In a recent appearance on CNBC, former Donald Trump Treasury Secretary Steve Mnuchin spoke as if the President-elect’s tax cut promises were a sure thing, legislatively speaking.
“The top priority is extending the Trump tax cuts and the signature part of his program. I think that should be easy to pass in Congress, particularly if the Republicans control the House as well,” Mnuchin said.
But Trump promised much more to both individuals and businesses on tax policy. Tax cuts on tipped income, overtime pay, some Social Security taxes, tax cuts for first responders and the military, and Americans living abroad, and deductions for auto loan interest, among others. As a result, tax experts are not as confident as Mnuchin that it won’t be a slog, even in a GOP sweep scenario, to deliver on the tax cuts promised to both voters and businesses in a nation increasingly concerned about rising national debt and an economy in which bond traders have been pushing yields higher, at least in part, due to the deficit.
Traditional GOP tax policy might be thought of as favoring more business tax cuts. But for corporations, the only certainty at this point, according to Rohit Kumar, co-leader of PwC’s national tax office and a former deputy chief-of-staff to Senate Majority Leader Mitch McConnell, is that the odds of a dramatic tax increase have been “taken off the table.”
But for U.S. corporations, “I don’t think people can necessarily assume, when all is said and done, there is not revenue pressure that will show up on the corporate ledger,” he said.
“Conservatives don’t have the stomach to do all of the 2017 cuts and keep campaign promises on the deficit,” said Dustin Stamper, head of the tax legislative affairs practice at Grant Thornton. “They are going to have to make some hard choices on priorities.”
The conservative policy movement Project 2025 has its own tax plan.
The reflexive thinking that a traditional GOP caters to the interests of big business when it comes to tax policy isn’t necessarily the case judging from campaign efforts. “Look at which tax cuts were getting the most focus on the campaign trail. A lot were more populist individual tax cuts,” Stamper said. “Can they really have a corporate wish list leapfrog those? It’s a tough sell. I would say it takes some tax increases companies were afraid of off the table, and in 2025, it gives the GOP the chance to rethink, not just blindly extend, the 2017 tax cuts in current form.”
Mnuchin noted that the original goal in 2017 was a 15% corporate income tax linked to businesses that support U.S.-based manufacturing and jobs, but Stamper said that would be “massively expensive.”
Any GOP majority will still be a relatively narrow one, complicating the path of tax policy, government funding and the debt ceiling debate. But one development that should help Trump is expectations that lawmakers will be even more deferential to him than they were during his first time. Already, those vying for Senate leadership posts have entered into a competitive game to show Trump how far they will go for his wishes.
Kumar said to expect one of the first big discussions on Capitol Hill, assuming the GOP maintains control of the House of Representatives, to be about the extension of the 2017 tax cuts and how to finance them without increasing the deficit. “There will be some who say it should all be deficit-financed, and that’s more than $4 trillion.”
The nonpartisan Congressional Budget Office estimates that extending the Trump tax cuts for the next 10 years would add $4.6 trillion to the deficit.
$4.6 trillion deficit and debate over whether tax cuts pay
In traditional conservative economic circles, there is an argument often made that tax cuts are self-financing, at least partially if not wholly, as a result of the economic growth that results from the policy. And there are powerful figures on the Hill when it comes to tax policy who are seen as still hewing to this philosophy, such as Idaho Republican Senator Mike Crapo.
But Stamper says this view “is starting to fray with conservatives on the House side,” and adding as much as $4.6 trillion to the deficit will make this faction with the GOP uncomfortable with no offsetting revenue.
Notably, House Speaker Mike Johnson has voiced support for the traditional view of funding tax cuts through economic growth.
If the Trump administration can convince the House and Senate in a sweep scenario that a big deficit-financed tax bill is the right policy, that could create some flexibility for the broader suite of tax cuts proposed, but Kumar said the reality is that “some in the GOP are starting from the position of having to pay for every penny. Getting these GOP lawmakers on board, he added, “might be more heroic.”
“Talk to lawmakers on Capitol Hill and they are already justifiably concerned about having the political bandwidth to address expiring provisions, let alone pick up additional tax cuts to carry across the finish line,” Kumar said.
It’s also what PwC described as a “must-pass year” for the expiring 2017 Tax Cuts and Job Act policies, with failure to act resulting in “across-the-board tax increases on virtually every individual taxpayer and automatic increases in some business taxes.”
Trump may be the “most pro-stock market president in history,” but for businesses, Kumar added, “I start from the position that additional tax decreases will be very difficult to obtain, given there are several trillion in individual taxes expiring.”
Individual tax cuts versus Social Security, business tax breaks
History shows that when it comes to the battle between individual and business tax cuts, contrary to popular perception, individual tax issues are always politically dominant issue.
In recent years, Hill battles over a research & development tax credit for corporations died on multiple occasions due to GOP concerns about the Child Tax Credit that was on the other side of the bargain. “Changes on the individual side dominate even when there is buzz about tax relief on both sides of the ledger,” Kumar said.
Corporations would like to see action on a host of issues, from corporate income tax rates to the excise tax on stock buybacks enacted during the Biden administration, bonus depreciation, the R&D tax credits, and small business tax policy.
Any new individual tax cut promises made by Trump will face similar hurdles. “Adding new individual tax relief suffers from the same obstacle: get in line behind the cost of all the expiring provisions,” he said.
Hedge fund manager and Trump ally John Paulson, who has been rumored as a potential Treasury Secretary candidate, told the New York Times in an interview ahead of Election Day that there is a way to pay for new tax cuts by lowering their total cost through narrowing eligibility requirements.
“You need to keep the concept of what he wants to achieve, and put guardrails around it so you achieve the goals, but lower the revenue impact,” Paulson said.
