Trump Tax Cuts 2025: Budget Reconciliation
As Kiplinger has reported, hundreds of rural hospitals across the U.S. are anticipating imminent closures and potential service reductions due to Trump’s steep Medicaid cuts. The numbers are in, and experts are signaling the biggest winners and losers from the Trump administration’s new tax and spending package. The U.S. debt-to-GDP ratio was 104% before the TCJA took effect and it was 108% a couple of years later before pandemic-era spending that pushed the ratio to 135% by mid-2020.
The top rate was reduced from 39.6% to 37%, and the other rates were adjusted accordingly. One of the major concerns surrounding the Trump tax plan is its potential impact on the national debt. The plan proposes a significant reduction in tax rates across the board, which could result in a decrease in government revenue. This change was compensated for with the increased standard deduction and the expanded child tax credit.
The simplification of the tax code, while a laudable goal, risks enabling individuals and corporations to exploit deductions, credits, and other provisions to reduce their tax liabilities. Under the TCJA, the child tax credit saw an increase from $1,000 to $2,000 per qualifying child, with $1,400 being refundable. This change could provide significant tax relief for families with children. The credit begins to phase out for individuals with income above $200,000 and couples with income above $400,000. Taxpayers have an option to itemize deductions or take a standard deduction from their taxable income at a rate set by the IRS.
Conversely, regions with lower state taxes might experience more net savings. Not captured in the estimates shown in this report are the broader benefits to society related to reducing climate change, which are the motivation for the enactment of these credits. An approach that provides tax breaks specifically to low- and middle-income families, regardless of the type of income they receive, would be more targeted and fairer. For example, a tipped worker may or may not earn a large income, and even one earning very little could be married to someone with a large salary, meaning their household income is much higher than average. In order to owe explaining the trump tax reform plan taxes on benefits, an individual would need to make $25,000 (or $32,000 for joint filers) in what’s called “combined income.” Combined income is adjusted gross income, nontaxable interest and half of Social Security benefits.
We’ll look at Trump’s tax proposals, their cost and what impact they could have on taxpayers. “My plan will massively cut taxes for workers and small businesses,” he said the day before the election in Pennsylvania, echoing a line in many of his speeches. Trump’s economic policy advisers oppose any increase to the $10,000 cap and are urging Trump to lower the monetary cap or to end the SALT deduction altogether. Meanwhile, a number of Capitol Hill Democrats and Republicans from high-tax states, such as New Jersey, New York and Illinois, are pushing for an increase to the $10,000 cap. The economic effects of this provision would likely be modest, with minimal impact on GDP and job creation.
This likelihood of a shared incidence effect between consumers and producers is discussed in Bistline et al. (2023). As illustrated in Figure 2, some of Trump’s proposals cut taxes dramatically, particularly his proposal to extend the temporary 2017 tax provisions. But his proposed tariffs, which would be largely passed onto consumers as increased prices, would more than offset those tax cuts for all income groups outside the richest 5 percent. President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) on Dec. 22, 2017. The TCJA cut individual income tax rates, doubled the standard deduction, and eliminated personal exemptions from the tax code, among other provisions.
Census Bureau’s American Community Survey, and numerous other sources to create a valid representation of the U.S. population, including federal filers and nonfilers (ITEP 2024). Its structure mirrors models at the federal level maintained by the congressional Joint Committee on Taxation, the U.S. Treasury Department, and the Congressional Budget Office, and at the state level by the Minnesota Department of Revenue and other state agencies. Microsimulation modeling is widely regarded as the best approach to tax policy analysis because of its ability to account for overlapping and interacting tax provisions and to produce results that are representative of the full population.
A single filer’s standard deduction increased from $6,350 in 2017 to $14,600 in 2024. The deduction for married joint filers has increased from $12,700 in 2017 to $29,200 in 2024. Under the Trump tax plan, the mortgage interest deduction is capped at $750,000 for new homebuyers. If you are planning to purchase a home, consider how this cap may affect the amount of mortgage interest you can deduct.
Permanence for the individual, estate, and business tax provisions of the TCJA would increase long-run economic output by a combined 1.1 percent when modeled with the cap on SALT deductions limited to $10,000. However, if Trump’s proposal to “get SALT back” means discontinuing the $10,000 SALT cap, removing the cap from TCJA permanence would boost GPD by an additional 0.7 percent, as the SALT cap creates a burden on labor income as well as housing investment. Some notable changes included the increase in the standard deduction, the elimination of personal exemptions, a cap on the state and local tax deduction, the modification of the mortgage interest deduction, and the expansion of the Child Tax Credit. The TCJA also eliminated or limited numerous itemized deductions, but retained others like charitable contributions and medical expense deductions. Under the Tax Cuts and Jobs Act (TCJA) signed by President Trump in December 2017, the individual income tax rates were modified. While the number of tax brackets remained the same at seven, the rates were lowered overall.
Overall, the plan would reduce federal revenue on a static basis by $11.98 trillion over the next ten years. Most of the revenue loss is due to the reduction in individual income tax rates, which we project to reduce revenues by approximately $10.20 trillion over the next decade. The changes to the corporate income tax will reduce revenues by an additional $1.54 trillion over the next decade, with the remaining static cost ($238 billion) due to the elimination of the estate tax.
The third major income exemption would eliminate federal income taxes on tip income. This would primarily benefit workers in the service industry, particularly in food service, hospitality, and personal services. Currently, the IRS expects all tip income to be reported and taxed as regular income. The overtime exemption would likely benefit manufacturing, healthcare, transportation, and service industry workers who regularly work overtime hours. According to economic modeling, this exemption would increase long-run economic output by approximately 0.3% and create an estimated 405,000 full-time equivalent jobs by increasing labor supply incentives.
Another noteworthy change is the amendment of the tax treatment for business investments. Under the Trump tax plan, businesses can now fully expense the cost of certain qualifying investments, such as machinery and equipment, in the year they are purchased. This expensing provision, known as bonus depreciation, is slated to gradually phase out, starting in 2023. Business owners should consider the investment opportunities that provide the most significant tax benefits before this provision expires. Furthermore, the tax reform’s impact on the federal deficit, which is projected to grow as a result of these changes, could exacerbate the financial strain on health care programs.
The Tax Foundation’s General Equilibrium Model estimates that the proposed tariffs would reduce long-run economic output by approximately 1.3% and eliminate about 1,073,000 full-time equivalent jobs. These negative effects occur because tariffs effectively act as taxes on both consumers and businesses that rely on imports, raising prices throughout the economy. The House-passed budget resolution (which contains the instructions that committees must follow for the reconciliation process) would allow a $4.5 trillion increase in the deficit from tax cuts over the next decade so long as spending is cut by $1.7 trillion. But if spending is not cut by $1.7 trillion, the cap on tax cuts will be reduced dollar-for-dollar. The House-passed bill as currently estimated meets the requirements of the budget resolution. We modeled the most significant provisions outlined above, and most of the less-significant provisions.
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