June 17, 2024,
Washington Center for Equitable Growth
As Prepared for Delivery
It’s wonderful to be here at such an important moment for the future of economic policy. And it’s a particular honor to join Senator Warren and the distinguished experts you just heard from.
The expiration of the individual provisions of the Trump tax cuts presents a generational opportunity to not just correct the failures of that legislation but to fundamentally reorient our tax system towards shared growth and economic opportunity—to address structural issues in our tax code that have long preferenced wealth over work, to adjust to demographic shifts that require us to raise more revenue, and to ensure our society can sustainably invest in a range of critical priorities that benefit those in the bottom and middle of the income and wealth distributions.
I’ll start with the failures of the Trump tax cuts because those failures inform where we should begin in 2025, and then I’ll discuss the kind of tax system and economy President Biden believes we should build.
The Trump Tax Cuts Failed on Their Own Terms
The Trump tax cuts failed on their own terms: they failed to deliver gains in income, economic activity, and revenue that proponents claimed—and instead were a large windfall for high-income households and large businesses.
In 2017, proponents of the Trump tax cuts said the bill would mainly benefit typical Americans and boost their wages. Instead, the bill gave those in the top 1 percent a tax cut over 50 times larger than that of middle-income households. Its corporate rate cut failed to trickle-down: one rigorous analysis found that corporations used the windfall to buy back stock, pay dividends, and boost executive pay, while the bottom 90 percent of workers saw no wage gains.
Similarly, proponents of the Trump tax cuts said they would double or even triple the economic growth rate. But real GDP and fixed investment grew at about the same rate in the two years after the legislation passed as in the two years before.
Finally, the bill’s proponents also claimed that it would increase revenues and fully pay for itself. But in 2017, revenues were expected to average 18.3 percent of the economy from 2023 to 2025. With 2023 behind us, the revised estimate for that period is only 17 percent. And every estimate of the bill suggests it increased deficits.
Despite the bill’s failures, congressional Republicans’ top priority for 2025 is to extend it, including for the highest-income households. In fact, recent reporting suggests they want to expand further on the Trump corporate rate cut. And last week, they even applauded the idea of entirely replacing the progressive income tax with regressive tariffs. While nearly impossible to achieve, anything approximating this policy would amount to a massive shift of the tax burden from the top of the distribution to the bottom and the middle, and it would likely require a tariff rate so high as to induce a substantial increase in prices and interest rates.
Extending the Trump tax cuts and related provisions would cost nearly $5 trillion over the decade, and Congressional Republicans have not said how they would pay for it. In addition to regressive tariffs, they have proposed draconian cuts to Social Security, Medicare, Medicaid, and the Affordable Care Act; major cuts to non-defense discretionary funding that would take that share of the Budget to about half of its historic average as a share of the economy; reversing this Administration’s investments in combatting climate change and building a durable clean energy industry here at home; or simply adding the cost to the national debt, as they did in 2017, with low- and middle-income households likely bearing the cost in the future through higher inflation and interest rates or deep programmatic cuts.
President Biden’s Plan Will Build a Tax System that Promotes Shared Growth and Economic Opportunity
President Biden rejects this regressive, anti-growth, and fiscally irresponsible approach. The question now is what kind of tax system and economy we build in 2025. As my boss, National Economic Advisor Lael Brainard, argued in May, our approach will be guided by five key principles.
First, our tax system should be more fair, promoting economic opportunity and work and eliminating preferences for wealth. The President is committed to ensuring that the over 95 percent of American households that earn less than $400,000 do not pay more in taxes.
But we must go beyond correcting the Trump tax cuts’ failures and seize the moment to promote economic opportunity for the middle-class and those in need. For example, President Biden expanded the premium tax credits, which lifted health insurance coverage to record levels across demographic groups. The expansion will lapse without congressional action by fall 2025; making it permanent is at the top of President Biden’s agenda.
The expanded Child Tax Credit cut child poverty nearly in half in 2021, primarily by allowing low-income families to access the full credit. Restoring it would lift those children out of poverty again and cut taxes by an average of $2,600 per year for 39 million families. The Senate should make a down payment on this expansion now by passing the bipartisan tax package that would lift 500,000 children out of poverty.
And, restoring the President’s expansion of the Earned Income Tax Credit for childless workers would cut taxes by an average of $800 per year for 19 million low-paid workers, lifting roughly 6 million workers out of poverty.
In addition to expanding opportunity, we can make our tax code fairer by eliminating preferences for wealth. That begins with allowing the Trump tax cuts above $400,000 to expire and not bringing back deductions or other tax breaks for those households. There is no economic justification for giving millionaires another dollar of tax cuts.
