July 15, 2025 • 34 mins
The One Big Beautiful Bill is now law—but what does it actually do? In this episode, we break down the new tax law’s key provisions, including who benefits, who doesn’t, and what it means for the economy, tax certainty, and the federal deficit.
Kyle Hulehan is joined by Daniel Bunn, President and CEO of Tax Foundation, and Garrett Watson, Director of Policy Analysis. Together, they dive into the bill’s temporary vs. permanent changes, its international implications, and how it sets the stage for future tax policy debates.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kyle Hulehan (00:00):
Hello and welcome to the Deduction a Tax
Foundation podcast.
I'm your host, Kyle Houlahan,and we are back today with
another episode, and we arejoined by Garrett Watson,
director of Policy Analysis hereat the Tax Foundation, and
Daniel Bunn, president of theTax Foundation.
Now, I would imagine you guyshave heard something by now that
there is a bill that was passed,a law passed, actually, and I
(00:21):
think we're gonna talk about itonce again.
Today.
So Daniel, I'm gonna start offwith you.
Uh, now that the one big,beautiful bill has passed, what
are some of the good provisionsin it why do they matter for
taxpayers in the economy?
Daniel Bunn (00:36):
Thanks, Kyle.
Uh, so this is a massive pieceof legislation and there are
certainly some good things init.
Um, but we'll talk through allthe various trade-offs that
lawmakers had to, to make.
I think the biggest thing when Ilook at this legislation, um,
the good kind of splits into twocategories, and the b both
follow our principle ofstability that we care about
(00:57):
here at tax.
Foundation, and that's thepermanence for the tax cuts for
individuals and permanence onthe pro investment, uh,
provisions.
If lawmakers hadn't passed thislegislation, uh, individuals,
households across the USwould've seen a massive tax hike
at the end of this year.
In fact, our estimates, I.
Uh, suggest that 62% ofhouseholds would see a tax
(01:20):
increase at the end of the year.
So providing certainty totaxpayers and avoiding that tax
cliff is really important.
But the other piece that'spermanent is provisions.
Uh, that support businessinvestment, like full expensing,
uh, like, uh, immediateexpensing for research and
development.
And then, uh, there's a coupleof other pieces on interest
(01:43):
treatment, but really thispermanency is really the best
part of the bill.
Uh, and I think it was reallygood to have those things as
part of this legislation.
Kyle Hulehan (01:53):
which part of the bills, and this is to you,
Garrett, uh, are, are, what doyou see?
What's permanent?
What's temporary?
What's.
Temporary and, and what doesthat mean for the future of tax
policy?
Garrett Watson (02:02):
Thanks, Kyle.
I think that's a, it's anexcellent question because one
major aspect, uh, of thismassive legislation that policy
makers are grappling with iswhat aspects of, uh, the tax
changes they're making to make.
Permanent over the 10 years ofthe budget window and beyond,
uh, in which to make temporary.
And there was a natural push andpull as it's made its way
(02:22):
through Congress, uh, both forbudgetary reasons to try to
balance out the fiscal cost aswell as to, uh, maximize the
benefits that Daniel just, uh,outlined, uh, when it comes to
stability and, uh, benefits botheconomic growth and to taxpayer
certainty moving forward.
And so the, the laws passed,ended up with a combination of.
Uh, permanency as well as, uh,uh, new temporary provisions.
(02:45):
There's permanency for theunderlying, uh, TCJ individual
provisions for the most part,uh, which is, uh, a, a good, uh,
improvement for not just growth,but also for taxpayer certainty.
Uh, there also was, uh, keyhere, permanency for the, uh,
many of the, uh, businessprovisions, including expensing,
uh, for bonus depreciation and rand d.
Uh, but it was paired withtemporary provisions, uh, for
(03:07):
both businesses and individuals.
For individuals, for example.
There was a grand bargain struckon the salt, uh, deduction cap.
So under the 2017 tax law, thesalt deduction, which is a
deduction for your state andlocal taxes paid against your
federal, uh, taxable income.
Uh, it was capped at$10,000 forall filers in 2017 and was a
major, uh, sort of, uh, area ofcontroversy and federal tax for,
(03:30):
for many years now.
There was a, a sense, anunderstanding that we needed to
have a compromise or somethingneeded to be landed on.
In the law and what they landedwith is a, basically a temporary
expansion of that, uh, thatdeduction of$40,000 paired with
an income limit.
but then the deduction snapsback down to a flat$10,000, uh,
(03:51):
starting in 2030 and beyond.
And so that's, uh, one areawhere there's permanency, but
the, the provision actually iscut in half and it will probably
motivate policy makers torevisit salt yet again, uh, in
2029 or, or, or uh, 2030 whenthat ends up happening
potentially.
And we'll have another saltdebate.
Of course, the other majortemporary provisions include the
new, uh, deductions for avariety of economic activity
(04:13):
that includes deductions andexemptions for, uh, tips for
overtime.
There's a new senior deductionworth$6,000 for someone age 65
and over.
There's a auto loan deductionfor your auto loan interest if
you have a, a new vehiclethat's, uh, assembled in the us.
All of these new items thatwere.
Uh, uh, that were recommended bythe president and campaign Don
during the 2024 campaign wereincluded here, but they were
(04:35):
made temporary.
So they begin this tax year in2025, and they go through the
end of 2028.
Uh, notice a theme here.
The late 2020s will becomepotentially a new tax cliff.
That may motivate, uh, more taxlegislation if we don't get it
before.
Then another temporary provisionwas the new, uh, depre a hundred
percent, uh, depreciationdeduction for certain
(04:56):
structures, uh, which is goingto, uh, take effect, uh, this
year and go through roughly 2031for, uh.
Uh, structures that are, uh,constructed in place in service
by then.
Uh, but it only qualify, is onlyqualifying for, uh, those
structures that, uh, produce areassociated with tangible
production in the us.
And so it's a subset ofstructures.
It's an exciting, interesting,wonky provision, but it could
(05:17):
help, uh, improve incentives forbuilding structures in the us.
Kyle Hulehan (05:19):
And real quick here, uh, to you Daniel, I I, I
wanted to ask, you know, we'retalking about temporary things.
We're talking about permanency.
Could you just explain for ouraudience real quick?
know, in the most simple way whyvalue permanency over, uh,
temporary policy.
Daniel Bunn (05:35):
Sure.
So the big thing is, uh, peopleand businesses plan for the long
term, and it's important for thetax code to also be situated so
that those decisions can bemade.
Uh, if you are changing taxlaws, every I.
Year or every other year.
Uh, then that creates a lot ofconfusion, a lot of complexity,
and a lot of difficulty forindividuals that might want to
(05:57):
be able to plan over multipleyears.
And in fact, businesses planinvestments over the course of
many years, sometimes decades,uh, and providing stability in
the tax code, uh, can reallysupport, uh, better decision
making or more effectivedecision making at all sorts of
levels of the economy.
Kyle Hulehan (06:15):
Okay, so, so now with that understanding, how do
we see the final version of thisbill, you know, weigh with the
trade-offs between economicgrowth and increased deficits?
Daniel Bunn (06:27):
Yeah, that's a great question.
So lawmakers had a real, realchallenge, uh, identifying
savings that they could put inplace, uh, that would allow some
sort of offset for the taxprovisions that they brought in.
There was a whole debate abouthow you measure this.
Relative to the baseline, butover the course of the
(06:49):
legislation, they ended up witha policy that will increase
deficits over the next 10 yearsby at least$3 trillion.
And at the same time, they wereable to adopt some pro-growth
policies.
But even after adopting policiesthat boost growth in our
estimates by more than 1% overthe course of the coming years,
and, uh, over the long run.
(07:11):
There's only about 20% of therevenues lost that comes back in
the form of higher economicgrowth and supporting, uh, new
revenues.
So there's still a significanthit to the deficit in long-term
debt.
And that's something that Ithink lawmakers.
Could have made better choicesto have this be more fiscally
(07:32):
sustainable.
But the margins for, uh, thepolitical coalition here were so
slim.
So, so few votes that they couldlose, that they had to go
searching for, uh, opportunitiesto increase the salt cap, like
Garrett was talking about.
Uh, they didn't have as muchwiggle room on some of the
spending cuts or even some ofthe treatment of some of the
(07:52):
green energy credits.
And that put them in a positionwhere.
They passed legislation thatdoes address some spending
concerns and significantlyaddresses these tax concerns,
but adds a bunch of other piecesthat are really expensive and
don't necessarily fit adefinition of fiscal
responsibility.
Kyle Hulehan (08:12):
So, uh, Garrett, who do we think comes out ahead
under this new law?
You know, and, and who doesn't?
What, what are thedistributional effects?
Tell us about the fairness ofthis bill.
Garrett Watson (08:24):
Right.
