On this week's episode of What's at Stake, Partner Bryan DeAngelis and Managing Director Ylan Mui speak to two special guests from the Tax Foundation, one of Washington's most influential think tanks. President and CEO Daniel Bunn and president emeritus Scott Hodge examine the complexities of the anticipated tax reform battle in 2025, and its implications for Americans and businesses, as well as the potential international ramifications.
Specific topics include:
Keep listening to What’s at Stake to understand the political and economic shifts of the incoming administration, and check out Scott’s book “Taxocracy” for more on tax policy and how it affects everyday life.
Bryan DeAngelis
Welcome to this week's episode of what's at Stake. We're your hosts. Bryan DeAngelis, partner and head of the DC office here at Penta.
Ylan Mui 0:15
And I'm Ylan Mui, managing director at Penta.
BD 0:17
And we're joined today by two special guests from the Tax Foundation, one of Washington's most influential think tanks. Daniel Bunn is current President and CEO of the Tax Foundation, and Scott Hodge is president emeritus. Scott served for more than two decades at the helm of the organization and is now senior policy advisor and also the author of "Taxocracy: What You Don't Know About Taxes and How they Rule Your Daily Life."
We're really excited to have you both on the show today, because tax is going to be the big legislative battle of 2025. Some are even calling it the Super Bowl of Tax. I've heard "taxmageddon" and several other terms as well, but we're so glad you guys are here to help us break it all down. So welcome to the show.
Daniel Bunn 1:11
Thanks so much for having us.
BD 1:13
Maybe I can jump right into the discussion and come to you. Let's, I guess, start by going backwards a little bit. So this tax battle that we'll see next year the tax expires at the end of 2025, actually began about seven or so years ago, in 2017, with the Tax Cut and Jobs Act. This was under Trump's first administration. You were right in the middle of all of that action at the time, so why don't we kind of help us understand what happened then and kind of how we got to today and why it all matters now?
Scott Hodge 1:53
Well, yeah, certainly next year is going to be wild, and if it is the Super Bowl of tax, let's hope that Congress spikes the ball at the end and doesn't fumble it and not extend the Tax Cuts and Jobs Act. So enough with the sports analogies. But going back in time, actually we need to go back before 2017. During 2015 and 16, a number of the Republican presidential candidates came to the Tax Foundation and asked us to use our dynamic tax model to assess their tax plans to see how they would affect economic growth, jobs, capital investment and, ultimately, what impact they would have on the nation's debt and deficit. And what began with just Marco Rubio's plan sort of mushroomed into a project in which we were literally doing more than 10 of the Republican presidential tax plans and it was kind of a three-ring circus. But what was so interesting about it was number one they all came to us with different types of plans. Some were more conventional let's just cut tax rates and broaden the base. Others were very innovative and say, for instance, proposing to include a value-added style tax to replace the income tax, for instance, style tax to replace the income tax, for instance. And what we were kind of thrilled about is that it created a kind of competition among all of these candidates to see which ones could come up with the most pro-growth, pro-taxpayer plan. In fact, during one of the campaign debates early in the spring of 2016, they started arguing about whose plan was more pro-growth according to the Tax Foundation, and it was kind of fun to see. But what it did is it set the tone for what Congress was going to later do with what became the Tax Cuts and Jobs Act, later do with what became the Tax Cuts and Jobs Act. And it wasn't just isolated to the presidential candidates, because on Capitol Hill then Congressman Paul Ryan and Ways and Means Chairman Kevin Brady started working on their own tax reform plan, which became the blueprint for tax reform, a very innovative plan of its own.
This ultimately snowballed in 2017 to what became the Tax Cuts and Jobs Act, and tax foundation economists were behind the scenes during all of the iterations of this plan as it worked through both chambers to model those plans and give feedback to members of Congress how the different elements were going to affect the economy, because what's really important with tax reform is that it's multifaceted. So you not only have tax cuts on the one hand, but they were trying to broaden the tax base, on the other hand, and that can have pretty profound impact on the economy if you do it wrong and negate a lot of the benefits that you would get from the pro-growth side. And so what our economists were trying to do was give members of Congress an understanding of what those trade-offs were, so that, when it came time to pass the final bill, it had the biggest impact on the economy as possible and the smallest impact on retarding economic growth, on the other hand, and so ultimately, it became a pretty good bill. Part of it was the fact that they decided that it was going to increase deficits by about a trillion and a half dollars over a decade, and they, of course, as we now know, played some games with timing. So much of the Tax Cuts and Jobs Act was expected to expire or scheduled to expire next year, and the only thing that was kept permanent was the 21% corporate tax rate, and it turned out that was the most pro-growth element in the plan, because it was made permanent and not temporary, and that's where it leaves us today, with the fact that we have a permanent corporate tax rate of 21%, but the entire, basically the individual income tax code is set to expire at the end of next year and if Congress does nothing, Americans will face about a $4 trillion tax increase automatically on January 1, 2026.
