The US tax code will change next year; the presidential election will determine how

NOT ONLY are taxes one of the only certainties in life, they are also one of the only certainties in this presidential election. That is because of the looming expiration of tax provisions passed in 2017, the main legislative accomplishment of Donald Trump’s term in the White House. This presents a fiscal cliff. By the end of 2025 whoever is president must sign new rules into law, or most Americans will see sharply higher income taxes.

Tax negotiations are thus guaranteed to occupy much of Kamala Harris’s or Donald Trump’s first year in office, giving them a chance to put their stamp on America’s tax code. Mr Trump favours broad, sweeping cuts that he believes would energise investment and innovation, whereas Ms Harris hopes to use tax changes to reduce inequality.

Mr Trump, unsurprisingly, hopes to keep many of his original cuts in place. These include: reductions to most individual income-tax rates; a doubling of the exemption on estate taxes, paid after death; and rules that make it easier for businesses to expense more investments. Simply enacting these extensions would cost the federal government about $4.6trn in lost revenue over the next decade, according to the Congressional Budget Office, a nonpartisan scorekeeper.

This would just be the starting point for Mr Trump. As the election has turned more competitive, the former president has pledged more tax cuts. In 2017 he slashed the corporate tax rate from 35% to 21%. Now he wants to take it even lower, perhaps to 15%. Another promise is to exempt employees such as waiters from taxes on tips. Mr Trump has also said that he would make Social Security benefits tax-free in order to help retirees. And he has promised to reverse one measure from his 2017 law: he would let residents of high-tax states resume deducting more of their local taxes from their federal tax bills.

Added together Mr Trump’s tax platform is eye-wateringly expensive, running to as high as $10trn over the next decade, according to Andrew Lautz of the Bipartisan Policy Centre, a think-tank based in Washington, DC. Mr Trump has proposed some offsets, including higher tariffs (see trade-policy brief) and scrapping the Biden administration’s green-energy tax credits. These would be insufficient to plug the fiscal holes, however, which means the federal deficit—already expected to reach 6% of GDP—may expand to 8% or so under Mr Trump. His plans could add $7.5trn to America’s debts over a decade, says the Committee for a Responsible Federal Budget (CRFB), a non-profit group.

Ms Harris’s tax plans draw heavily on Joe Biden’s budgets. She has vowed to extend Mr Trump’s expiring tax cuts for individuals earning less than $400,000 per year. For those above that line, the tax rate would revert to its pre-2018 level of 39.6%. She also wants to partially undo Mr Trump’s corporate-tax cuts, taking the rate on companies up to 28%. Most controversially, she wants to tax unrealised capital gains for the wealthiest Americans—a useful revenue source but hard to administer and possibly detrimental to growth.

At the same time Ms Harris has proposed a range of tax cuts, largely in the form of targeted credits. She wants to nearly double the tax credit for families with children to $3,600 per year, in addition to giving a $6,000 tax credit to families with newborns. For lower-income Americans, she would like to expand the earned-income tax credit (EITC), a kind of reverse income tax. She has proposed downpayment assistance of $25,000 for first-time homebuyers and a deduction of up to $50,000 for business startups. And like Mr Trump, she has pledged to exempt taxes on tips (indeed, Mr Trump has mocked her for copying this idea).

Totted up, Ms Harris’s proposals would generate nearly $2trn in federal revenue over the next decade. But the higher taxes—especially the increased corporate levy—would weigh on growth. The Tax Foundation, another Washington think-tank, estimates that her plans would reduce GDP by about 2% over the next decade. The result would be a continued increase in the deficit, but probably not as great as under Mr Trump. Her plans may add $3.5trn to the national debt, according to the CRFB. Ms Harris would at least succeed in her aim of making the tax system a little better at redistributing income from the wealthy to the poor.

So long as Congress is divided, neither Mr Trump nor Ms Harris will be able to deliver on their full plans. But this is why the expiration of the 2017 tax provisions is so important. Both the House and the Senate will be highly motivated to find a way to extend the cuts, at least in part. That will give the president leverage to push for a new bill along the lines of what he or she pledged while campaigning. Voters therefore have a real choice between different visions of who should pay taxes, and how much they should pay. ■

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