So the distribution of the taxburden, of course, is one, one
of the ways in which we canevaluate, you know, the impact
of this legislation on, youknow, on everyday folks.
And so we leveraged our modeland our data crunching to try to
see how does, uh, folks aftertax incomes change from this law
relative to if the law was neverpassed.
And so we can look at that in afew different ways.
(08:45):
That includes ranking folks bytheir income, right?
From uh, lower earning folks upto the top 1% and see how their
a tax incomes.
Are changed on a percentagebasis, and a couple things stand
out.
One is, uh, one, the, thebiggest component of this, uh,
the tax component of this lawwas as we've been talking about
permanency for the expiring 2017individual provisions and
(09:07):
important fact about thoseprovisions is that they
generally benefited taxpayersacross the income spectrum.
Uh, it was a large tax cut,right?
In and of itself it's, uh, worthseveral trillion dollars over 10
years.
Uh, and that's represented inour, our findings, right?
We find after tax incomes.
Uh, primarily boosted from thispermanency are increased, uh,
across the board in, uh, in2026.
(09:27):
So along, for example, thebottom 20% see a 2.6% increase
in their tax income, and that,uh, is consistent across the
board, averaging about a littleover 5%.
In that year.
A bulk of that is from those,uh, permanency of those
underlying tax cuts.
Now, of course, one, uh, caveat,and it's been talked about a lot
in the politics of this, is, uh,that is of course a continuation
(09:48):
of the status quo.
So we've effectively avoided atax hike by extending those tax
cuts.
And so that increases relativeto our world where we avoided,
uh, uh, we avoided that taxhike.
Um, so I think that's, that's animportant caveat.
But of course, there's all theseadditional tax cuts we've been
talking about that are, that arelabeled on top, that are also
included.
So that includes these new taxdeductions.
(10:09):
Uh, it includes the businessprovisions that, of course, are
going to benefit bothshareholders and workers in the,
uh, short and long run that willincrease after tax incomes.
Uh, one, you know, limitation tosome of the new deductions of
course, is.
Uh, well, I think there are twothat are worth pointing out, um,
in terms of, uh, who benefits.
One, of course is unlike a lotof the permanent provisions from
(10:30):
the 2017 tax law.
These items are very targeted,right?
When you're talking about adeduction for on tipped income
or for overtime, or if you're asenior or you have an auto loan.
Those are very specific economicfacts about someone's life.
That for some folks, they maysee a big benefit, right?
If you're a tipped workerworking a lot of overtime, you
may have a very significantchange in your tax bill in the
(10:50):
next couple of years.
While those provisions are ineffect, if you're someone who
doesn't fall into any of thesecategories, uh, you may feel
like it's just a continuation ofthe status quo.
So it's very lumpy there interms of the, uh, the facts of
the matter, in terms of thechange in incomes and, uh, the,
potentially the perception ofthe law moving forward.
So I think that's one thing tofollow.
The second is because a lot ofthese new.
(11:11):
Tax cuts are designed asdeductions.
A lot of folks who are, youknow, within the standard
deduction already, uh, may notsee an additional benefit, even
if they qualify.
So that's one reason why we seeslightly smaller increases in
after tax income at the bottom,uh, 20%.
And of course, they're alsogonna have to deal with some a.
Uh, wonkier changes to the rulesrelated to the earned income
credit, the child credit, uh,the, um, affordable Care Act,
(11:34):
premium tax credits that were,uh, that were changed in this
law as well.
Uh, that could, for some folks,they, they could see a, a, uh, a
gross tax hike from.
Um, and so the last thing I'llmention on the distribution is,
of course, this does change alittle bit as you get further
out.
So by 2034, for example, uh,the, the change in the in after
tax incomes is still positive,but it's smaller in the next
(11:56):
couple of years.
And that's primarily driven bythe fact that you have these
temporary policies that arecutting taxes, but then, uh, are
expiring.
And then you have, of course,the, the tighter, uh, salt cap
that comes back to$10,000 thatwill raise taxes further at the
top.
And so while it's still a taxcut at the end of the day, uh,
by 2034, it's a bit smaller thanin the next few years.
Kyle Hulehan (12:16):
Daniel, I, I'm wondering, you know, how is this
bill being paid for?
We're talking.
About this big deficit increaseand, and, you know, what are
the, the revenue offsets thatthey found and, and what
rollbacks do they maybe havewith the inflation reduction Act
and some of the credits there.
Daniel Bunn (12:34):
Sure.
So on the Inflation ReductionAct side, there were significant
trim backs to, uh, things like,uh, electric vehicle credits.
And some of the special creditsfor green energy production, uh,
and some savings that I thinkwill be, will be meaningful
assuming those savings areallowed, uh, to actually go into
place as, and that a futureCongress doesn't reverse some of
(12:55):
the savings.
Uh, additionally there were somechanges to some of the spending
programs that the federalgovernment runs.
Uh, through Medicaid or throughsnap and all of those added up
to a pretty substantial offsetto a lot of the other provisions
in the bill and the additionalspending items in the, in the
bill.
Uh, but as I mentioned earlier,on net, you're still looking at
(13:16):
a long-term increase in, uh,debt and deficits.
I, I.
I think it's also interestingthe, you know, discussion you
were having with Garrett on, youknow, who wins from this
legislation.
One of the, one of the areas Ithink that's, that's worth
looking at is like in the, inthe business community who, who
wins.
Um, and one of the things thatwe've looked at.
(13:37):
And we'll have some data out onthis, uh, in the coming days, is
that this is, this is very mucha huge win for manufacturers,
uh, and especially because ofthe, uh, provisions for
expensing, um, you know,companies that are heavy, you
know, capital, heavy businesses,and that are going to be
investing in response to thislegislation.
We'll certainly see, uh, lowertax bill and, uh, you know, we,
(14:01):
we hope that some of that growthwill, as we model it out.
Uh, you know, come back tobenefit, uh, the, the growth of
the US tax base, uh, through,you know, higher, higher, uh,
returns on investment.
Um, rather than, you know, uh,saying we're gonna, you know,
add, add new taxpayers to thetax base, but grow the tax base
through economic growth.
Kyle Hulehan (14:21):
And so then Daniel, from an international,
uh, standpoint, how does thebill position the US in terms of
competitiveness and, and, andglobal tax trends?
Daniel Bunn (14:31):
Yeah, that, that's, that's a great question and this
is a really tough one to teaseout because different sectors
are going to look at the taxlegislation and have different
opinions on it.
Uh, there were severalprovisions.
That could have made thislegislation, um, very difficult
for foreign companies to want toinvest in the us.
(14:53):
Uh, thankfully some of thoseprovisions fell out, but then
there were also provisions thatwere very favorable to, uh,
different multinationals aroundthe world, uh, that also fell
out of the legislation.
So on net, it's an adjustment toour cross-border tax rules.
Uh, that is not.
Too far off from the status quoon net.
(15:14):
Uh, but it really depends onwhether you are borrowing, uh,
to fund new investment in the uswhether you're headquartered in
the us, whether you do yourresearch and development in the
us.
Or whether you're a serviceprovider or a heavy CapEx
company.
So it's, it's really kind of,uh, messy.
But one of the big changes thatwas made is that a policy that
(15:37):
was adopted in 2017, um, that'scalled Guilty and another
policy.
C uh, that was adopted in 2017called, uh, FDII.
Um, those were changed.
The calculation for those werechanged, uh, so that the minimum
tax that we had on foreignincome, the base is now broader
for that the race is, uh, isadjusted, uh, a little bit
(16:00):
higher.
Um, but then some quirky thingsthat were brought in in 2017
were fixed.
Uh, and then similarly on the,uh, uh, FDII, which is an
incentive to own yourintellectual property here and,
uh, export abroad from here.
The base and the eligibility forthat broadened significantly.
(16:21):
Uh, and it's looks a little bitmore like an export subsidy now,
and it's.
It's really not clear how thisis all going to shake out the
cross-border changes in thecontext where we have, as you
all have talked about on thispodcast, many times, a, a, a
trade war going on.
So it's, it's not a particularlypro uh, cross-border investment
(16:42):
bill.
It makes some changes around theedges and it's interest.
It'll be interesting to see howthese changes play out in the
context of the ongoing tradewar.
Kyle Hulehan (16:53):
We always get back to tariffs somehow on this
podcast.
There's always, we've alwaysfind a way we get there.
Um, but Garrett, now that, um,now that the dust has settled
here a bit, what are some of themore questionable gimmicks or,
or missed policy opportunitiesbaked into this bill?
Garrett Watson (17:12):
So there's several things here.
One, of course, as we've beentalking about is the continued
existence, uh, of temporarypolicy primarily used as a
gimmick to reduce the fiscalcost of score legislation.
