issue: Fiscal Policies

Baseline Gimmickry Doesn’t Erase Costs

Posted on by Max Sherrill

From our Budget Breakdown series highlighting problems in fiscal policy to inform the 2025 tax and budget debate.

Senate Republicans and “moderate” House Republicans who are uncomfortable with the $4.5 trillion cost of extending the expiring tax cuts enacted during Trump’s first term are pushing a new strategy: pretend it is free. Normally, the cost of legislation is measured as the amount passing the legislation would increase the deficit relative to a scenario where the legislation did not pass, which is known as a “current law” baseline. But Republicans instead want to score their upcoming tax bill against a “current policy” baseline that assumes every policy in effect today continues in perpetuity.

Although advocates of this approach suggest it would “zero out” the cost of extending expiring tax cuts, the reality is that it would do nothing to change the actual cost. If Republicans pass a bill with policies that are “fully offset” relative to current policy, the national debt as a percent of gross domestic product would increase by nearly twice as much compared to if they did nothing.

Aside from helping Republicans justify their budget-busting plans to themselves and the public, adopting a current policy baseline could potentially clear some legislative procedural hurdles. Budget reconciliation bills, which can be passed by a simple majority in the Senate without being subject to a filibuster, are not allowed to increase deficits over 10 years by more than the amount permitted in a previously-passed budget resolution. These constraints are the reason Republicans scheduled many tax cuts to expire at the end of this year when they passed the Tax Cuts and Jobs Act in 2017.

By using a current policy baseline – instead of the current law baseline used in 2017 and for every other piece of legislation – Republicans are hoping to hide the true cost of extension so they can bypass reconciliation constraints and clear the path for their legislative agenda. Most experts believe budget rules do not allow lawmakers to subjectively select their preferred baseline like this. But if Republicans are somehow able to do so, either by exploiting legal loopholes or overruling the Senate parliamentarian, the results could annihilate any fiscal guardrails in future legislative debates.

Consider this scenario: After enacting the American Rescue Plan in 2021, which cost $1.9 trillion compared to a current law baseline, Democrats could have said that not extending the law’s one-time spending provisions would “save” up to nearly $20 trillion over the following decade compared to a current policy baseline. They could then have used these phony savings as an “offset” for a bill four times as expensive as Joe Biden’s original “Build Back Better” plan. Effectively, Republicans would be setting a precedent that enables far-left Democrats to enact prohibitively expensive proposals like the Green New Deal or Medicare-for-All and claim they cost virtually nothing, even as the national debt would balloon.

Some Republicans have argued that making tax cuts permanent is so important for economic growth that the benefits of extending them should outweigh any potential consequences. But according to the nonpartisan Congressional Budget Office, extending the tax cuts without offsets would be unlikely to generate any long-term economic growth at all – and could even reduce it, as higher borrowing costs outweigh any positive economic impact. Moreover, when the federal budget is on such an obviously unsustainable trajectory, no fiscal policy can be considered permanent. At some point in the not-too-distant future, some combination of tax and spending policies that currently have no expiration date will have to change to prevent, or react to, an economic crisis caused by exploding debt. If Republicans really wanted their tax cuts to be permanent, they would figure out how to pay for them.

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Under a current policy baseline, the national debt will increase by more than $26 trillion over the next 10 years.

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IRS Layoffs Threaten to Inject Chaos Into Tax Filing Season and Cost Taxpayers Billions

Posted on by Alyssa Brown

From our Budget Breakdown series highlighting problems in fiscal policy to inform the 2025 tax and budget debate.

The Trump administration is laying off thousands of employees at the Internal Revenue Service (IRS), just as tax season gets underway. These cuts will worsen customer service for millions of hardworking taxpayers as they try to comply with the law. And while the cuts make it harder for Americans to follow the law, it will empower those who break it, allowing tax cheats to continue avoiding paying their fair share.

Many of the 6,700 IRS staffers laid off were recent hires tasked with improving the agency’s poor responsiveness by answering phone calls, processing tax refunds, and assisting with filing. Cutting this staff at the beginning of tax season will reverse recent improvements at a time when households need the most tax help. And with even larger layoffs planned after tax season, the administration will set the stage for even more chaos in future tax seasons.             

The administration claims to be making these cuts in the name of improving government efficiency and reducing waste. However, it is actually more likely to increase budget deficits by undermining efforts to close the “tax gap” — the difference between what taxpayers owe and what the IRS actually collects.

There are two main causes of the tax gap: well-intentioned taxpayers misunderstanding their obligations, and malicious tax cheats actively working to evade their obligations. The Inflation Reduction Act included additional funding for customer service to assist the former and enforcement to crack down on the latter, which the nonpartisan Congressional Budget Office originally estimated would generate $180 billion in additional revenue over the next decade. These expected savings have already declined somewhat due to funding recissions, and laying off newly-hired auditors and customer support staff will go even further, potentially preventing the agency from realizing any savings at all. 