YM 6:31
Well, that's, that's a good point, because, you know, just just keeping tax policy where it is today would cost about four trillion dollars, right? But you know, certainly Republicans and certainly President-elect Trump are talking about, you know, expanding some of the the tax cuts that he was able to to achieve during his, his first term, maybe even cutting the corporate tax rate, reducing taxes on households even further, reducing taxes on, for example, tips. So how do you guys think about? One, when you're looking at this landscape, what are the most important priorities? And then, two, how do you balance that with the potential impact on the debt and deficits?
DB 7:15
Yeah, that's a great question. The narrative on growth continues to be important. It's certainly important to us at Tax Foundation and the way we look at the debate and the landscape for next year. So that's going to include policies that impact investment, like the treatment of capital investment, the treatment of research and development costs. Those policies can have really large bang for the buck when it comes to growth relative to the tax cut.
But I think politically there's two things. One that Scott already mentioned members are going to be looking to avoid a tax hike and trying to. Whatever political coalition can get the final bill across the finish line to be able to avoid that tax hike is going to require some probably very tense negotiations over what policies get adjusted for different types of taxpayers, whether you have something that is going to treat folks who have large state and local tax deductions differently. There's folks who are very interested in something that does not dramatically increase the debt over the long term. And then there are folks who are looking at things like the child tax credit that are very expensive, don't do much for growth and trying to see where there's opportunities there. So the coalition that eventually avoids this tax hike is going to be multifaceted and we're already seeing all sorts of lines dividing that kind of set of Republican lawmakers where they're trying to already aim for their final outcome without even necessarily a template for that outcome yet.
On the point about some of the things that Trump brought up on the campaign trail, I think lawmakers may be interested in giving the president some sort of win when it comes to things like taxes on tips. I'm not sure about the no tax on Social Security. They're challenging bits about the legislative process that will make it really difficult to touch that part of the tax code. But these things are also they can be pretty expensive, complex, not necessarily what you would look at if you were trying to design a principled pro-growth set of tax rules, and it's, in my view, a little bit of a distraction from the underlying goal of delivering a pro-growth policy that avoids this tax hike.
SH 9:59
Yeah, and a lot of those policies can create some really strange incentives. I was lecturing a group of college students not long ago talking about Trump's plan to cut taxes on or exempt taxes on, tips, overtime and Social Security, and I told him that if he goes ahead with that, I'm going to go from hourly or from salary to hourly in order to take advantage of the overtime being tax exempt. I was going to take half my income in tips and then I was going to retire early to take advantage of Social Security being tax exempt. I was going to take half my income in tips and then I was going to retire early to take advantage of Social Security being tax exempt. So you can see the kind of games that would be played. Oh, of course, and if we have tariffs, I'm going to stock up on French wine before tariffs go up on that. So this is what happens when you have bad tax policy.
YM 10:51
We're going to come hang out with you, Scott. If that happens, we're going to party at your house.
BD 10:56
It's the age old saying right, you campaign in poetry and govern in prose, because it's a lot easier to promise things than to go through with them. But I want to bring the conversation back, Daniel, maybe to you and I guess Scott, you raised it too. But, Daniel, you talked about kind of the debt and deficit, and you know, while we're still waiting to see the details, this tax package will be incredibly expensive. I think it's been estimated at around four point two trillion by you all. Trump, I don't know. In my opinion, I don't think he's overly concerned about deficits. He talks about them and I'll solve it with tariffs, I'll solve it with this. But you know, curious your take can tax cuts really help us either grow our way out of debt or are there other revenue raisers, like tariffs, that we're going to have to look at to balance this off?
DB 11:53
Yeah. So let me introduce a metric that I think is really helpful, and it used to not be all that interesting, but the metric that I think is helpful to think about is net interest payments as a share of our annual revenue. The previous, I think, peak for that metric was around 18%, where in the early 90s we were paying less than 20%, but a very, very high amount of our annual revenues in interest payments. We are now surpassing that and with current projections we could be paying a quarter of our annual revenues in interest payments on the debt, and that, to me, suggests that whether you're looking at the spending side or the revenue side, you have to have some sort of fiscal reality in mind, because I don't think the average taxpayer would appreciate that for every dollar they send to the government, 25 cents is just going to pay the interest on the debt.