And so we saw that of course,with these new, uh, you know,
deductions for tips and overtimeand whatnot, uh, because there's
a general sense that, um, that,that there's very high
likelihood that Congress willcome back in, in the future and
(17:35):
extend or make permanent thosechanges.
Uh, and so, um, while you couldsee it as a a, a test run, and I
think it very well be what willbe able for taxpayers in the IRS
in the coming years for thesenew, uh, provisions, uh, that
the intention is to continuethem.
And, and that's, uh, that wasone I think missed opportunity
to just be, um, uh, to be moretransparent about what the real
(17:57):
long-term fiscal cost is.
Same thing is true, I think, ofthe salt deduction, right?
Where we're seeing this.
$40,000 increase, but then it'scome back done to 10,000.
I think, uh, folks who are infavor of that design would say,
Hey, it flips the, the, uh,prior situation on its head in
that the salt, uh, deduction capwas scheduled to expire.
And so if we did nothing, therewould be an unlimited salt
deduction.
Now, if nothing is done,$10,000cap remains, and maybe that
(18:21):
makes that cap more, moredurable for folks who wanna see
a tighter limit on salt.
But it does still introduce moreuncertainty about where salt is
gonna be in the coming years fortaxpayers, and it brings salt
back into the debate.
Um, uh, in, in the, in the late2020s, which could be, uh,
problematic if they tried to,you know, extend the$40,000
design instead and that wouldcost more revenue.
(18:41):
Um, you know, relatedly, ofcourse we have, there's been
discussion about, uh, howcontrasting the way in which,
for example, the 2017 tax lawwas approached from a policy
perspective where we were tryingto broaden the tax base and
lower the rates and reallyrationalize and reform and
simplify the tax code in someways, of course, permanency for
the 2017 tax law.
To be fair, that was continued,right?
We did see an expansion of thisdeduction.
(19:03):
We did see, uh, you know, someother simplification that was
preserved there, but there weresome steps, you know, uh, that
were taken back on this, right?
When we look at targeteddeductions for certain groups of
folks based on certain economicactivity, not only is that
complicated, that is, uh, it'sactually, uh, reversing tax
reform, right?
You were narrowing the base andthat requires higher rates for
someone else to raise the sameamount of revenue.
(19:25):
Uh, and that's, uh, inefficientand the opposite of where we
wanna be going.
Uh, that also relates closely tothe deficit impact as Daniel
outlined, right?
We're seeing a, even includingthe dynamic impact from higher
economic growth and some of therevenue recycling from that, uh,
that larger economy, we're stillseeing a$3 trillion deficit
increase over 10 years at a timewhere interest rates and
financial stability are.
(19:46):
In question.
Uh, of course there were uh, taxoptions left on the table that
we've been outlining and otherpolicy experts have mentioned to
broaden the tax space to reallycontinue the progress we made in
the 2017 tax law.
Uh, and so that's, uh, anothermissed opportunity.
We'll have to see if that, um,comes back up in future, um,
either future reconciliationbills or in future congresses to
(20:08):
continue that work.
There were, of course, otherodds and ends that you'd always
wanna see improved.
We would love to see thestructures.
Incentive through, uh, immediateexpensing, uh, to be made more
durable or some form of, uh,neutral cost recovery, which we
talked about on this showbefore, uh, ideally, uh, made,
made permanent.
Uh, there's also, of course, wehaven't talked about it yet, but
a lot of folks have questionsand interest in these, uh, these
(20:30):
Trump accounts, which are new.
tax advantaged account forchildren.
Uh, the reason why there's a lotof questions is they are quite
complicated, uh, in terms of howthey, they work.
There are rules, uh, and ofcourse they need to be stood up
by treasury still.
Um,'cause there's gonna be athousand dollar contribution for
every child that's born between25 and, uh, I believe it's 2028.
Uh, we, of course, recommendUniversal Savings Accounts to
(20:51):
streamline and simplify the taxtreatment of savings.
Uh, you know, this, these Trumpaccounts, uh, provide partial
relief in some ways, but in alot of ways they make the, the,
the compound, the existingcomplexity and con confusion
surrounding tax, uh,incentivized accounts for
saving.
That's just another example ofsome odd ends.
Uh, on the bright side, youknow, silver lining is, uh, this
(21:12):
is not the end of, uh, taxreform or tax policy.
I think that's gonna be a big.
message for us moving forward.
Um, and maybe we're biased'causethat keeps us, uh, uh, having
work to do.
Uh, but there will beopportunities in the future to,
uh, to, to build on and improvethis work.
Uh, much like uh, uh, has beendone since, uh, the 2017 law
passed.
Kyle Hulehan (21:32):
You know, Garrett, there was something I, I
actually wanted you to flesh outfrom earlier a little bit that
I, that I, um.
heard you say, which was, youmentioned that, that some people
wouldn't be able to use some ofthese deductions because they,
they fall into the standarddeduction and, and so it might
not help the people that thesedeductions were intended to
help.
(21:52):
Could, could you explain thatmaybe in a little bit more
simple of a way for me tounderstand that?
Garrett Watson (21:57):
Right.
So at the, for folks who are,uh, you know, uh, working class
folks say who, uh, are working arestaurant job and let, let's
say it's a part-time job.
They might be, you know, freshoutta college or in college and
they only earn, say,$15,000 ayear.
That's already, uh, at basicallyat the standard deduction
amount, which for single filerthis year is$15,000.
So that means is they're takingthat introduction.
(22:17):
They effectively aren't payingany.
Any tax.
And so there's no additional,uh, taxable income to use this
deduction for.
So even though you could saytheir tips are now deductible,
it's already basically coveredunder the standard deduction.
So for folks in that incomerange, a lot of them are, you
know, folks who are maybeworking part-time or getting
started in the labor market, um,or just lower income in general.
(22:38):
That just limits the benefit ofcertain deductions or
non-refundable credits.
Uh, just mechanically, right?
And in some ways that is atestament to the fact that we do
have a progressive tax systemand we are shielding low income
folks from, uh, from taxburdens.
But it also makes the, you know,the, uh, the political project
of tax cuts, if you will.
Um, harder for that reason, uh,where you know, you need to have
(23:00):
refundable credits or othermeans by which you, uh, you get
to, uh, you know, increase theirupper tax incomes.
Daniel Bunn (23:05):
Yeah, I, I was on, uh, CSPAN yesterday and someone
asked me if they, you know,don't pay tax this year, should
they expect to get a tax cutnext year.
It wasn't quite phrased exactlylike that, but the answer is
like, if you're not paying taxesbecause your income is already
low enough and you are eligiblefor, uh, the standard deduction
or, uh, using various othercredits that wipe up, wipe out
(23:27):
your tax liability, then it'slikely that your tax liability
will still be zero after thisbill.
Kyle Hulehan (23:33):
Okay, then that makes sense.
I, I was able to follow that.
Thank you.
Um, so I think we might know theanswer to this question.
But Garrett, does this billsimplify the tax code or does it
make it more complex and andwhat sort of challenges does
this put on the IRS?
Garrett Watson (23:48):
Right, so the when, whenever you have major
policy changes like this,there's always a thing going to
be some complexity andconfusion.
In the short run, of course, E,even if you had a law that made
things a lot simpler, thetransition itself is going to be
a.
Uh, it can be a challenge, and Ithink that is, that does, uh,
put added pressure andresponsibility on, uh, tax
authorities on both the IRS andTreasury as the agency
(24:10):
responsible for proclamationregulation to.
Make things as straightforwardas possible for taxpayers.
And of course, uh, ideally theunderlying law would simplify
and be very clear about whatthe, what that may look like in
terms of actual administrationand real world, uh, you know,
use by taxpayers andpractitioners.
Uh, and I, I, you know, thinkingabout this a little more of the
(24:31):
last couple weeks, I think it'sat best a mixed bag, right?
Where you can, on the one hand,look at, uh, as we've talked
about in, in other, um, in otherrespects, right, the underlying
permanency of the 2017 tax law.
That did, uh, you know, reducethe share of itemizes, for
example, from about 33% down toabout 9% this year.
That will be continued forward.
That's a win with respect tocontinuing the status quo, uh,
(24:53):
which is great.
There's of course caveats onthat.
There's still gonna be folks whoneed to calculate their itemized
deduction to compare it againstthe standard deduction, right?
It doesn't bring it down tozero, but it does help quite a
bit.
Um, and that will be continued.
That legacy has been preserved.
That's a big win.
But a lot of that, of course, iscounterbalanced by the fact that
you do have a lot of these new.
Uh, provisions that, uh, folkswill need to grapple with that
(25:13):
are particularly, um, uh, eithercomplicated or targeted, uh, are
new and, uh, will requireguardrails to, uh, to stop
avoidance, right?
There's a lot of discussionabout, it's, it's basically a
meme at this point, but, youknow, converting folks full-time
income into tips or trying togain things to, to earn more tax
exempt, uh, overtime income.