Like any large agency, there is clearly room for the IRS to improve, including by modernizing its outdated technology or simplifying a complex tax filing process. But rather than work to truly make the IRS more efficient to save taxpayers money, Trump’s layoffs instead cost the Treasury billions in foregone revenue and taxpayers millions of hours in compliance headaches. While this is great news for tax cheats seeking to evade their responsibilities, it will hurt the law-abiding American businesses and households who will be left to pick up the tab.  

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Fiscal Fact

The current U.S. Tariff schedule, which specifies the goods subject to tariffs and the rates they face, already has roughly 11,000 lines. Trump’s proposal to move to a reciprocal tariff system, where every imported good faces a tariff equal to the rate that the same American good would face if exported to its country of origin, would require an exponential expansion to at least 3.1 million lines. 

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Child Opportunity Accounts Would Expand Opportunity and Financial Capability for American Children

Posted on by Alex Terr

Economic policy debates in recent years have increasingly focused on how to better support children and families. One of the central proposals in these discussions is expanding the Child Tax Credit (CTC), which will be a key feature in the current debate over the Tax Cuts and Jobs Act. This tax benefit helps working parents by providing them with additional resources to cover everyday costs, which can significantly improve the lives of disadvantaged children by meeting their basic needs.

However, while the CTC provides important short-term assistance to parents, it does less to ensure children can access opportunities for long-term success. Many children from low-income families face barriers to building wealth, such as limited income or job opportunities. Additionally, a lack of financial literacy often makes it even harder for these children to make informed decisions about managing money, impeding their ability to effectively plan for the future or continue building wealth over time. Together, this combination of limited opportunity and financial capability can trap many Americans into lower economic positions, regardless of their talent or potential.

In a recent report, “Building Opportunity and Financial Capability with Child Opportunity Accounts,” PPI proposed to help increase financial resources and financial capability for children from all backgrounds by establishing universal Child Opportunity Accounts (COAs). COAs would automatically be opened at birth with a $700 contribution from the government, with the government making supplemental contributions depending on household income each year on the child’s birthday up to age 16. This progressive approach ensures that children from families struggling to make ends meet get the most help, while still offering modest support to children born in more well-off households. In addition to the contributions from the government, families are also encouraged to participate by contributing to their child’s COA.

Account balances would be automatically invested in diversified portfolios, growing over time to give each child a financial cushion when they enter adulthood. By the time they reach 18, a child from a low-income family could have tens of thousands of dollars in their account to use for wealth-building activities — including education, housing, or starting a business — and guardrails in place to ensure that the money does not go to waste.

 These accounts do not just provide resources for children but also foster the skills they need to grow those resources over time. Financial education resources would be embedded into the accounts and beneficiaries would have to pass an assessment to access their account’s funds before age 25. As children grow, they would learn to manage their own finances and gain more control over their financial future.

To ensure that the burden of rising public debt doesn’t negate the benefit of COAs for young Americans, PPI has offered a comprehensive fiscal blueprint with several policy options to fully offset the program’s cost. One particularly fitting offset included in the blueprint and further detailed in another recent PPI report would be reforming the taxation of inheritances. Taxing the birthrights of the richest 1% to give every child an equal starting point would help create a more inclusive society where everyone, regardless of their background, has access to the resources and opportunities necessary for success. But PPI’s blueprint also offers several dozen potential alternatives if this offset proves politically challenging for one reason or another.

America’s economic future depends on its ability to foster talent, not just in its wealthiest citizens, but across the socioeconomic spectrum. Providing for a child’s basic needs, while important, does little to set them up for success in adulthood. Investing in Child Opportunity Accounts would ensure that every child, regardless of background, has the financial foundation and knowledge they need to pursue their full potential. This isn’t just an investment in individual families, but in our country’s future prosperity.

Tariffs Are Bad Taxes

Posted on by Max Sherrill

From our Budget Breakdown series highlighting problems in fiscal policy to inform the 2025 tax and budget debate.

Both on the campaign trail and in his time as president, Donald Trump has hailed tariffs as “the greatest thing ever invented.” There’s seemingly no problem these taxes on imports can’t solve: paying for his legislative agenda, closing trade deficits, exacting diplomatic concessions, and more. Yet, in reality, the tariffs Trump began enacting this week are bad tax policy that don’t raise much revenue but do raise costs for American businesses and households.

This week began with Trump announcing his intent to impose a 25% tariff on goods from Canada and Mexico and an additional 10% tariff on goods from China. The new tariffs on China went into effect on Tuesday, while those on Mexico and Canada were only temporarily delayed after last-second agreements with their respective leaders. Together, Mexico, China, and Canada make up a substantial amount of U.S. trade — roughly 44% of all imported goods — with important imports ranging from oil and lumber to computers and produce. And this is likely to only be the beginning of Trump’s trade wars, as he’s promised to impose similar measures on the European Union, which represents another 17% of imported goods.

There are plenty of serious problems with these aimless and destructive tariff policies. By targeting Canada and EU allies, the United States is eroding vital diplomatic partnerships at a time when it should be strengthening them to counter rising threats from Russia, China, and Iran. These unilateral tariffs also represent a blatant disregard for the U.S. Constitution, which clearly assigns the power to levy taxes to Congress, not the president. By circumventing the legislative process to impose sweeping tax hikes, Trump is concentrating power in the executive and diminishing the fiscal checks and balances essential for our democracy.