In a revenue-constrained environment, this “little of everything” approach could be pitted against the “a lot of a few things” approach, what Kumar described as “the art of the doable.”
The Trump administration and GOP members on the Hill are expected to move relatively quickly, and use the reconciliation process in a bid to enact tax policy with only Republican votes, as was the case in 2017 when the TCJA was enacted. That simple majority process is the best path for the expiring 2017 tax cuts, but would be a more difficult road for other provisions discussed on the campaign trail, such as Social Security tax cuts, with reconciliation rules stipulating no changes to Social Security.
But that may be one of the bargains that the GOP has to make. When it comes to the effectiveness of reconciliation to address the 2025 expirations, Republicans may not “let any particular provision force them off that tool,” Kumar said. “The political penalty would be in excess of upside from something you can’t do in reconciliation.”
“Social Security will be the hardest to achieve,” Stamper said. “There may be other ways to write rules but there are hard limits to what can be done through reconciliation. … But we know they won’t get near the 60 votes needed to do whatever they want, and the only viable option is reconciliation,” he said.
Even using this approach, PwC cautions that challenges in reaching an agreement could delay action on a tax bill until late 2025.
Trump tariffs and government revenue
The Trump administration does have new arguments to make about how its policies will limit the deficit impact of new tax cuts, predominantly, in the form of aggressive trade tariffs. By some estimates, tariffs as outlined by President-Elect Trump could add $2 trillion to $3.3 trillion in revenue, but that is a figure estimated in isolation from the parallel finding that tariffs would serve as an additional tax on households running into the thousands of dollars annually. Even the trillions generated from tariffs would “fall well short of what is needed to fully offset the revenue losses of making the expiring provisions of the 2017 tax cuts permanent,” according to the Tax Foundation.
Kumar said the tariffs are not insignificant math in the coming tax battle, representing as much as two-thirds of the cost, but it would require some flexibility on the Hill when it comes to how tax law is scored. Tariffs revenue would not be officially scored as part of any tax legislation, requiring House and Senate Republicans to be willing to consider revenue from sources not in the bill or CBO estimates. The GOP would need to be willing to see sufficient political cover in that approach, and there is a recent precedent — offered by the Democrats.
When passing the Inflation Reduction Act in 2022, it was $80 billion in additional IRS funding that got West Virginia Senator Joe Manchin on board, with the CBO writing a memo saying that if spent correctly, the funding would allow the IRS to ultimately raise $200 billion in revenue — a net gain of $120 billion. “Manchin pointed to it and said, ‘This is why I am comfortable voting.’ We would be asking the GOP to do something similar,” Kumar said.
There is also the opportunity to repeal aspects of the Inflation Reduction Act, another complicated effort given the placement of many benefits in red states and districts, and also not a tax promise that was discussed at the same level or volume during the campaign.
“If you believe in the concept of political capital, that accrues through things you were talking about actively on the campaign trail and you feel more pressure to fill the promises made the loudest,” Stamper said. As a result, it would make sense for the GOP to “pick a few,” and pick measures that “seem most practical and achievable.”
Stamper thinks there will be pressure to pursue the no tax on tipped income measure since it was among the first promises made on the campaign trail and various versions of it have support from both political parties. (Kamala Harris supported the policy as well.)
Removing the limit on SALT deductions put in place in Trump’s 2017 tax act alone could add $1 trillion to the total cost of a new tax bill. “There are some major tradeoffs there,” Stamper said. “Lots of GOP members in districts in high tax states that really hate the SALT cap, but the House and Senate majority could be narrow.”
National debt and the bond market
It will be some months before the Trump administration reveals its hand. Some data points may come in the form of a Treasury Secretary nominee appearing before a Hill finance committee. But the first detailed look at which campaign proposals are being pursued will come in a budget proposal that the new president sends to Capitol Hill, typically in the spring. That can often be delayed in the first year of a presidency, but in this case the timing could change based on whether Trump’s term is considered a first or fifth year.
There are additional ideas under consideration in a second Trump term that can influence overall government spending, such as the government efficiency effort to potentially be headed by Elon Musk. However, the biggest spending items of all, mandatory spending across government health-care programs, Social Security, interest on debt and the Defense budget, each double-digit percentage items in the federal budget, will add to the uphill battle against the deficit. Trump has made clear he has no interest in taking on entitlements and a GOP sweep would potentially make that even more political unpalatable.
All of these mandatory spending items are growing relative to GDP at a worrisome rate, with interest on the national debt growing faster as a percentage of total spending than any other budget item, and expected to continue to rise. But neither of the two political parties typically wants to take the heat, and risk in the next election cycle, that can come from major entitlement program changes, with divided government thought by many to be the better bet for action. That implies that the deficit will continue to grow, and that is what the bond market has been signaling in recent months, and was signaling even before election results were clear. Bond yields have been rising even though the Federal Reserve as begun cutting interest rates and that has been attributed, at least in part, to growing concerns about the deficit from the market, and belief that these concerns are becoming persistent.
The current national debt total is nearly $36 trillion and there is the potential for close to $5 trillion added to the deficit over a decade in the cost of a renewed 2017 tax plan, without additional new tax policy measures. While there is now greater attention to the bond market and the potential macroeconomic effects of higher deficits, the reality in Washington, D.C., is that long-term economic concerns aren’t usually the deciding factor.
“The arc of history here reminds us that every time long-term deficit concerns come into conflict with near-term policy, near-term wins,” Kumar said. “It’s batting about 1.000.” And that may be the most encouraging political factor for passage of tax legislation with a price tag that could run as high as $5 trillion. “You don’t get that without that maxim being consistently true across both parties over 40 years,” he said.