Some of those more aggressiveor, you know, MeMed examples are
(25:35):
probably not likely, but thereare lots of edge cases.
That we may not be able to thinkabout right now, that people are
very creative and motivated, uh,to minimize their tax liability
that the IRS and Treasury willhave to combat.
And that makes thingscomplicated for everyone.
Uh, and so that's, that's one Ithink concern you layer on top
of that.
Of course, these, the fact thatthey're, the, the dates, the
effective dates of when thesethings start and stop, uh, are
(25:57):
all different.
I've gotten a lot of questionsfrom media and taxpayers on,
does this item start in 25 or26?
Because it's inconsistent acrossthe law.
Simple things like that, I thinkadd up when you really aggregate
them all altogether, um, uh,when it comes to a, a piece of
legislation of this size.
So I think there's still a lotof work to be done.
Uh, and part of that has to dowith just sort of zooming out a
(26:18):
little bit, right?
That, uh, this was a missedopportunity and that it did not.
The primary goal was not, youknow, full rationalization or
transformation of the taxsystem.
Part of that has to do with, youknow, the political constraints.
Part of that has to do with thepriority was preserving the, the
progress we just talked aboutfrom the 2017 tax law.
But that does limit, uh,realistically the ability of
lawmakers to significantlyimprove things.
(26:39):
On the simplicity front, um, inthe, in the sort of, when you
think about next steps, I thinkit is, uh, that all attention is
gonna be paid to the IRS andTreasury on, uh, the, uh, on, on
their ability to stand up these.
Regs and guidance very quickly.
It's very likely we will not getfinalized regs by the next tax
season.
So they will need to, to offer,uh, basically FAQs and guidance
in lieu of that.
(27:00):
That was done, uh, during the2018 tax season when the TCJ was
still being rolled out.
Um, one piece of good news, ofcourse, is because there's
permanence of a lot ofunderlying law.
Uh, that they, that will justcontinue.
It's most of the new stuff thatwill have to be dealt with, but
they have a lot on their platebetween now and then.
Um, and final thing I'll say, ofcourse, is there's now some
uncertainty about specificitems.
(27:21):
In particular, the rules relatedto, for example, IRA tax credit,
uh, uh, uh, qualification forthat are currently being
constructed.
Apparently there were some sidedeals made between the White
House and.
Uh, members of Congress who arevoting on the legislation, uh,
and there's now all of a suddenuncertainty about how that will
be interpreted in regulation.
So there's gonna be items likethat that are going to continue
(27:42):
to, to contribute to complexityand, uh, tax debate in the
coming months.
Kyle Hulehan (27:48):
Yeah.
So I, I think it's safe to saythings got a little more
complicated.
Um, but to you, Daniel, uh, withthis bill now being the law, w
what's likely the next round offixes, clarifications, or
political fights?
Fights that we can expect?
Daniel Bunn (28:03):
Yeah, that's a, that's a good question.
It's hard, it's hard to forecastsome things, but as Garrett
said.
There's a lot of cliffs thatthis law sets up.
Uh, so going into 2028 and 2029,I would expect there to be
political lines being drawnaround some of the provisions,
whether it's the, the salt capor these new provisions for no
(28:25):
tax on tips, no tax on, uh, overtime, et cetera.
And trying to figure out what,uh, a rational extension or
expiration, uh, of some of thesethings looks like.
And also what might be utilizedto offset the cost of extending
some of these policies.
Uh, another thing that I thinkis worthwhile thinking about,
(28:46):
going back to where you openedthe conversation, Kyle is
thinking about the good thingsin this.
Uh, legislation and thinkingabout how to keep those things
as long as possible, even thoughthere will be future debates
about them.
Uh, so one of the things wehaven't talked about yet is
there's a, there's a newlimitation on itemized
deductions that I think is oneof the best revenue raisers and
(29:09):
best designed revenue raisers.
Uh, in the bill.
We talk a lot about.
Uh, at Tax Foundation about thecomplexity of all the various
deductions and carve outs and,and provisions that really
narrow the income tax base.
And this provision is somethingthat limits the value of
itemized deductions at 35% forpeople in the top income tax
(29:30):
bracket.
And it would be great to seelegislation, uh, future
legislation that doubles down onthat.
And we get.
Uh, essentially a broader andbetter tax base over the course
of time, while also protectingsome of the pro-growth elements
like full expensing, uh,expensing for research and
development and, uh, some of theother provisions, you know,
(29:51):
hoping to get some extra lengthof time out of the structures
provision.
Um, another element of thecoming debates is that we're
getting closer and closer to,uh, real challenges with the
broad entitlement programs andthe trust funds, uh, that
support those programs.
Uh, in the early 2030s, therecould be automatic benefit cuts
(30:11):
if Congress doesn't change theprovisions that support things
like social security andMedicare.
And we're already thinking atTax Foundation about what
options lawmakers might be, uh,might, might, should consider as
we get closer to that deadline.
Uh, both on the benefits sideand on the revenue side.
I think there's a lot of workthat needs to be done there.
(30:32):
I.
Uh, and honestly, given theamount of regular turnover we
see in Congress, it's not clearwho will have leadership, uh,
either politically, uh, with,for the different parties or
whether current members willstill be around, uh, uh, in
Congress.
Um, pushing forward on differentfiscal policy efforts or if it
(30:53):
will be a whole new, uh,generation of lawmakers.
By the time we get to the early2030s, we've seen a lot of
turnover, uh, in the lastseveral years, and that could
con continue.
Kyle Hulehan (31:05):
And before we start off, uh, to you, Garrett,
I, I just wanted you to give youa chance, is there any work
you're doing right now that youwanna plug for the people to
know about?
Garrett Watson (31:12):
So
Daniel Bunn (31:12):
I.
Garrett Watson (31:13):
on a few different things, following up
from the passage of.
This law, uh, two very excitingproducts that we're halfway
through.
Um, finishing up to on thewebsite is an update to our
interactive, uh, tax map andcalculator where you're able to
look at the county by countyimpact of the law when it comes
to changes in after tax incomes,as well as inability to look at,
uh, some stylized taxpayerexamples of how the law will
(31:35):
change tax liability.
Uh, if you're, you're earningsome additional, uh, uh, tips or
you have a child who's gonnabenefit from the, you know,
expanding child tax credit, etcetera, you're able to calculate
that, uh, on the fly.
And that's a, uh, expansion andupdate from our popular
products, uh, for TCJ expirationthat we released last year.
We're also doing some, uh, someadditional, uh, research of
(31:56):
course, uh, based on a lot offeedback we've gotten from
folks.
Um, across our differentaudiences.
One is, as, as Daniel mentioned,uh, industry by industry
analysis of the, uh, businessprovisions, which is really, uh,
an interesting, um.
A story that's been not beentalked about as much as part of
this, this debate.
Uh, we're also working onlooking at, in detail the
(32:16):
combination, the impact of thecombination of this law with,
uh, with tariffs to come back totariffs.
Uh,'cause that's gonna be animportant discussion,
particularly this month as theWhite House continues to try to
finalize trade agreements or gotheir own way on.
tariffs in other countries,which of course, will, uh,
threatens to significantlydegrade or mute the, uh, impact,
(32:36):
positive impact on people's, uh,wallets, uh, over, over the
coming years.
So we'll have an updatedanalysis on that in detail,
which will be helpful.
We're also working on, uh, a, alonger form piece aimed at, uh,
policy audiences looking at, uh,precisely the, what we were just
talking about before on the netsimplification or complexity
that this.
Uh, law offers, uh, to taxpayersand try to provide some
(32:58):
constructive, uh,recommendations moving forward
that were left on the cuttingroom floor that could be
considered in the, in the debateas we, uh, as we move forward.
Kyle Hulehan (33:06):
And Daniel, is there anything you wanna plug
before we sign off real quick?
Daniel Bunn (33:09):
Yeah, I think two things.
Uh, one, uh, we're continuing tolook at the international side
of this legislation and, uh, therole that, uh, those rules play
relative to the global minimumtax, which we've talked about on
this program before.
Uh, there's a lot of complexityand some uncertainty.
There, but, uh, there has beensome progress on getting things
(33:32):
a little bit more stabilized, socertainly paying attention to
that.
And then more broadly, there's,there's a lot of work to be done
to educate, uh, both policymakers and the public on like
what the choices were.
I.
That led to this legislation andwhether those choices were the
right ones or if better choicescould have been made.
Uh, and that's going to be kindof a long-term effort, but
(33:54):
certainly taking some time overthe course of the next couple of
weeks to think through whatopportunities we have to kind
of, uh, show where, uh, thepolicy could have been improved,
um, and what choices that weremade that were actually good
and, and net beneficial.
Kyle Hulehan (34:08):
And thank you both for being on the show today and
breaking all of this complicatedstuff down for us.