Now there's opportunities for pro-growth reforms, and growth is certainly helpful. You know, the thing you don't want to do when you're in this fiscal situation is to introduce policies that would slow our economic growth. Growth is helpful, but it is not necessarily the only solution. You have to look at additional reforms. There have been a lot of conversations since Trump noted or selected Elon Musk and Vivek Ramaswamy to run this Department of Government Efficiency and what they might be looking at. There was a letter, I think, today on identifying $2.5 trillion worth of savings that lawmakers want to see out of that process. That would be very helpful, and what you want to do on the tax side is to not make things worse, so you want to be able to have a pro-growth reform that supports a fiscally sustainable situation. Now we've modeled ways for you to kind of fully offset a lot of the Tax Cuts and Jobs Act provisions with additional revenues.
I don't think lawmakers are all that interested in bringing additional revenues into the conversation at this point and, honestly, the approach that we see from lawmakers is one that I think will connect with most taxpayers. You know we're talking about these tax provisions expiring, but I think your you know your average family is probably not looking at, you know, the tax code and thinking, oh, I need to save a little bit more here in 2024 or 2025 because my tax bill in 2026 is going to, you know, go up unless Congress does something. So a lot of people have in their mind what we in Washington talk about as a current policy baseline, that whatever the rules are today, I'm going to expect those rules to be the same tomorrow. Most of the time when we're scoring well, basically all the time when we're looking at tax legislation we're not necessarily assuming that current policy what's happening today will automatically be extended. So the $4.2 trillion number you're talking about, Bryan, is the difference between taking the rules on the books as they are today and continuing them into the future, relative to letting those expire and the way lawmakers especially some folks who do not seem as focused on this fiscal situation are looking at this and they're saying well, actually we can reset the way we measure this legislation to just focus on things that are additional to the Tax Cuts and Jobs Act. You know there would not necessarily be a piece of legislation that gets dinged for a lot of costs just for extending current policy. But if you do something like taxes on tips or if there's more revenue from other places, maybe you would be willing to use those as offsets.
Now, this is very much an inside baseball kind of thing, to bring in yet another sports analogy, but that doesn't really solve the long-term fiscal situation. You still need fiscal discipline on the spending side or, potentially, additional revenues. You mentioned tariffs as an additional revenue source. I think this would be a particularly bad revenue source. I mentioned like kind of a do no harm principle for looking at reforms. If you want additional revenues, you should choose the policies that provide revenues with the least amount of economic harm. And tariffs are particularly distorted. They're particularly harmful to American consumers. We just went through this whole inflation scenario where people are really concerned about the prices they're facing in grocery stores and in the general marketplace and tariffs aren't going to do anything to help that and in fact they could hurt it, whether you're looking at French wine or your average grocery bill.
SH 16:55
Some of our economists just modeled Trump's recent proposal to impose a 25% tariff on both Canada and Mexico and a 10% tariff on China. We estimate it would raise about $1.2 trillion over a decade at the cost of over 600,000 jobs. Again, you know, tax policy giveth and it takes away, and you really do have to look at the economic side of this, because that's really what matters.
YM 17:45
What do you all think is the most fruitful revenue raiser? Where should we be looking if we do want to increase revenues and not just cut spending?
DB 17:52
So one of the things that has a huge dollar amount associated with it is the way our tax code treats health care benefits. Now this is like I'm taking your, your, your suggestion in your question, to ignore the politics, because politically this would be very dangerous. But you know, for for employer provided health care benefits, there's a deduction on the employer side and essentially an exemption from income tax on the individual side. So we have this really large chunk of what I think a lot of people would associate with a definition of some sort of income. It's an in-kind benefit that goes completely untaxed. There's another thing, and I'll pass this over to Scott, to talk about the angle on nonprofits as well. But there are things like this that you expand the base, you're able to potentially use that revenue, maybe partially, to lower some rates as well. But I'll let Scott talk about some of his work on the nonprofit sector as well.
YM 18:57
Because you're a nonprofit right.
DB 18:59
We are a nonprofit yeah, like full disclosure oh are a nonprofit right. We are a nonprofit yeah, like full disclosure oh yeah yeah, yeah, we're a 501c3.