We should go further here, too. Billionaires pay an average federal tax rate of just 8 percent on their true income—a lower rate than many middle-class families—primarily because most of their income comes in the form of returns to capital, which is taxed at a lower rate than wages, if it at all. The current system also allows the wealthy to avoid capital gains taxes entirely on massive amounts of income by holding assets until death. These preferences tilt the tax system in favor of wealth, exacerbating income, wealth, and racial inequality.
The President’s Budget addresses these distortions and promotes greater efficiency and equity by taxing capital gains at ordinary rates for income above $1 million, applying a minimum tax to the wealthiest Americans’ full economic income, and closing the step-up in basis loophole for the wealthiest households.
Our second principle for 2025 is that we should raise revenue in order to fund critical national priorities and reduce fiscal risks. President Biden supports paying for any tax cut extensions to avoid deepening the fiscal hole created by two decades of tax cuts skewed to the wealthy. But we should set our sights higher and raise sufficient revenue to fund our existing commitments, pay for a much-needed public investment agenda, and improve the long-term fiscal outlook.
President Biden strongly believes we must raise more revenue to meet commitments we’ve made to our seniors. Because of our aging population, federal revenue as a share of the economy needs to increase to protect programs for older Americans, yet two decades of tax cuts have caused it to fall instead.
Raising additional revenue will also ensure we are able to invest in national priorities that will help us achieve shared and durable economic growth—including narrowing racial wealth gaps, reducing poverty, investing in our children and education, establishing a robust care infrastructure, building more affordable housing to lower housing costs, reducing healthcare costs, and more.
Raising revenue is also necessary because past tax cuts have increased risks to our long-term fiscal health, with revenues now running below historic averages even when, like now, the economy is strong and unemployment is low. The additional revenue called for in the President’s Budget—along with a reduction in federal outlays to pharmaceutical companies and other special interests—would stabilize debt and deficits as a share of the economy and maintain the economic burden of debt within historical ranges. Doing so is likely to substantially reduce the long-term risk of a fiscal adjustment that would harm lower- and middle-income Americans.
Third, we should ask more from corporations that are making record profits and paying less as a share of the economy and as a share of total revenue than they have historically. The corporate share of revenue has fallen from around 30 percent in the 1950s to well under 10 percent today. American corporate tax receipts are around 1.6 percent of GDP, just half of the OECD average of 3.3 percent. Yet, corporate profits as a share of the economy reached record highs during the pandemic, and have stayed historically elevated as corporations hold onto margins that were forecast to have compressed as the pandemic faded.
The President’s Budget would raise the corporate rate to 28 percent—halfway back to the previous 35 percent rate—in addition to other base-broadening reforms. The lackluster investment response to the Trump tax cuts suggests that bringing corporate taxation more in line with past U.S. and current international practice could raise substantial revenue without hindering economic growth.
Fourth, taxpayers should pay what they owe and play by the same rules. This requires an IRS with the resources needed to identify and address tax evasion—and to provide a smooth tax filing experience.
After a decade of severe underfunding, President Biden’s investment in the IRS has in just a year and a half allowed the IRS to provide exemplary customer service, successfully pilot the Direct File tool that will be a permanent offering, collect over $500 million in unpaid taxes from delinquent millionaires, and launch new initiatives aimed at high-end non-compliance, like a new effort to audit personal use of corporate jets.
Just this morning, Treasury and the IRS announced new efforts to stop large businesses and the wealthy from engaging in complex and opaque transactions where they shift the basis of an asset between related partnerships in order to unlawfully claim increased tax benefits, like depreciating an asset over and over. These abuses were turbocharged by the Trump tax cuts and can typically require a wealthy taxpayer to pay an accountant millions of dollars. Treasury estimates this initiative alone will save the government at least $50 billion over the next decade.
President Biden’s investment in the IRS will lapse without congressional action, starting with the IRS’s taxpayer service cliff in 2026. Congressional Republicans also continue to target IRS funding for deep cuts, which would increase deficits by billions. The Administration will block those misguided efforts and prioritize extending the IRS investment in 2025.
Finally, our tax system should avoid an international race to the bottom. The Administration negotiated an historic agreement, signed by more than 130 nations, that will level the playing field for American small businesses that can’t afford complex tax minimization strategies. The agreement will also better support American workers by preventing other countries from luring jobs and operations out of the U.S. with rock-bottom tax rates, and by enabling the U.S. to collect more tax revenues from corporations instead of workers.
Many of the world’s largest economies are implementing this transformational agreement. We must join them in 2025 to grow our corporate tax base rather than allow it to erode further.
Conclusion
President Biden’s plan would correct the failures of the Trump tax cuts and fundamentally reorient our tax system—and economy—in order to achieve shared growth and economic opportunity. Next year’s tax debate presents a moment of possibility that we must seize together, bolstered by the economic evidence that we have discussed today—and also by the support of the American people, who overwhelmingly believe our tax system and economy should work better for the middle-class and those most in need.
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