Uh, and I want to let the peopleknow if you have any burning
questions on taxes, you can sendthem our way.
You can drop a comment onYouTube.
You can email us atpodcast@taxfoundation.org, slide
into our dms at Deduction Pod onTwitter.
you all for listening.
Hello and welcome to the Deduction a Tax
Foundation podcast.
I'm your host, Kyle Houlahan,and we are back today with
another episode, and we arejoined by Garrett Watson,
director of Policy Analysis hereat the Tax Foundation, and
Daniel Bunn, president of theTax Foundation.
Now, I would imagine you guyshave heard something by now that
there is a bill that was passed,a law passed, actually, and I
(00:21):
think we're gonna talk about itonce again.
Today.
So Daniel, I'm gonna start offwith you.
Uh, now that the one big,beautiful bill has passed, what
are some of the good provisionsin it why do they matter for
taxpayers in the economy?
Daniel Bunn (00:36):
Thanks, Kyle.
Uh, so this is a massive pieceof legislation and there are
certainly some good things init.
Um, but we'll talk through allthe various trade-offs that
lawmakers had to, to make.
I think the biggest thing when Ilook at this legislation, um,
the good kind of splits into twocategories, and the b both
follow our principle ofstability that we care about
(00:57):
here at tax.
Foundation, and that's thepermanence for the tax cuts for
individuals and permanence onthe pro investment, uh,
provisions.
If lawmakers hadn't passed thislegislation, uh, individuals,
households across the USwould've seen a massive tax hike
at the end of this year.
In fact, our estimates, I.
Uh, suggest that 62% ofhouseholds would see a tax
(01:20):
increase at the end of the year.
So providing certainty totaxpayers and avoiding that tax
cliff is really important.
But the other piece that'spermanent is provisions.
Uh, that support businessinvestment, like full expensing,
uh, like, uh, immediateexpensing for research and
development.
And then, uh, there's a coupleof other pieces on interest
(01:43):
treatment, but really thispermanency is really the best
part of the bill.
Uh, and I think it was reallygood to have those things as
part of this legislation.
Kyle Hulehan (01:53):
which part of the bills, and this is to you,
Garrett, uh, are, are, what doyou see?
What's permanent?
What's temporary?
What's.
Temporary and, and what doesthat mean for the future of tax
policy?
Garrett Watson (02:02):
Thanks, Kyle.
I think that's a, it's anexcellent question because one
major aspect, uh, of thismassive legislation that policy
makers are grappling with iswhat aspects of, uh, the tax
changes they're making to make.
Permanent over the 10 years ofthe budget window and beyond,
uh, in which to make temporary.
And there was a natural push andpull as it's made its way
(02:22):
through Congress, uh, both forbudgetary reasons to try to
balance out the fiscal cost aswell as to, uh, maximize the
benefits that Daniel just, uh,outlined, uh, when it comes to
stability and, uh, benefits botheconomic growth and to taxpayer
certainty moving forward.
And so the, the laws passed,ended up with a combination of.
Uh, permanency as well as, uh,uh, new temporary provisions.
(02:45):
There's permanency for theunderlying, uh, TCJ individual
provisions for the most part,uh, which is, uh, a, a good, uh,
improvement for not just growth,but also for taxpayer certainty.
Uh, there also was, uh, keyhere, permanency for the, uh,
many of the, uh, businessprovisions, including expensing,
uh, for bonus depreciation and rand d.
Uh, but it was paired withtemporary provisions, uh, for
(03:07):
both businesses and individuals.
For individuals, for example.
There was a grand bargain struckon the salt, uh, deduction cap.
So under the 2017 tax law, thesalt deduction, which is a
deduction for your state andlocal taxes paid against your
federal, uh, taxable income.
Uh, it was capped at$10,000 forall filers in 2017 and was a
major, uh, sort of, uh, area ofcontroversy and federal tax for,
(03:30):
for many years now.
There was a, a sense, anunderstanding that we needed to
have a compromise or somethingneeded to be landed on.
In the law and what they landedwith is a, basically a temporary
expansion of that, uh, thatdeduction of$40,000 paired with
an income limit.
but then the deduction snapsback down to a flat$10,000, uh,
(03:51):
starting in 2030 and beyond.
And so that's, uh, one areawhere there's permanency, but
the, the provision actually iscut in half and it will probably
motivate policy makers torevisit salt yet again, uh, in
2029 or, or, or uh, 2030 whenthat ends up happening
potentially.
And we'll have another saltdebate.
Of course, the other majortemporary provisions include the
new, uh, deductions for avariety of economic activity
(04:13):
that includes deductions andexemptions for, uh, tips for
overtime.
There's a new senior deductionworth$6,000 for someone age 65
and over.
There's a auto loan deductionfor your auto loan interest if
you have a, a new vehiclethat's, uh, assembled in the us.
All of these new items thatwere.
Uh, uh, that were recommended bythe president and campaign Don
during the 2024 campaign wereincluded here, but they were
(04:35):
made temporary.
So they begin this tax year in2025, and they go through the
end of 2028.
Uh, notice a theme here.
The late 2020s will becomepotentially a new tax cliff.
That may motivate, uh, more taxlegislation if we don't get it
before.
Then another temporary provisionwas the new, uh, depre a hundred
percent, uh, depreciationdeduction for certain
(04:56):
structures, uh, which is goingto, uh, take effect, uh, this
year and go through roughly 2031for, uh.
Uh, structures that are, uh,constructed in place in service
by then.
Uh, but it only qualify, is onlyqualifying for, uh, those
structures that, uh, produce areassociated with tangible
production in the us.
And so it's a subset ofstructures.
It's an exciting, interesting,wonky provision, but it could
(05:17):
help, uh, improve incentives forbuilding structures in the us.
Kyle Hulehan (05:19):
And real quick here, uh, to you Daniel, I I, I
wanted to ask, you know, we'retalking about temporary things.
We're talking about permanency.
Could you just explain for ouraudience real quick?
know, in the most simple way whyvalue permanency over, uh,
temporary policy.
Daniel Bunn (05:35):
Sure.
So the big thing is, uh, peopleand businesses plan for the long
term, and it's important for thetax code to also be situated so
that those decisions can bemade.
Uh, if you are changing taxlaws, every I.
Year or every other year.
Uh, then that creates a lot ofconfusion, a lot of complexity,
and a lot of difficulty forindividuals that might want to
(05:57):
be able to plan over multipleyears.
And in fact, businesses planinvestments over the course of
many years, sometimes decades,uh, and providing stability in
the tax code, uh, can reallysupport, uh, better decision
making or more effectivedecision making at all sorts of
levels of the economy.
Kyle Hulehan (06:15):
Okay, so, so now with that understanding, how do
we see the final version of thisbill, you know, weigh with the
trade-offs between economicgrowth and increased deficits?
Daniel Bunn (06:27):
Yeah, that's a great question.
So lawmakers had a real, realchallenge, uh, identifying
savings that they could put inplace, uh, that would allow some
sort of offset for the taxprovisions that they brought in.
There was a whole debate abouthow you measure this.
Relative to the baseline, butover the course of the
(06:49):
legislation, they ended up witha policy that will increase
deficits over the next 10 yearsby at least$3 trillion.
And at the same time, they wereable to adopt some pro-growth
policies.
But even after adopting policiesthat boost growth in our
estimates by more than 1% overthe course of the coming years,
and, uh, over the long run.
(07:11):
There's only about 20% of therevenues lost that comes back in
the form of higher economicgrowth and supporting, uh, new
revenues.
So there's still a significanthit to the deficit in long-term
debt.
And that's something that Ithink lawmakers.
Could have made better choicesto have this be more fiscally
(07:32):
sustainable.
But the margins for, uh, thepolitical coalition here were so
slim.
So, so few votes that they couldlose, that they had to go
searching for, uh, opportunitiesto increase the salt cap, like
Garrett was talking about.
Uh, they didn't have as muchwiggle room on some of the
spending cuts or even some ofthe treatment of some of the
(07:52):
green energy credits.
And that put them in a positionwhere.
They passed legislation thatdoes address some spending
concerns and significantlyaddresses these tax concerns,
but adds a bunch of other piecesthat are really expensive and
don't necessarily fit adefinition of fiscal
responsibility.
Kyle Hulehan (08:12):
So, uh, Garrett, who do we think comes out ahead
under this new law?
You know, and, and who doesn't?
What, what are thedistributional effects?
Tell us about the fairness ofthis bill.
Garrett Watson (08:24):
Right.
So the distribution of the taxburden, of course, is one, one
of the ways in which we canevaluate, you know, the impact
of this legislation on, youknow, on everyday folks.
And so we leveraged our modeland our data crunching to try to
see how does, uh, folks aftertax incomes change from this law
relative to if the law was neverpassed.