But beyond these grave concerns, tariffs are simply bad tax policy. One of Trump’s central justifications for the new tariffs is that they will raise revenue that can be used to offset cuts to other taxes — even suggesting that they could replace income taxes entirely. But estimates for this latest round of tariffs show that, if implemented, they would raise only $1.3 trillion over ten years. That is less than one-third of what it would cost to extend the expiring provisions of the Tax Cuts and Jobs Act over the same period. Even if Trump imposed tariffs on all imported goods at the revenue-maximizing rate — estimated to be around 50% — they would likely still be insufficient to finance the full Trump agenda that some Republicans have estimated could cost as much as $10 trillion, much less replace the roughly $35 trillion the income tax will raise over the next ten years.

Not only do tariffs raise less revenue than income taxes, they do so in a way that is less fair. The tariff schedule currently has over 11,000 different rates depending on the type of good, its composition, and the county of origin. This complexity invites special interest carveouts and results in disproportionately higher tariffs on the goods that lower- and middle-income households consume. For example, expensive silver spoons currently face much lower tariffs than steel spoons, and cheaper clothing made from polyester and wool faces higher tariffs than more luxurious counterparts such as silk or cashmere. Well-resourced lobbyists and businesses are already seeking to carve out their own exemptions from Trump’s new tariffs, leaving the remainder of Americans with higher tariff rates.

The American people will pay the price for such bad tax policy. Businesses that rely on imported goods or components would face higher input costs for production. These higher costs would then be passed down to consumers in the form of higher prices, raising the cost of everyday goods, from food to clothing to gas. Tariffs would also harm export-reliant industries — such as agriculture, energy, and manufacturing — by strengthening the dollar and inviting retaliatory measures, thereby lowering demand for American goods overseas. Overall, estimates suggest that these measures could hike taxes on the average American household by nearly $1,000 while the resulting decline in economic output could eliminate 330,000 jobs.

Rather than foster economic growth and prosperity, tariffs create economic uncertainty and chaos. If Trump continues to lean on them as his favorite policy tool, he will unnecessarily burden American households and cause massive economic disruptions for businesses. Instead of standing idly by to enable aimless trade wars, Congress should look to the alternative trade agenda recently outlined by PPI, which focuses on lowering costs for Americans, promoting the global competitiveness of U.S. industry, and strengthening vital partnerships abroad.

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Trump’s Federal Workforce Orders Unleash Chaos Without Meaningful Savings

Posted on by Max Sherrill

From our Budget Breakdown series highlighting problems in fiscal policy to inform the 2025 tax and budget debate.

President Trump spent the first full week of his second term in office rolling out a series of executive actions aimed at radically reshaping the federal workforce. While the administration framed the moves as a fiscally responsible culling of a bloated bureaucracy, they will, in reality, hinder critical government responsibilities, create uncertainty for both Americans and civil servants, and may even cost taxpayers more than they save. Ultimately, these chaotic measures are more about politicizing the federal workforce to advance the president’s extreme ideological agenda than they are about improving government efficiency for taxpayers.

Trump’s sweeping executive actions have cut deeply across the entire federal workforce. He has imposed a general hiring freeze across most federal civilian positions and demanded that agencies submit plans for reducing the size of their workforce. He has moved to dismantle any program that could be construed as related to diversity, equity, and inclusion (DEI), directing all affiliated staff to be put on paid leave and eventually laid off. He fired senior officials that he deemed insufficiently loyal to the administration, including inspectors general and federal prosecutors that traditionally operate with independence. And earlier this week, he offered to pay eight months’ salary to any of the 2.3 million individuals employed by the federal government if they agree to resign by February 6 — adding that agencies “are likely to be downsized” if people choose to remain.

This flood of orders has sowed chaos and confusion across the government. Agencies are unsure what programs and personnel are impacted by the vaguely worded directives, while demoralized civil servants wonder whether their roles will be eliminated as they try to manage day-to-day operations. And like the president’s short-lived order to freeze wide swaths of federal spending, many of these efforts are legally dubious. Agencies can only offer severance payments in lump sums of up to $25,000 — a number that most buyouts under this order would likely exceed. The president is also required to give Congress at least 30 days advance notice and written justification for firing inspectors general, which Trump’s purge blatantly ignored.

But even if these moves are legal, they will still wreak havoc on critical government functions while likely costing taxpayers more than they save. Not all the workers who would accept the Trump buyout offer are contributing to wasteful spending; many are talented civil servants doing critical functions of government work that the administration ostensibly supports, including air traffic control, cybersecurity, and law enforcement — including those implementing the president’s immigration priorities. Replacing these workers or retraining existing civil servants to do their jobs would take time and come at a significant cost to both effective governance and American taxpayers, as replacements would lack the experience of former employees and could lead to the delay or degradation of important federal programs and services that many Americans rely upon.

