney Tax Plan: During the 2012 election, Republican candidate Mitt Romney proposed significant tax reforms, including a 20% across-the-board cut in marginal tax rates and elimination of taxes on capital gains, dividends, and interest for taxpayers with AGI below $200,000. While Romney's plan wasn't implemented due to his election loss, it influenced later tax policy discussions.
Nor are tax reform proposals limited to the Republicans and the Right. Democratic and Left-Leaning tax reform proposals include:
The Green New Deal
Proponents: Primarily backed by progressive Democrats like Representative Alexandria Ocasio-Cortez and Senator Bernie Sanders.
Key Tax Provisions
• Wealth Tax: A proposal to tax the wealth of the ultra-rich, targeting assets over certain thresholds (e.g., $50 million and $1 billion).
• Higher Income Tax Rates: Increasing marginal tax rates on the highest income brackets, with proposals suggesting rates as high as 70% on incomes above $10 million.
• Corporate Tax Rate Increase: Reversing some of the corporate tax cuts introduced by the TCJA, with proposals suggesting a corporate tax rate increase to around 28%.
• Financial Transaction Tax: Imposing a small tax on financial transactions, such as stock trades, to curb speculative trading and generate revenue.
The Ultra-Millionaire Tax
Proponent: Senator Elizabeth Warren.
Key Tax Provisions
• Wealth Tax: A 2% annual tax on household net worth between $50 million and $1 billion, and a 3% tax on net worth above $1 billion.
• Estate Tax Reform: Proposals to lower the estate tax exemption and increase the rates on larger estates.
• Corporate Tax Reforms: Including a 7% surtax on corporate profits above $100 million to ensure large corporations pay their fair share.
President Joe Biden’s Tax Proposals
Proponent: President Joe Biden.
Key Tax Provisions
• Top Income Tax Rate Increase: Restoring the top individual income tax rate to 39.6% for high earners.
• Capital Gains Tax: Taxing long-term capital gains and qualified dividends at the same rate as ordinary income for individuals earning more than $1 million.
• Corporate Tax Rate: Increasing the corporate tax rate to 28%.
• Global Minimum Tax: Implementing a minimum tax on U.S. companies’ foreign earnings to prevent profit-shifting to low-tax jurisdictions.
The People's Budget
Proponent: Congressional Progressive Caucus.
Key Tax Provisions
• Wealth Tax: Similar to Warren’s proposal, targeting the ultra-rich.
• Income Tax: Higher marginal tax rates on high-income earners.
• Corporate Tax: Increasing the corporate tax rate and closing loopholes that allow tax avoidance.
• Carbon Tax: Introducing a carbon tax to address climate change and generate revenue.
Comparison And Political Feasibility
Economic And Social Impact
• Wealth Redistribution: Many left-leaning proposals focus on wealth redistribution to address income inequality.
• Revenue Generation: Proposals aim to generate significant revenue to fund social programs, infrastructure, and climate initiatives.
• Economic Growth: Proponents argue that investing in social programs and green infrastructure can stimulate long-term economic growth.
Political Feasibility
• Congressional Support: Implementation depends heavily on the composition of Congress and the level of bipartisan support.
• Public Opinion: Many of these proposals are popular among the general public, particularly those targeting wealth inequality.
• Economic Climate: The feasibility of these reforms also depends on the broader economic climate and priorities of the administration in power.
Conclusion
Project 2025 and the various tax reform proposals from the Democratic side both aim to overhaul the U.S. tax system but approach it from fundamentally different philosophies regarding taxation, economic growth and wealth distribution. The outcome of these proposals largely depends on the political landscape and the ability to navigate legislative processes.