And so we can look at that in afew different ways.
(08:45):
That includes ranking folks bytheir income, right?
From uh, lower earning folks upto the top 1% and see how their
a tax incomes.
Are changed on a percentagebasis, and a couple things stand
out.
One is, uh, one, the, thebiggest component of this, uh,
the tax component of this lawwas as we've been talking about
permanency for the expiring 2017individual provisions and
(09:07):
important fact about thoseprovisions is that they
generally benefited taxpayersacross the income spectrum.
Uh, it was a large tax cut,right?
In and of itself it's, uh, worthseveral trillion dollars over 10
years.
Uh, and that's represented inour, our findings, right?
We find after tax incomes.
Uh, primarily boosted from thispermanency are increased, uh,
across the board in, uh, in2026.
(09:27):
So along, for example, thebottom 20% see a 2.6% increase
in their tax income, and that,uh, is consistent across the
board, averaging about a littleover 5%.
In that year.
A bulk of that is from those,uh, permanency of those
underlying tax cuts.
Now, of course, one, uh, caveat,and it's been talked about a lot
in the politics of this, is, uh,that is of course a continuation
(09:48):
of the status quo.
So we've effectively avoided atax hike by extending those tax
cuts.
And so that increases relativeto our world where we avoided,
uh, uh, we avoided that taxhike.
Um, so I think that's, that's animportant caveat.
But of course, there's all theseadditional tax cuts we've been
talking about that are, that arelabeled on top, that are also
included.
So that includes these new taxdeductions.
(10:09):
Uh, it includes the businessprovisions that, of course, are
going to benefit bothshareholders and workers in the,
uh, short and long run that willincrease after tax incomes.
Uh, one, you know, limitation tosome of the new deductions of
course, is.
Uh, well, I think there are twothat are worth pointing out, um,
in terms of, uh, who benefits.
One, of course is unlike a lotof the permanent provisions from
(10:30):
the 2017 tax law.
These items are very targeted,right?
When you're talking about adeduction for on tipped income
or for overtime, or if you're asenior or you have an auto loan.
Those are very specific economicfacts about someone's life.
That for some folks, they maysee a big benefit, right?
If you're a tipped workerworking a lot of overtime, you
may have a very significantchange in your tax bill in the
(10:50):
next couple of years.
While those provisions are ineffect, if you're someone who
doesn't fall into any of thesecategories, uh, you may feel
like it's just a continuation ofthe status quo.
So it's very lumpy there interms of the, uh, the facts of
the matter, in terms of thechange in incomes and, uh, the,
potentially the perception ofthe law moving forward.
So I think that's one thing tofollow.
The second is because a lot ofthese new.
(11:11):
Tax cuts are designed asdeductions.
A lot of folks who are, youknow, within the standard
deduction already, uh, may notsee an additional benefit, even
if they qualify.
So that's one reason why we seeslightly smaller increases in
after tax income at the bottom,uh, 20%.
And of course, they're alsogonna have to deal with some a.
Uh, wonkier changes to the rulesrelated to the earned income
credit, the child credit, uh,the, um, affordable Care Act,
(11:34):
premium tax credits that were,uh, that were changed in this
law as well.
Uh, that could, for some folks,they, they could see a, a, uh, a
gross tax hike from.
Um, and so the last thing I'llmention on the distribution is,
of course, this does change alittle bit as you get further
out.
So by 2034, for example, uh,the, the change in the in after
tax incomes is still positive,but it's smaller in the next
(11:56):
couple of years.
And that's primarily driven bythe fact that you have these
temporary policies that arecutting taxes, but then, uh, are
expiring.
And then you have, of course,the, the tighter, uh, salt cap
that comes back to$10,000 thatwill raise taxes further at the
top.
And so while it's still a taxcut at the end of the day, uh,
by 2034, it's a bit smaller thanin the next few years.
Kyle Hulehan (12:16):
Daniel, I, I'm wondering, you know, how is this
bill being paid for?
We're talking.
About this big deficit increaseand, and, you know, what are
the, the revenue offsets thatthey found and, and what
rollbacks do they maybe havewith the inflation reduction Act
and some of the credits there.
Daniel Bunn (12:34):
Sure.
So on the Inflation ReductionAct side, there were significant
trim backs to, uh, things like,uh, electric vehicle credits.
And some of the special creditsfor green energy production, uh,
and some savings that I thinkwill be, will be meaningful
assuming those savings areallowed, uh, to actually go into
place as, and that a futureCongress doesn't reverse some of
(12:55):
the savings.
Uh, additionally there were somechanges to some of the spending
programs that the federalgovernment runs.
Uh, through Medicaid or throughsnap and all of those added up
to a pretty substantial offsetto a lot of the other provisions
in the bill and the additionalspending items in the, in the
bill.
Uh, but as I mentioned earlier,on net, you're still looking at
(13:16):
a long-term increase in, uh,debt and deficits.
I, I.
I think it's also interestingthe, you know, discussion you
were having with Garrett on, youknow, who wins from this
legislation.
One of the, one of the areas Ithink that's, that's worth
looking at is like in the, inthe business community who, who
wins.
Um, and one of the things thatwe've looked at.
(13:37):
And we'll have some data out onthis, uh, in the coming days, is
that this is, this is very mucha huge win for manufacturers,
uh, and especially because ofthe, uh, provisions for
expensing, um, you know,companies that are heavy, you
know, capital, heavy businesses,and that are going to be
investing in response to thislegislation.
We'll certainly see, uh, lowertax bill and, uh, you know, we,
(14:01):
we hope that some of that growthwill, as we model it out.
Uh, you know, come back tobenefit, uh, the, the growth of
the US tax base, uh, through,you know, higher, higher, uh,
returns on investment.
Um, rather than, you know, uh,saying we're gonna, you know,
add, add new taxpayers to thetax base, but grow the tax base
through economic growth.
Kyle Hulehan (14:21):
And so then Daniel, from an international,
uh, standpoint, how does thebill position the US in terms of
competitiveness and, and, andglobal tax trends?
Daniel Bunn (14:31):
Yeah, that, that's, that's a great question and this
is a really tough one to teaseout because different sectors
are going to look at the taxlegislation and have different
opinions on it.
Uh, there were severalprovisions.
That could have made thislegislation, um, very difficult
for foreign companies to want toinvest in the us.
(14:53):
Uh, thankfully some of thoseprovisions fell out, but then
there were also provisions thatwere very favorable to, uh,
different multinationals aroundthe world, uh, that also fell
out of the legislation.
So on net, it's an adjustment toour cross-border tax rules.
Uh, that is not.
Too far off from the status quoon net.
(15:14):
Uh, but it really depends onwhether you are borrowing, uh,
to fund new investment in the uswhether you're headquartered in
the us, whether you do yourresearch and development in the
us.
Or whether you're a serviceprovider or a heavy CapEx
company.
So it's, it's really kind of,uh, messy.
But one of the big changes thatwas made is that a policy that
(15:37):
was adopted in 2017, um, that'scalled Guilty and another
policy.
C uh, that was adopted in 2017called, uh, FDII.
Um, those were changed.
The calculation for those werechanged, uh, so that the minimum
tax that we had on foreignincome, the base is now broader
for that the race is, uh, isadjusted, uh, a little bit
(16:00):
higher.
Um, but then some quirky thingsthat were brought in in 2017
were fixed.
Uh, and then similarly on the,uh, uh, FDII, which is an
incentive to own yourintellectual property here and,
uh, export abroad from here.
The base and the eligibility forthat broadened significantly.
(16:21):
Uh, and it's looks a little bitmore like an export subsidy now,
and it's.
It's really not clear how thisis all going to shake out the
cross-border changes in thecontext where we have, as you
all have talked about on thispodcast, many times, a, a, a
trade war going on.
So it's, it's not a particularlypro uh, cross-border investment
(16:42):
bill.
It makes some changes around theedges and it's interest.
It'll be interesting to see howthese changes play out in the
context of the ongoing tradewar.
Kyle Hulehan (16:53):
We always get back to tariffs somehow on this
podcast.
There's always, we've alwaysfind a way we get there.
Um, but Garrett, now that, um,now that the dust has settled
here a bit, what are some of themore questionable gimmicks or,
or missed policy opportunitiesbaked into this bill?
Garrett Watson (17:12):
So there's several things here.
One, of course, as we've beentalking about is the continued
existence, uh, of temporarypolicy primarily used as a
gimmick to reduce the fiscalcost of score legislation.
And so we saw that of course,with these new, uh, you know,
deductions for tips and overtimeand whatnot, uh, because there's
a general sense that, um, that,that there's very high
likelihood that Congress willcome back in, in the future and
(17:35):
extend or make permanent thosechanges.
Uh, and so, um, while you couldsee it as a a, a test run, and I
think it very well be what willbe able for taxpayers in the IRS
in the coming years for thesenew, uh, provisions, uh, that
the intention is to continuethem.