Even worse, these responsibilities might ultimately be reassigned to employees hired not for their qualifications but their unquestioning loyalty to the president, or to an even more bloated system of expensive federal contractors that is estimated to be at least twice the size of the federal workforce. Purging inspectors general is especially irresponsible, because these are individuals primarily responsible and best-equipped to identify waste or fraud in their respective agencies. Removing them not only increases the risk of fraudulent or wasteful spending, but diminishes their political independence to act as agency watchdogs.

Furthermore, payrolls are only a fraction of government spending, meaning that reducing them wouldn’t meaningfully improve the bleak fiscal situation highlighted in last week’s Budget Breakdown. In 2024, the federal government ran a $1.9 trillion budget deficit but spends less than $300 billion on civilian payrolls annually. In other words, even if every single civilian government employee accepted Trump’s buy-out proposal — and doing so did nothing to compromise government functions — the federal budget deficit would shrink by less than one-sixth. Moreover, those savings would be wiped out if Republicans proceed with their plans to extend the expiring provisions of the Tax Cuts and Jobs Act enacted in Trump’s first term, which are projected to cost more than $4 trillion over the next 10 years.

None of these arguments are meant to defend an ossified status quo in need of reform. It has now been more than three decades since President Bill Clinton undertook the last major effort to reinvent government, meaning a well-intentioned re-evaluation of how the sprawling federal bureaucracy of agencies, personnel, and programs could be streamlined to cut costs and better serve the American people is long overdue. But rather than pursuing any thoughtful reforms, Trump’s flood of directives reflects a ham-fisted attempt to dismantle checks and balances, purge the civil service of those he considers disloyal, and chaotically push an extreme ideological agenda at the expense of both American taxpayers and effective governance.

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Trump Inherits a Broken Fiscal Policy He Seems Determined to Make Worse

Posted on by Max Sherrill

From our Budget Breakdown series highlighting problems in fiscal policy to inform the 2025 tax and budget debate.

When Donald Trump began his second presidency earlier this week, he took the helm of a government running an annual budget deficit twice as big as the one Barack Obama left him eight years ago. Unfortunately, Trump and his Republican allies in Congress seem determined to expedite the breakdown of our country’s fiscal foundation by pursuing an extension and expansion of the budget-busting tax cuts they passed in his first term alongside irresponsible spending policies. To help inform the debate around these policies over the coming months, PPI’s Center for Funding America’s Future is launching Budget Breakdown, a new series that breaks down for our followers the many problems facing fiscal policymakers.

The latest budget and economic outlook published last week by the nonpartisan Congressional Budget Office (CBO) made clear the daunting fiscal challenges facing the new administration. This year, CBO projects the federal government will spend almost $1.9 trillion more than it raises in revenue. That deficit equals 6.2% of gross domestic product (GDP), which is twice the size of the federal budget deficit in Fiscal Year 2016.

The borrowing required to finance this deficit will bring our national debt to 100% of GDP, meaning that our government will owe lenders an amount equal to the total value of all goods and services produced by the U.S. economy in a single year. And the government will spend nearly $1 trillion just to pay interest on that debt — more than it spends on either national defense or Medicare. To further put this enormous cost in perspective: whether measured in dollars or as a percent of GDP, the federal government is now spending more money servicing our national debt than at any other point in American history.

Each of these already alarming figures will likely worsen if Trump and Congressional Republicans get their way. The GOP’s top priority is extending the expiring provisions of the Tax Cuts and Jobs Act they passed in 2017, which by itself could add up to $5 trillion to budget deficits over the next 10 years. But the new president also wants to cut taxes even further, such as by increasing the amount of state and local taxes that high-income households can deduct from their federal income taxes and exempting all tip income from federal taxation. At the same time, he has proposed to massively increase spending on immigration enforcement, national defense, and other conservative priorities. While the exact details of their ambitious legislative plans remain fluid, some House Republicans have estimated that the price tag for Trump’s full agenda could run as high as $10 trillion over the 10-year budget window.

Even if Republicans curtail their ambitions, it’s highly unlikely that they could fully offset the costs of whatever policies they do enact. Trump repeatedly ruled out any reforms to Social Security and Medicare, the two largest and fastest-growing federal programs, leaving just one-third of federal spending going to programs for which he has neither proposed to maintain or increase spending. When House Budget Committee Chairman Jodey Arrington circulated a preliminary menu of potential offsets totaling $5.7 trillion to his colleagues earlier this month, several members quickly concluded most of the options were politically unrealistic even though they conformed to Trump’s demands. It’s not hard to see why: to take just one example, 40% of the possible savings were from cuts to Medicaid — a popular program that provides health care to low-income Americans and represents less than 10% of federal spending.

Republicans had no qualms about increasing the deficit in Trump’s first term, during which the president enacted policies that increased budget deficits over CBO’s 10-year budget window by more than $8 trillion — nearly $5 trillion of which was unrelated to the COVID pandemic. But the consequences of more borrowing today are likely to be far worse than they were four years ago. Americans saw firsthand how trillions of dollars in deficit-financed spending during the Biden administration helped push prices and interest rates to their highest levels in decades. Further deficit spending could easily reignite inflation and hamper long-run growth by crowding out both public and private investment, sticking future workers with higher tax bills, and diminishing our fiscal reserve to address future crises. Already, CBO projects that rising debt would reduce incomes 30 years from now by up to $14,500 per person, in today’s dollars. If Trump and Congressional Republicans deficit-finance their agenda, they will further increase these costs for working Americans now and in the future.

