Tax Cuts for the Coalition We Have

In 2017, Republicans on Capitol Hill couldn’t agree on where they were headed. Was Trumpism an aberration? Was then-Speaker of the House Paul Ryan calling the shots? Did the populist energy that fueled the upset of Hillary Clinton represent a shift in political fortunes, or was it just red-meat window dressing to advance the GOP’s pre-existing agenda?

After a failed attempt at repealing Obamacare, congressional Republicans needed a win, and cutting taxes was something pretty much everyone in the party could agree on at a time of particular disunion. Enter the Tax Cuts and Jobs Act (TCJA), which showed signs of the identity crisis the GOP was going through. It was, in essence, an old-wine-in-new-wineskins moment, where the priorities that drove the GOP for decades—lowering tax rates on corporations and higher earners—sat uneasily with the reality that President Trump had campaigned on a different set of priorities.

As Congress now prepares to revisit TCJA in the upcoming year, it’s important for Republicans to grapple with the ongoing political realignment. Simply tapping copy-paste to extend 2017’s tax bill—something some in the party seem intent on doing—will be a missed opportunity. A TCJA 2.0 should put meat on the bones of an authentically conservative approach to tax policy—fiscally prudent, parent-friendly, and pro-worker.

Back then, staunch anti-tax true believers, like former Speaker Ryan and Rep. Kevin Brady, then-chair of the powerful Committee on Ways and Means, sought to reduce America’s corporate tax rate, which at that time was higher than most other developed nations. They chose to lock in that new, lower rate for businesses on a permanent basis.

Another goal behind the push for TCJA was to reform and simplify the tax code for households, pitching the idea that most of them would be able to file taxes on a form the size of a postcard. That was the nominal reason for almost doubling the standard deduction, getting rid of the dependent exemption, capping the deductibility of state and local taxes and home mortgage interest payments, and other tax reform ideas that made it into the final bill.

However, to keep the cost of the package from exceeding $1.5 trillion, Republicans chose to design their bill such that these provisions impacting households had a ticking clock, set to expire in 2025—that is, this upcoming year. The question is not if Congress will act, but how. No one believes they will sit back and watch taxes go up on millions of American families. The artificial deadline will force a choice about whether Republicans are content to inherit the tax policy of the old guard, or if they’re willing to adapt their priorities to deliver for working families.

It shouldn’t be surprising that families with higher incomes benefited most from TCJA. As the Tax Foundation estimated the year after TCJA’s passage, taxpayers in the top income quintile would see an increase in after-tax income of 2.6%, while the bottom four-fifths of households would see a boost of only 1.6%, on average.

Again, in that tumultuous political moment, cutting taxes for all income brackets was the one thing that could unite the various factions on the Right. But without careful design, cutting income taxes will naturally benefit those with higher incomes. Taxpayers making less than the national average income already pay next-to-nothing in federal income taxes (excluding FICA), so simply cutting their tax rates doesn’t do much. More targeted approaches are needed to help these Americans.

Just because the center of gravity on the Right defaulted to tax cuts that predominantly benefited the well-off in 2017 doesn’t mean the party has to automatically offer that same policy prescription in 2025. That’s particularly true when the Republican coalition of today looks meaningfully different. Over the past two election cycles, working-class Americans—many of whom may have dreams of one day making it into the top tax bracket, but are far away from it now—have swung firmly into the GOP camp. Rewarding them by simply extending TCJA as-is, rather than improving how it is designed and implemented, would be using populist political rhetoric to advance a political agenda that reflect yesterday’s Republican coalition.

Improving the Child Tax Credit (CTC) should be at the top of that list. Replacing the dependent exemption, which would have been worth $4,150 for each taxpayer in 2018, with a bigger per-child credit may have helped rationalize the tax code. But it placed even more weight on ensuring the CTC remained an essential part of the mix going forward.

The CTC is the primary way in which the federal government recognizes the costs associated with raising kids. Rather than a benefit tied to a certain expense or work-family structure, the credit is broadly egalitarian, allowing families more space to afford the necessities of daily life in the way they best see fit. And it is an important recognition that parents bear the costs of raising the next generation, while society as a whole benefits from their important labor.

Yet some in Congress seem inclined to treat the CTC as ancillary, rather than at the heart of what the next round of tax negotiations needs to be about. Americans know too well what kind of stress the high rates of inflation the past four years have put on their wallets. But another painful side effect of inflation is how it erodes the real value of tax provisions, like the CTC, that aren’t indexed for inflation. Since 2017, the real value of the credit has plummeted by around 25%—what was worth $2,000 when the TCJA was signed worth around $1,560 today. Simply maintaining the TCJA level of $2,000 per child would be locking in a real-world erosion that a party of parents shouldn’t content itself with.

Responding to inflation is a must. But Republicans could easily get more creative in delivering for families. As I wrote with scholars from the Niskanen Center, the Institute for Family Studies, and other pro-family groups, improving the Additional Child Tax Credit (ACTC)—that is, the amount that parents who owe less in income tax than the amount of credit they would be otherwise eligible for—can be done in a sensible way that doesn’t break the bank or penalize work and marriage. The easiest way to get more money into moderate-income parents’ hands would be to raise the cap on how much ACTC they can receive, and make it possible for them to see benefits from the very first dollar they earn.

Champions of the original vision of the TCJA did get plenty right the first time around. “Filing taxes on a postcard” might still be a pipe dream, but a simpler, more user-friendly tax code would benefit millions of American households, who spend an average of nine hours and $150 filing their taxes every year, according to the IRS. Making the process of filing tax returns less cumbersome could reduce some headaches, and directly benefit families without the forgone tax revenue that accompanies expanded tax credits or lower tax rates.

One example of this is the recently launched Direct File program, which allows those with relatively simple tax situations to have the option of filing their taxes online for free in nearly half of states in 2025. Yet a small group of House Republicans, influenced by (at times, justifiable) anti-IRS bias, have pushed the incoming administration to eliminate Direct File via executive order on day one, and there will doubtlessly be a legislative push to roll it back. For a party that wants to deliver for working parents, that would be a mistake – there’s nothing pro-family about injecting complexity into the tax filing process.  

But overall, the TCJA reflected where the bulk of the GOP was in 2017. Eight years later, the party has changed—fewer country club memberships and more workers (of all races) without a college degree. Responding to that will require making tough choices about what is in or out of a potential tax package—lowering the corporate rate from 21 to 15%, for example, or eliminating taxes on Social Security benefits, would soak up potential dollars that could otherwise go toward supporting working-class families, implementing a ‘Baby Bonus,’ and more.

An agenda aimed at supporting working-class families shouldn’t content itself with tax cuts skewed toward higher earners, or focus on repealing new initiatives that have saved families time and money. Congress appears likely to adopt a two-track strategy to tax negotiations, rather than rushing to get it done in the first 100 days. That gives them plenty of time to examine what principles should be guiding their next bite at the apple, and how best to improve, rather than just extend, the signature accomplishment of President Trump’s first term in office. Doing so must recognize why and how the American people gave him a second term to begin with.