And, and that's, uh, that wasone I think missed opportunity
to just be, um, uh, to be moretransparent about what the real
(17:57):
long-term fiscal cost is.
Same thing is true, I think, ofthe salt deduction, right?
Where we're seeing this.
$40,000 increase, but then it'scome back done to 10,000.
I think, uh, folks who are infavor of that design would say,
Hey, it flips the, the, uh,prior situation on its head in
that the salt, uh, deduction capwas scheduled to expire.
And so if we did nothing, therewould be an unlimited salt
deduction.
Now, if nothing is done,$10,000cap remains, and maybe that
(18:21):
makes that cap more, moredurable for folks who wanna see
a tighter limit on salt.
But it does still introduce moreuncertainty about where salt is
gonna be in the coming years fortaxpayers, and it brings salt
back into the debate.
Um, uh, in, in the, in the late2020s, which could be, uh,
problematic if they tried to,you know, extend the$40,000
design instead and that wouldcost more revenue.
(18:41):
Um, you know, relatedly, ofcourse we have, there's been
discussion about, uh, howcontrasting the way in which,
for example, the 2017 tax lawwas approached from a policy
perspective where we were tryingto broaden the tax base and
lower the rates and reallyrationalize and reform and
simplify the tax code in someways, of course, permanency for
the 2017 tax law.
To be fair, that was continued,right?
We did see an expansion of thisdeduction.
(19:03):
We did see, uh, you know, someother simplification that was
preserved there, but there weresome steps, you know, uh, that
were taken back on this, right?
When we look at targeteddeductions for certain groups of
folks based on certain economicactivity, not only is that
complicated, that is, uh, it'sactually, uh, reversing tax
reform, right?
You were narrowing the base andthat requires higher rates for
someone else to raise the sameamount of revenue.
(19:25):
Uh, and that's, uh, inefficientand the opposite of where we
wanna be going.
Uh, that also relates closely tothe deficit impact as Daniel
outlined, right?
We're seeing a, even includingthe dynamic impact from higher
economic growth and some of therevenue recycling from that, uh,
that larger economy, we're stillseeing a$3 trillion deficit
increase over 10 years at a timewhere interest rates and
financial stability are.
(19:46):
In question.
Uh, of course there were uh, taxoptions left on the table that
we've been outlining and otherpolicy experts have mentioned to
broaden the tax space to reallycontinue the progress we made in
the 2017 tax law.
Uh, and so that's, uh, anothermissed opportunity.
We'll have to see if that, um,comes back up in future, um,
either future reconciliationbills or in future congresses to
(20:08):
continue that work.
There were, of course, otherodds and ends that you'd always
wanna see improved.
We would love to see thestructures.
Incentive through, uh, immediateexpensing, uh, to be made more
durable or some form of, uh,neutral cost recovery, which we
talked about on this showbefore, uh, ideally, uh, made,
made permanent.
Uh, there's also, of course, wehaven't talked about it yet, but
a lot of folks have questionsand interest in these, uh, these
(20:30):
Trump accounts, which are new.
tax advantaged account forchildren.
Uh, the reason why there's a lotof questions is they are quite
complicated, uh, in terms of howthey, they work.
There are rules, uh, and ofcourse they need to be stood up
by treasury still.
Um,'cause there's gonna be athousand dollar contribution for
every child that's born between25 and, uh, I believe it's 2028.
Uh, we, of course, recommendUniversal Savings Accounts to
(20:51):
streamline and simplify the taxtreatment of savings.
Uh, you know, this, these Trumpaccounts, uh, provide partial
relief in some ways, but in alot of ways they make the, the,
the compound, the existingcomplexity and con confusion
surrounding tax, uh,incentivized accounts for
saving.
That's just another example ofsome odd ends.
Uh, on the bright side, youknow, silver lining is, uh, this
(21:12):
is not the end of, uh, taxreform or tax policy.
I think that's gonna be a big.
message for us moving forward.
Um, and maybe we're biased'causethat keeps us, uh, uh, having
work to do.
Uh, but there will beopportunities in the future to,
uh, to, to build on and improvethis work.
Uh, much like uh, uh, has beendone since, uh, the 2017 law
passed.
Kyle Hulehan (21:32):
You know, Garrett, there was something I, I
actually wanted you to flesh outfrom earlier a little bit that
I, that I, um.
heard you say, which was, youmentioned that, that some people
wouldn't be able to use some ofthese deductions because they,
they fall into the standarddeduction and, and so it might
not help the people that thesedeductions were intended to
help.
(21:52):
Could, could you explain thatmaybe in a little bit more
simple of a way for me tounderstand that?
Garrett Watson (21:57):
Right.
So at the, for folks who are,uh, you know, uh, working class
folks say who, uh, are working arestaurant job and let, let's
say it's a part-time job.
They might be, you know, freshoutta college or in college and
they only earn, say,$15,000 ayear.
That's already, uh, at basicallyat the standard deduction
amount, which for single filerthis year is$15,000.
So that means is they're takingthat introduction.
(22:17):
They effectively aren't payingany.
Any tax.
And so there's no additional,uh, taxable income to use this
deduction for.
So even though you could saytheir tips are now deductible,
it's already basically coveredunder the standard deduction.
So for folks in that incomerange, a lot of them are, you
know, folks who are maybeworking part-time or getting
started in the labor market, um,or just lower income in general.
(22:38):
That just limits the benefit ofcertain deductions or
non-refundable credits.
Uh, just mechanically, right?
And in some ways that is atestament to the fact that we do
have a progressive tax systemand we are shielding low income
folks from, uh, from taxburdens.
But it also makes the, you know,the, uh, the political project
of tax cuts, if you will.
Um, harder for that reason, uh,where you know, you need to have
(23:00):
refundable credits or othermeans by which you, uh, you get
to, uh, you know, increase theirupper tax incomes.
Daniel Bunn (23:05):
Yeah, I, I was on, uh, CSPAN yesterday and someone
asked me if they, you know,don't pay tax this year, should
they expect to get a tax cutnext year.
It wasn't quite phrased exactlylike that, but the answer is
like, if you're not paying taxesbecause your income is already
low enough and you are eligiblefor, uh, the standard deduction
or, uh, using various othercredits that wipe up, wipe out
(23:27):
your tax liability, then it'slikely that your tax liability
will still be zero after thisbill.
Kyle Hulehan (23:33):
Okay, then that makes sense.
I, I was able to follow that.
Thank you.
Um, so I think we might know theanswer to this question.
But Garrett, does this billsimplify the tax code or does it
make it more complex and andwhat sort of challenges does
this put on the IRS?
Garrett Watson (23:48):
Right, so the when, whenever you have major
policy changes like this,there's always a thing going to
be some complexity andconfusion.
In the short run, of course, E,even if you had a law that made
things a lot simpler, thetransition itself is going to be
a.
Uh, it can be a challenge, and Ithink that is, that does, uh,
put added pressure andresponsibility on, uh, tax
authorities on both the IRS andTreasury as the agency
(24:10):
responsible for proclamationregulation to.
Make things as straightforwardas possible for taxpayers.
And of course, uh, ideally theunderlying law would simplify
and be very clear about whatthe, what that may look like in
terms of actual administrationand real world, uh, you know,
use by taxpayers andpractitioners.
Uh, and I, I, you know, thinkingabout this a little more of the
(24:31):
last couple weeks, I think it'sat best a mixed bag, right?
Where you can, on the one hand,look at, uh, as we've talked
about in, in other, um, in otherrespects, right, the underlying
permanency of the 2017 tax law.
That did, uh, you know, reducethe share of itemizes, for
example, from about 33% down toabout 9% this year.
That will be continued forward.
That's a win with respect tocontinuing the status quo, uh,
(24:53):
which is great.
There's of course caveats onthat.
There's still gonna be folks whoneed to calculate their itemized
deduction to compare it againstthe standard deduction, right?
It doesn't bring it down tozero, but it does help quite a
bit.
Um, and that will be continued.
That legacy has been preserved.
That's a big win.
But a lot of that, of course, iscounterbalanced by the fact that
you do have a lot of these new.
Uh, provisions that, uh, folkswill need to grapple with that
(25:13):
are particularly, um, uh, eithercomplicated or targeted, uh, are
new and, uh, will requireguardrails to, uh, to stop
avoidance, right?
There's a lot of discussionabout, it's, it's basically a
meme at this point, but, youknow, converting folks full-time
income into tips or trying togain things to, to earn more tax
exempt, uh, overtime income.
Some of those more aggressiveor, you know, MeMed examples are
(25:35):
probably not likely, but thereare lots of edge cases.
That we may not be able to thinkabout right now, that people are
very creative and motivated, uh,to minimize their tax liability
that the IRS and Treasury willhave to combat.