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Ritz for Forbes: Trump’s Debt-Ceiling Demand Signals A Return To Chaotic Governance

Posted on by Max Sherrill

Shortly after House Speaker Mike Johnson (R-La.) and his Democratic counterparts announced a bipartisan deal to prevent a government shutdown at midnight on Saturday, the MAGA movement tore it apart and sent the federal government hurtling towards a holiday shutdown.

Although many far-right Republicans grumbled from the get-go, Johnson’s problem really began when billionaire Elon Musk launched into a thread on the social media app formerly known as Twitter excoriating the details of the bill. Although there were many provisions of questionable merit attached to the continuing resolution that would keep the government operating until next March, Musk’s thread was full of misinformation and falsehoods — a problem that has always plagued the platform and become even worse since he took ownership of it in 2022.

President-elect Trump and Vice President-elect JD Vance then issued a joint statement announcing their opposition to the legislation, effectively killing any chance it had of passing the Republican-controlled House with less than 48 hours to prevent a government shutdown. It’s worth remembering that the last time Republicans had unified control of the House, Senate, and Presidency, the federal government shut down three times in just one year — more than any other year in the preceding four decades. If Donald Trump and his billionaire backer Elon Musk are so quick to undermine legislation negotiated by their own party’s House speaker, who has a far narrower majority to work with than his predecessor did in 2018, the country is likely to be in for uniquely high levels of government dysfunction over the next two years.

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A Better Way to Tax Unearned Income

Posted on by Alex Terr

The belief that success should come from your personal initiative and hard work, rather than the good fortune of your birth, is central to our nation’s identity as the “land of opportunity.”

Rags to riches stories are deeply rooted in American history and folklore, with several of our founding fathers, such as Alexander Hamilton and Benjamin Franklin, rising from impoverished backgrounds to build a nation. Conversely, the American ethos has steadfastly rejected the “artificial aristocracy founded on wealth and birth,” as Thomas Jefferson writes, in favor of one built upon “virtue and talents.” Success in America is supposed to be built upon merit and hard work rather than who your parents are.

Despite this national ethos, America has fallen behind many of our international peers in creating opportunities for social mobility. In the World Economic Forum’s measure for social mobility, the United States performs worse than the Nordic countries, France, and even the United Kingdom, with their long history of hereditary aristocracy. Declining levels of intergenerational mobility have come in tandem with rising levels of wealth inequality. U.S. wealth is densely concentrated among relatively few households, with the top 10% of households today owning roughly 67% of the nation’s wealth, compared to the 2.5% for the bottom 50% of households. Even among households that are exclusively above age 50, which removes cases where people are high-income but low-wealth (such as a recent law school graduate), the wealthiest 10% of households own 70% of wealth in that age range, while the bottom 50% of households only have 3%.

This combination of low social mobility and high wealth inequality produces a self-perpetuating hierarchy of economic privilege, making it difficult to get ahead on hard work alone. As much as 60% of all wealth in the United States is inherited rather than earned. Moreover, this inheritance income is skewed toward those who already enjoy comfortable lives: In 2021, the top 10% of earners received 55% of total inherited wealth, while the bottom 40% received less than 10%. It’s perfectly natural that people who have enjoyed economic success would want to pass some of their wealth on to their children. But the privilege cannot be limitless. Entrenched aristocracies built upon generations of inherited wealth create a substantially uneven playing field and pose a threat to our democracy, as concentrated wealth, in turn, leads to concentrated economic opportunities and political power.

The best tool for reconciling this tension between individual liberty and America’s promise of equal opportunity for all is the U.S. tax system. But as the next section of this paper explains, the current estate tax is undermined by large exemptions and loopholes that make it easy to avoid for even the wealthiest families. It has also become deeply unpopular with the general public after years of anti-tax Republicans arguing that, because taxes are already levied on the income a person earns during their lifetime, taxing the assets a person leaves behind is an unfair “death tax” that amounts to double taxation. But these critiques misrepresent who actually pays the estate tax. Someone who is already dead suffers no inconvenience from the estate tax or any other tax policy; the tax is instead borne entirely by heirs who never paid any tax on the income they receive from an inheritance.

The following sections of this paper offer federal policymakers a technical framework for reforming the taxation of intergenerational wealth transfers to progressively raise revenue and undercut the misleading political attacks levied against the current system. To start, we propose to replace the estate tax — which taxes a decedent’s estate — with a new system that would only tax inheritance as it is received by an heir. This approach would both limit Republican “death tax” arguments by making it more clear that the tax is paid by wealthy heirs and create a fairer system for heirs by only taxing the inheritance they actually receive as income. We also propose reforms to the gift and generation skipping transfer taxes — two taxes intended to complement the estate tax — to work better alongside our proposed inheritance tax.