SH 19:04
Yeah, we just published a paper by me a few weeks ago months ago on 10 ways that you can raise revenues with the least harm on the economy, and one of the ways is to tax the business income of nonprofits. And we're talking about, say, the healthcare sector, where you have nonprofit healthcare hospitals and insurance providers are now a trillion and a half dollar business part of the economy and they generate billions of dollars in profits that go on taxed. We have universities, we have the AARP, the NCAA all getting billions of dollars in profits and paying no income taxes. And if you were to tax that business income and avoid any charitable contributions, you could raise roughly about $40 billion a year, which would help offset a lot of the cost of extending the Tax Cuts and Jobs Act. The Congress's Joint Committee on Taxation just released their annual tax expenditure report and what that is is a Washington way of saying we've accounted for all the tax breaks that are in the economy or in the tax code, and that's well over a trillion dollars worth of tax breaks. In and of itself, Many of those are very special interest targeted and should be part of the menu of looking at ways of broadening the tax base with minimal impact on economic growth. So there are lots of ways that you can get at this.
The other one is asset sales. The government owns all kinds of stuff. It should be putting it on eBay and selling it off to the highest bidder, whether it's Amtrak or the Tennessee Valley Authority. Why is it running businesses? So these are the kind of things it should be looking at, rather than just saying, oh my gosh, we're going to have raised taxes on this group of people in order to offset tax cuts on that. They should be thinking a little bit more creatively and looking at this as a chance to not only reform the tax code, but reform government at the same time.
BD 21:09
Can I jump over the Atlantic for a minute? Daniel, you've done a lot through the Center for Global Tax Policy to kind of expand your presence and work in Europe and obviously there's been plenty of you know international tax debates over the same time period as we're talking about now. Do you expect many changes to the international tax code next year for any of that to get wrapped up in these debates in Congress?
DB 21:39
Jared for any of that to get wrapped up in these debates in Congress? Yes, I do. Let me take a little bit of a step back when Scott was talking about the story of the Tax Cuts and Jobs Act. One element that Tax Foundation was pretty influential in was moving the US tax system away partially from a worldwide tax system to a territorial system, and it introduced some anti-avoidance rules that are pretty complicated at the same time. And that was both kind of a follow-on to a conversation that had been run at the OECD, the Organization for Economic Cooperation and Development, a project that was called the Base Erosion and Profit Shifting Project, and so Congress brought in some elements that essentially adopted a viewpoint of well, we need, yes, a territorial system, but we need some anti-avoidance rules. Some of those rules need to be cleaned up, and I think that there will be an opportunity next year for Congress to do some cleanup on those rules. But that legislation also kicked off a conversation that's still ongoing about a global minimum tax, and the global minimum tax has now been adopted by dozens of countries. Countries in Europe were the first to kind of lead out of the gate, and there are.
You know, I don't think the global minimum tax is great policy. In fact, there's a lot of pieces to it that are wide open to my criticism and Scott's criticisms and it's kind of like this global tax cartel. But one piece of it which is sort of an enforcement tool to get other countries to sign up to it, which is called the undertax profits rule or just the UTPR. This is particularly offensive to US lawmakers and a lot of folks in the tax community because it essentially lets another country look at what a US company is paying in US taxes and say, well, hey, that's not enough, you need to pay more in taxes over here in maybe Germany, and that is very, you know, extraterritorial. It's kind of, on principle, something that's offensive to US lawmakers, even if there's not going to be a lot of you know kind of tax payments under this regime, because US companies do pay a decent amount of tax here in the US and elsewhere. That it's kind of the principle that a lot of Republican lawmakers have locked onto and see it as something that they need to be responsive to.
I don't know how far this goes if this gets wrapped into Trump's tariff approach and saying, well, we're gonna tariff everybody who tries to tax a US company on its US income, or if it's something that Congress would use the opportunity to legislate on next year. I think Congress is interested in having a really competitive or this new Congress, with the Republican leadership, is interested in having a very competitive and pro-growth tax code and a code that allows US multinationals to flourish without necessarily having to get hit over the head with this global minimum tax on their US operations. So it's going to be interesting to see how that landscape evolves. There's also this issue of digital services taxes. That's been around for six or eight years. I don't know if you want me to get into that, but it's a whole other can of worms as well.
SH 25:15
All of that motivated us to open a branch or an office in Brussels to address it. So we now have a team in Europe that's addressing these issues directly.
YM 25:26
Daniel. So do you expect, in this sort of round of tax discussion, for there to be any additional tweaks or changes to the international side then? Or is it just about avoiding, in your view, signing on to the global minimum tax and the agreements that countries have made around that provision?