And that makes thingscomplicated for everyone.
Uh, and so that's, that's one Ithink concern you layer on top
of that.
Of course, these, the fact thatthey're, the, the dates, the
effective dates of when thesethings start and stop, uh, are
(25:57):
all different.
I've gotten a lot of questionsfrom media and taxpayers on,
does this item start in 25 or26?
Because it's inconsistent acrossthe law.
Simple things like that, I thinkadd up when you really aggregate
them all altogether, um, uh,when it comes to a, a piece of
legislation of this size.
So I think there's still a lotof work to be done.
Uh, and part of that has to dowith just sort of zooming out a
(26:18):
little bit, right?
That, uh, this was a missedopportunity and that it did not.
The primary goal was not, youknow, full rationalization or
transformation of the taxsystem.
Part of that has to do with, youknow, the political constraints.
Part of that has to do with thepriority was preserving the, the
progress we just talked aboutfrom the 2017 tax law.
But that does limit, uh,realistically the ability of
lawmakers to significantlyimprove things.
(26:39):
On the simplicity front, um, inthe, in the sort of, when you
think about next steps, I thinkit is, uh, that all attention is
gonna be paid to the IRS andTreasury on, uh, the, uh, on, on
their ability to stand up these.
Regs and guidance very quickly.
It's very likely we will not getfinalized regs by the next tax
season.
So they will need to, to offer,uh, basically FAQs and guidance
in lieu of that.
(27:00):
That was done, uh, during the2018 tax season when the TCJ was
still being rolled out.
Um, one piece of good news, ofcourse, is because there's
permanence of a lot ofunderlying law.
Uh, that they, that will justcontinue.
It's most of the new stuff thatwill have to be dealt with, but
they have a lot on their platebetween now and then.
Um, and final thing I'll say, ofcourse, is there's now some
uncertainty about specificitems.
(27:21):
In particular, the rules relatedto, for example, IRA tax credit,
uh, uh, uh, qualification forthat are currently being
constructed.
Apparently there were some sidedeals made between the White
House and.
Uh, members of Congress who arevoting on the legislation, uh,
and there's now all of a suddenuncertainty about how that will
be interpreted in regulation.
So there's gonna be items likethat that are going to continue
(27:42):
to, to contribute to complexityand, uh, tax debate in the
coming months.
Kyle Hulehan (27:48):
Yeah.
So I, I think it's safe to saythings got a little more
complicated.
Um, but to you, Daniel, uh, withthis bill now being the law, w
what's likely the next round offixes, clarifications, or
political fights?
Fights that we can expect?
Daniel Bunn (28:03):
Yeah, that's a, that's a good question.
It's hard, it's hard to forecastsome things, but as Garrett
said.
There's a lot of cliffs thatthis law sets up.
Uh, so going into 2028 and 2029,I would expect there to be
political lines being drawnaround some of the provisions,
whether it's the, the salt capor these new provisions for no
(28:25):
tax on tips, no tax on, uh, overtime, et cetera.
And trying to figure out what,uh, a rational extension or
expiration, uh, of some of thesethings looks like.
And also what might be utilizedto offset the cost of extending
some of these policies.
Uh, another thing that I thinkis worthwhile thinking about,
(28:46):
going back to where you openedthe conversation, Kyle is
thinking about the good thingsin this.
Uh, legislation and thinkingabout how to keep those things
as long as possible, even thoughthere will be future debates
about them.
Uh, so one of the things wehaven't talked about yet is
there's a, there's a newlimitation on itemized
deductions that I think is oneof the best revenue raisers and
(29:09):
best designed revenue raisers.
Uh, in the bill.
We talk a lot about.
Uh, at Tax Foundation about thecomplexity of all the various
deductions and carve outs and,and provisions that really
narrow the income tax base.
And this provision is somethingthat limits the value of
itemized deductions at 35% forpeople in the top income tax
(29:30):
bracket.
And it would be great to seelegislation, uh, future
legislation that doubles down onthat.
And we get.
Uh, essentially a broader andbetter tax base over the course
of time, while also protectingsome of the pro-growth elements
like full expensing, uh,expensing for research and
development and, uh, some of theother provisions, you know,
(29:51):
hoping to get some extra lengthof time out of the structures
provision.
Um, another element of thecoming debates is that we're
getting closer and closer to,uh, real challenges with the
broad entitlement programs andthe trust funds, uh, that
support those programs.
Uh, in the early 2030s, therecould be automatic benefit cuts
(30:11):
if Congress doesn't change theprovisions that support things
like social security andMedicare.
And we're already thinking atTax Foundation about what
options lawmakers might be, uh,might, might, should consider as
we get closer to that deadline.
Uh, both on the benefits sideand on the revenue side.
I think there's a lot of workthat needs to be done there.
(30:32):
I.
Uh, and honestly, given theamount of regular turnover we
see in Congress, it's not clearwho will have leadership, uh,
either politically, uh, with,for the different parties or
whether current members willstill be around, uh, uh, in
Congress.
Um, pushing forward on differentfiscal policy efforts or if it
(30:53):
will be a whole new, uh,generation of lawmakers.
By the time we get to the early2030s, we've seen a lot of
turnover, uh, in the lastseveral years, and that could
con continue.
Kyle Hulehan (31:05):
And before we start off, uh, to you, Garrett,
I, I just wanted you to give youa chance, is there any work
you're doing right now that youwanna plug for the people to
know about?
Garrett Watson (31:12):
So
Daniel Bunn (31:12):
I.
Garrett Watson (31:13):
on a few different things, following up
from the passage of.
This law, uh, two very excitingproducts that we're halfway
through.
Um, finishing up to on thewebsite is an update to our
interactive, uh, tax map andcalculator where you're able to
look at the county by countyimpact of the law when it comes
to changes in after tax incomes,as well as inability to look at,
uh, some stylized taxpayerexamples of how the law will
(31:35):
change tax liability.
Uh, if you're, you're earningsome additional, uh, uh, tips or
you have a child who's gonnabenefit from the, you know,
expanding child tax credit, etcetera, you're able to calculate
that, uh, on the fly.
And that's a, uh, expansion andupdate from our popular
products, uh, for TCJ expirationthat we released last year.
We're also doing some, uh, someadditional, uh, research of
(31:56):
course, uh, based on a lot offeedback we've gotten from
folks.
Um, across our differentaudiences.
One is, as, as Daniel mentioned,uh, industry by industry
analysis of the, uh, businessprovisions, which is really, uh,
an interesting, um.
A story that's been not beentalked about as much as part of
this, this debate.
Uh, we're also working onlooking at, in detail the
(32:16):
combination, the impact of thecombination of this law with,
uh, with tariffs to come back totariffs.
Uh,'cause that's gonna be animportant discussion,
particularly this month as theWhite House continues to try to
finalize trade agreements or gotheir own way on.
tariffs in other countries,which of course, will, uh,
threatens to significantlydegrade or mute the, uh, impact,
(32:36):
positive impact on people's, uh,wallets, uh, over, over the
coming years.
So we'll have an updatedanalysis on that in detail,
which will be helpful.
We're also working on, uh, a, alonger form piece aimed at, uh,
policy audiences looking at, uh,precisely the, what we were just
talking about before on the netsimplification or complexity
that this.
Uh, law offers, uh, to taxpayersand try to provide some
(32:58):
constructive, uh,recommendations moving forward
that were left on the cuttingroom floor that could be
considered in the, in the debateas we, uh, as we move forward.
Kyle Hulehan (33:06):
And Daniel, is there anything you wanna plug
before we sign off real quick?
Daniel Bunn (33:09):
Yeah, I think two things.
Uh, one, uh, we're continuing tolook at the international side
of this legislation and, uh, therole that, uh, those rules play
relative to the global minimumtax, which we've talked about on
this program before.
Uh, there's a lot of complexityand some uncertainty.
There, but, uh, there has beensome progress on getting things
(33:32):
a little bit more stabilized, socertainly paying attention to
that.
And then more broadly, there's,there's a lot of work to be done
to educate, uh, both policymakers and the public on like
what the choices were.
I.
That led to this legislation andwhether those choices were the
right ones or if better choicescould have been made.
Uh, and that's going to be kindof a long-term effort, but
(33:54):
certainly taking some time overthe course of the next couple of
weeks to think through whatopportunities we have to kind
of, uh, show where, uh, thepolicy could have been improved,
um, and what choices that weremade that were actually good
and, and net beneficial.
Kyle Hulehan (34:08):
And thank you both for being on the show today and
breaking all of this complicatedstuff down for us.
Uh, and I want to let the peopleknow if you have any burning
questions on taxes, you can sendthem our way.
You can drop a comment onYouTube.
You can email us atpodcast@taxfoundation.org, slide
into our dms at Deduction Pod onTwitter.
you all for listening.
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