Next, we offer a series of reforms to close the largest loopholes in the current wealth transfer tax system. One of the biggest is the stepped up basis, which permits previously unrealized capital gains to completely escape taxation after an asset has been passed down. In addition, our proposal takes aim at the myriad of loopholes that arise from the IRS’s favorable treatment of non-liquid assets, including tax deductions and discounts commonly abused by wealthy families. However, we also pair these reforms with expanded protections to ensure that no heir has to sell the family farm, home, or small business they inherit just to pay an onerous tax bill. Lastly, we make major reforms to the taxation of trusts, streamlining complicated tax rules and closing the many loopholes that arise from this complexity while preserving the use of trusts for valid reasons unrelated to tax avoidance.

Left out of our proposal are changes to address other vehicles that are sometimes used to avoid estate tax, such as leaving estates to questionable nonprofit “family foundations” or using life insurance to pass along wealth tax-free. Since closing these loopholes would require a much broader rethink of the taxation of nonprofits and life insurance overall, and our proposal makes them no worse than under current law, we have chosen to leave them unchanged. Despite these omissions, our proposal would be a substantial improvement over the status quo, raising several hundred billion dollars over ten years from the wealthiest households while creating a better and fairer tax regime. Furthermore, every dollar raised by taxing unearned inheritance is one that does not need to be raised by increasing taxes on the earned incomes of working and middle-class Americans, making it a strong option for policymakers to consider in the context of future tax reform or deficit reduction efforts.

Read the full report.

 

 

Many Americans Are Unprepared to Weather a Trump Economic Storm

Posted on by Max Sherrill

After a pandemic-induced recession and several years of high inflation, many Americans are pessimistic about both their own personal finances and the overall economy. Unfortunately, the incoming Trump administration will likely bring more economic turbulence, with sweeping policy promises that could cause economic growth and employment to drop, while reigniting high inflation. Americans without robust savings are especially vulnerable in such turbulent times.

One of the most unnecessary contributors to inflation over the past four years was an excess of deficit-financed stimulus spending. But Trump and Congressional Republicans appear likely to repeat the mistake of their predecessors by extending and possibly expanding upon the tax cuts they enacted in Trump’s first term — which would cost more than $4 trillion over 10 years — without offsetting most of the cost. Furthermore, while the tax cuts’ largest benefits will disproportionately flow to wealthy Americans, the inflation they could cause would be borne primarily by working-class Americans who consume more of their household income than their upper-income peers. 

As both a candidate and as president-elect, Trump has promised several other policy shifts that would wreak havoc on American households’ financial stability. For example, Trump promised throughout his campaign to impose a 10-20% tariff on every imported good, with at least a 60% tariff on Chinese goods. More recently, Trump also threatened a 25% tariff on Canada and Mexico, two of our largest trade partners. If implemented, these proposals would lower most Americans’ incomes by thousands of dollars, as importers pass the cost onto consumers through higher prices for everyday items.

If enacted, these policies and the many others Trump has advocated for, such as mass deportations, would send shockwaves through the economy. One prediction from the Peterson Institute for International Economics suggests severe consequences for Americans: Prices could skyrocket as much as 28% above the baseline prediction, gross domestic product could be  $6.4 trillion lower, and employment would fall in exporting industries such as agriculture and manufacturing. While other estimates may be smaller, they all point to disastrous consequences for American households if Trump succeeds in enacting the economic agenda he campaigned on. 

Households without savings to rely upon will be especially vulnerable to these economic disruptions. Emergency savings can not only provide a crucial financial cushion during unexpected events such as job loss but can also reduce reliance upon debt when a household’s costs rise faster than its income. Yet the past few years of inflation have taken a toll on American households, with 65% of adults in a Federal Reserve survey published earlier this year saying price increases have worsened their financial situation. One consequence of higher prices is that it becomes harder to adequately save for emergencies: According to the same survey, 46% of Americans surveyed did not have emergency savings to cover three months of expenses, up from 41% in 2021. Another recent survey by Blackrock found that more than one in four Americans lack any form of easily accessible savings to draw from during a crisis. 

Donald Trump’s voting base is especially at risk: Blackrock’s survey found that 36% of rural households, which backed Trump by a 28-point margin, had no form of emergency savings — one of the highest of any demographic group. But these communities will also be among the hardest hit by Trump’s economic policies: The trade wars caused by his across-the-board tariffs will not only raise the prices they pay on consumer goods, but hit export-reliant industries that are important for rural economies, such as agriculture. As other countries respond with retaliatory tariffs, the industry will suffer as American products become substantially less competitive overseas.

Ideally, policymakers should avoid pursuing policies that will cause economic uncertainty or chaos. But in any case, they should pursue policies that promote financial capability to help vulnerable households weather whatever turbulent times lie ahead. PPI will be highlighting some potential policies that could advance these objectives in the next year.