DB 25:48
So if let's talk about a universe where the global minimum tax didn't happen, us lawmakers still have kind of a cleanup job to do with the global intangible low tax income, the GILTI regime, the base erosion anti-abuse tax, the BEAT, and our foreign-derived intangible income regime.
So the rates on all three of those policies that impact multinationals primarily those are automatically set to go up in 2026. And one of the problems with that is that in the rush to put together the 2017 tax reform, there were a couple of pretty fundamental flaws, especially with the GILTI regime. With tax reform, you usually want to kind of clean things up and start up fresh as much as possible, but with all three of these they were layered on top of our existing rules for multinationals with the foreign tax credit rules and other rules for foreign passive income, and there needs to be kind of a realignment of the different rules. In fact, if you're expecting, you know, to get hit by one of these rules, but then you get hit by multiple of them, that's probably not what Congress intended and there's an opportunity to clean things up there and I would say that you know that would be there. You know, regardless of the global minimum tax conversation, the global minimum tax adds another layer to how Congress might react or retaliate against some of these enforcement mechanisms.
YM 27:27
Great, Thank you. All right, Scott. I know that we're now clear that the Tax Foundation can go deep into the weeds and get super wonky and some of the more complicated issues in the tax code.
We love wonky so, but I know that you also recently wrote a book, as we mentioned at the top of the show Taxocracy. That's about how all of this debate might actually impact ordinary families and have an effect on America's kitchen table. So tell us a little bit about how, if you're not someone who's following the ins and outs of the tax code day to day, how you might think about the way this impacts you.
SH 28:07
Yeah, Taxocracy is actually written in English, not Geek speak. There's no math involved, unlike most things in tax policy.
It's an easy read and the book is about the unintended consequences of tax policy. And the book starts out with a lot of narratives and stories and little vignettes about tax policy gone bad and the economic lessons that we can learn from those things. Things like, oh, the window tax and the chicken tax and the road tax and the luxury tax All of those things can teach us lessons about what not to do in tax policy.
We can apply those lessons to today's tax code and learn a lot about things like the mortgage interest deduction, the charitable deduction and even some of the taxes that Daniel was talking about. And then all of those then sum up into some principles for how we can reform and fix today's tax code. And I close out the book with summaries really nice, simple summaries of all the different ways that people have talked about reforming the tax code, whether it's the flat tax, the fair tax, the X tax and some of these others that are a little kind of nerdy but actually would fix the system and change it away from a system that it's harmful to the economy but, most importantly, change it away from a system that's most intrusive on our daily lives.
And it's available on Amazon.
BD 29:40
I was just going to say I look forward to reading it and we'll have to plug it in the show notes because we all know folks will have to get smart really fast next year. But, guys, it's been a great conversation. We probably only have time for one more question, so I'll make it maybe kind of an easy one. But if you had really one change that you want to see happen next year to ensure long-term growth, what would it be?
SH 30:09
It's about as easy as it gets. What would it be? It's about as easy as it gets. This is on audio, but I'm going to show you my full expensing foundation mug, which is kind of a joke. We talk about expensing a lot.
I think related to this is permanency. Lawmakers, like Scott was talking about, they don't always think about how companies plan their investments and plan what the life of a new factory or the life of a new research facility is going to be way longer than the 10-year budget window, and when you sacrifice permanency for some expediency or some process, you're losing out on the economic impact. Expensing for CapEx research and development and we've talked for many years about expensing for structures as well and different ways to do that it should be high on lawmakers list if they're interested in seeing a real bang for the buck from the bill next year.
SH 31:20
Oh, absolutely. But simplicity has got to be a big part of this too, and we published a paper earlier this year looking at the total compliance costs of the tax code now exceeds $500 billion a year between the time that we spend complying with it and also our out-of-pocket costs. And much of that on the business side is through these expensing provisions, which are very complex and very onerous, and the more we can simplify that, the more we can improve both economic growth and the incentives to invest in the kinds of equipment that make us all much more productive and allow us to earn more as well. So simplicity ought to be part of this conversation, because I think taxpayers are screaming for simplicity right now.
YM 32:09
Well, they should get your book and so they can understand how taxes impact them, and then they can become advocates for simplicity as well. Daniel and Scott, thank you so much for joining us today. Really appreciate the conversation To our listeners. Remember to like and subscribe, wherever you listen to your podcasts, and follow us on Twitter or X at PentaGRP and on LinkedIn at PentaGroup. I'm your co-host, Ylan, and, as always, thanks for listening to what's At State.