Tax Tracker | Joint Address, Fake Offsets, IRS Cuts
Links for the 2025 tax debate.
The tax debate in Washington keeps rolling on.
Yesterday, House Ways and Means members met for the first of two marathon all-day meetings this week to begin hashing out the details of the tax bill. The meetings come on the heels of President Trump’s joint address to Congress, in which he reiterated his support for tax policy improvements, like full expensing, permanent income tax cuts, and repealing the Chips Act. He also dug in on less-than-desirable policies, such as no tax on tips, overtime, and Social Security, new car interest deductions, and targeted tax cuts for manufacturing and shipbuilding. Notably missing was any mention of the child tax credit or changes to the SALT deduction.
This week’s Tax Tracker highlights the fiscal dangers of counting deficit reductions that may never materialize, discusses recent reporting on Internal Revenue Service (IRS) staff reductions, and ends with two new studies on corporate welfare.
Here are this week’s tax highlights:
Don’t let tariffs or DOGE distract from real spending cuts. Republicans will continue to face enormous pressure to scale back the modest spending cuts outlined in the House budget. Deficit hawks should be wary of budget gimmicks, unrealized tariff revenue, and illusory DOGE cuts as pressure mounts to cave on spending cuts.
The campaign to rewrite budget rules to score from a “current policy” baseline is the first of these ploys to undermine the need for spending cuts to offset permanently lower revenues. Second, Trump’s unilateral tariff policies are off to a bumpy start. Still, the fiscal threat of tariffs—beyond the obvious recession risk—is that the administration will use claims of yet-to-materialize tariff revenues to argue against the need for spending cuts or tax offsets in reconciliation. DOGE presents a third fiscal threat. As Cato’s Romina Boccia and Dominik Lett recently warned, “Now is not the time to pass the buck for spending decisions, hoping DOGE and OMB will wave a magic wand and close a $2 trillion deficit.” Only congressional action can make DOGE cuts permanent. Republicans should not trade permanently higher deficits for gimmicky offsets that may never materialize and can be reversed by the courts or the next president.
Related links:
Event: The Dangers of the Current Policy Baseline Gimmick
March 13, Committee for a Responsible Federal Budget
Letter to Democrat Senators on Current Policy Baseline
Thomas A. Barthold, Joint Committee on Taxation
Five Things to Know About Trump’s Income Tax and Tariff Idea
Erica York, Tax Foundation
Cutting the IRS doesn’t have to be scary. At a recent Semafor event, I was asked if I was worried about the reported staff reductions at the IRS. I noted that resources supporting taxpayers, like answering the phones and technology modernization, are worthy of increased staffing and funding. However, overenforcement “has a lot of collateral damage…and those costs are high; they lead to business closures, they have impacts on start-ups, and they are a burden on small businesses.” Congress should simplify the tax code to ease compliance burdens before sending enforcement officers after well-meaning Americans trapped in the circuitous maze of tax law Congress has unwittingly assembled.
Related links:
Collateral Damage of IRS Audits
Chirs Edwards, Cato Institute
IRS Layoffs: A Libertarian Perspective
Jeffery Miron, Jonah Karafiol, Libertarian Land
New Cato studies on corporate welfare and the Inflation Reduction Act. In a new Cato study, Chris Edwards finds the US government spends $181 billion a year on aid to private businesses. He gives 12 reasons to cut this spending, noting, "More industries are becoming dependent on the federal government and driven by politics, which is a dangerous move toward central planning in the economy. Cutting corporate welfare would free markets, boost growth, and trim alarmingly high federal budget deficits.” Edward’s tally excludes corporate tax expenditures. In congressional testimony last year, I estimated industrial policy tax subsidies cost taxpayers more than $200 billion annually.
These costs are especially pronounced in the energy sector. A second new Cato policy analysis by Travis Fisher and Joshua Loucks estimates that the energy subsidies in the Inflation Reduction Act (IRA) could cost taxpayers between $936 billion and $1.97 trillion over the next decade. The long-term costs could reach $4.67 trillion by 2050 as several of the IRA tax credits are effectively uncapped.