Ritz for Forbes: Democrats’ Last Act Shouldn’t Be Expediting Social Security Insolvency

Posted on by Alyssa Brown

By Ben Ritz

On Wednesday, outgoing Senate Majority Chuck Schumer announced his intention to bring the House-passed “Social Security Fairness Act” up for a vote before the end of the year. While the bill may sound good and have some admirable goals, passing it now as written would undermine the future of Social Security. It would be both political malpractice and bad governance for Democrats to rush this bill into law as their final act before handing control of the White House and U.S. Senate to the GOP in January.

Social Security is currently built around two core principles. The first is that workers should receive benefits based on what they paid into the program. Although this principle is heavily strained today, as workers have not paid enough in Social Security payroll taxes to cover the cost of benefits for many years now, benefits are calculated based on the average wages upon which workers paid payroll taxes over their careers. The second principle is that the benefit formula is progressive, meaning workers with lower lifetime incomes receive a greater benefit relative to the money they earned (and paid into the program) compared to higher earners.

At issue are two provisions, known as the windfall elimination provisions (WEP) and government pension offset (GPO), that attempt to enforce these principles fairly for people who spend part of their career working for state and local governments in jobs that offer pension benefits in lieu of Social Security. Earnings from these jobs are considered “uncovered,” which means workers don’t have to pay payroll taxes on the income, but those earnings also aren’t taken into account for Social Security’s benefit formula. WEP and GPO are intended to prevent someone who consistently earned a $100,000 annual salary over a career that was split evenly between covered and uncovered jobs — and thus would be treated by the benefit formula as if they received a $50,000 over their whole career — from getting a higher return on their payroll-tax contributions than someone who consistently earned $60,000 in covered employment.

Read more in Forbes.

Most U.S. Government Borrowing Just Pays for More Borrowing

Posted on by Max Sherrill

Over the course of the Biden administration, the federal government borrowed more than $5 trillion to pay for programs it did not have the tax revenue to finance. Under current law, the Congressional Budget Office projects these primary deficits — the difference between non-interest spending and tax revenue — to total $7.4 trillion over the next decade.

Financing government spending with deficits is not inherently bad. In fact, it is often necessary to support the economy temporarily during widely recognized emergencies such as wars or recessions. When the crisis subsides, the government can raise taxes or reduce spending to compensate, and the debt is either repaid or at least shrinks as a share of the economy. Debt can also be a useful tool to make investments that will grow our economy over the long-term, such as funding scientific research that lays the foundation for technological progress. 

But most federal debt isn’t taken out for these productive purposes. Before the COVID-19 pandemic, more than half of the national debt could be attributed to the cumulative cost of interest payments. This means that most of our debt wasn’t used to finance tangible benefits like providing public goods, uplifting the poor, or subsidizing long-term investments. Instead, it was borrowed just to pay the cost of past debt. 

Although it might appear that the share of debt attributable to interest has since shrunk, this is an artifact from the unusual surge of borrowing to finance temporary programs following the COVID-19 pandemic. As the federal government begins paying interest on the debt accumulated over the past four years, and then pays interest on the debt used to pay for future interest payments, cumulative interest payments will snowball to the point where they again make up the majority of debt within the next decade.

The problem will only get worse as time goes on if current law remains unchanged. Over the next 30 years, cumulative interest payments are projected to grow twice as fast as gross domestic product. At the end of that window, the amount of money spent financing past debts will exceed the total value of all goods and services produced by our economy each year.

When we borrow, we are making a transfer from future taxpayers to current ones. By continuing to neglect the long-term cost of debt, we are setting our future selves and subsequent generations for a snowballing debt burden, most of which will not even have been used to buy anything other than time for politicians to procrastinate. 

Despite the nation’s deteriorating fiscal health, President-elect Trump and his Republican allies in Congress want to accumulate even more debt. Their top fiscal policy priority for next year — fully extending the expiring provisions of the 2017 Tax Cuts and Jobs Act without offsetting the cost — would increase primary deficits by $5.2 trillion over the next 10 years alone. Implementing all of Trump’s proposals from his 2024 presidential campaign, including tax cuts on income from tips, overtime pay, and social security payments, could add as much as $13.5 trillion to primary deficits over the coming decade.

If there is one key takeaway from this analysis, it is that when policymakers pass unfunded tax cuts today, future taxpayers will be stuck with a debt burden that is many times the cost of the tax cuts themselves. When each dollar of debt we undertake is unlikely to be repaid soon, it comes with a far higher cost of interest. This should set the standard for what’s worth borrowing for higher, not lower.

Ritz for Forbes: Voters Shouldn’t Be Fooled By Trump’s Unbelievable Tax Proposals

Posted on by Max Sherrill

Throughout his 2024 presidential campaign, former president Donald Trump has spontaneously proposed roughly a dozen tax cuts that sound perfectly targeted toward constituencies he likely wants to win over. For hourly workers: no taxes on overtime pay. For Nevada service workers: no taxes on tips. For the Michigan auto industry: tax deductions for car loan interest. For people in the Southeast who were recently hit by hurricanes: tax deductions for home electricity generators. For seniors: no taxes on Social Security benefits. For military members, firefighters, police, and veterans: no taxes whatsoever. Some of these proposals are so arbitrary that one might think they were pulled from a randomized policy generator.

Each proposal is so vague or riddled with obvious flaws that it suggests very little thought was given to how any of them would work. For example, since Trump announced his no tax on overtime or tips proposals, he has failed to answer some basic questions about how they could be implemented. Would these sources of income just be exempt from federal income tax, or would they also be exempt from payroll taxes that are currently earmarked for Social Security and Medicare? If the answer is yes, would workers then receive lower benefits in retirement because they paid less into the programs? And what guardrails would be put in place to prevent high-income professionals from simply reclassifying their income as tips or overtime pay?

What about Trump’s proposal to eliminate income taxes on Social Security benefits? Like payroll taxes, the revenue collected from these taxes is legally earmarked to pay for Social Security and Medicare benefits. Both programs are currently spending more than they take in through dedicated revenue sources, and when their trust funds are exhausted — something that is already slated to happen within about a decade — benefits are automatically cut across the board. How could Trump’s promises not to cut Social Security or Medicare be squared with his tax proposals that would make these automatic cuts even bigger?

The only reasonable conclusion is that these are not serious policy proposals, they are fools’ gold to entice undiscerning voters. The swing voters who will decide the election next week shouldn’t let Trump’s pandering promises distract them from the high costs that giving him a second presidency would likely impose.

Keep reading in Forbes.

New PPI Report Proposes Solutions to Prevent Wage Theft for Everyday Americans

Posted on by Alex Terr

WASHINGTON — Across the country, many working-class Americans are struggling to make ends meet. One reason why is because their wages are being stolen from employers who are not paying them what they are legally owed. These employers either pay less than the minimum or agreed-upon wage, refuse to pay for overtime at the legally required rate, take secretive deductions from paychecks, withhold earned tips, fail to make final payments, or demand unpaid work after a shift has ended. 

Today, the Progressive Policy Institute (PPI) released a new report titled “Ensuring Working Americans Get Paid What They Deserve,” which proposes new measures to combat wage theft. Report author Alex Kilander, Policy Analyst for PPI’s Center for Funding America’s Future, argues that former President Trump’s campaign proposal to end taxes on tips and overtime will not meaningfully increase the take-home pay for the employees that need it most, and Democratic policymakers should instead pass legislation that expands the legal toolbox for wage theft enforcement in order to help working Americans.

This new publication is the eighth in a series of papers published in PPI’s Campaign for Working America, which was launched earlier this year in partnership with former U.S. Representative Tim Ryan of Ohio. The Campaign aims to develop and test new themes, ideas, and policy proposals that help Democrats and other center-left leaders make a compelling economic offer to working Americans, bridge divides on culturally sensitive issues like immigration and education, and rally public support for the defense of democracy and freedom globally. Other papers cover career paths for non-college workers, housing, and competition.

Kilander emphasizes that lawmakers need to increase the low civil penalty for initial wage theft offenders while ensuring escalating penalties for repeat offenders. This will prevent employers from stealing money from their employees’ pockets in the first place and heavily punish those who continue to do it, and replace the Wage and Hour Division (WHD) that is now in charge of preventing wage theft. However, the WHD struggles to maintain consistent enforcement actions and resolve cases quickly, forcing the agency to pare back how many cases it can accept.

“Tackling wage theft, a crime that takes thousands of dollars out of working Americans’ pockets each year, will do far more to improve the lives of the millions of tipped and overtime workers who are at risk of being cheated than misguided tax proposals,” said Kilander. “Our government should not stand idly by as dishonest employers steal billions of dollars each year from working Americans who have rightfully earned their wages. We need to make sure that employers are held accountable for their actions and stop hurting the American people.”

Read and download the report here.

The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org. Find an expert at PPI and follow us on Twitter.

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Media Contact: Ian O’Keefe – iokeefe@ppionline.org

Ensuring Working Americans Get Paid What They Deserve

Posted on by Alyssa Brown

Campaign for Working America PPI

INTRODUCTION

A core component of the Trump campaign’s pitch to working Americans is a package of costly tax cuts that sound targeted toward their interests, such as exempting income from tips and overtime pay from taxation. But amongst the many problems with these budget-busting proposals, they wouldn’t meaningfully increase the take-home pay of the many working-class individuals, who have little to no income tax liabilities at all.

A better way for Democrats to boost the incomes of working Americans is to ensure they are actually paid what they are owed in the first place. Tackling wage theft, a crime that takes thousands of dollars out of working Americans’ pockets each year, will do far more to improve the lives of the millions of tipped and overtime workers who are at risk of being cheated than misguided tax proposals.

Read the full report.

PPI Report Warns of Economic Risks in Trump’s Proposed Tariff Agenda

Posted on by Max Sherrill

WASHINGTON —Throughout his 2024 campaign, former President Donald Trump has made imposing a double-digit tariff on all imports and a 60% tariff on goods from China a central pitch to voters, and has even suggested replacing the income tax with tariff revenue. The Progressive Policy Institute (PPI) today released a critical new report, “It’s Not 1789 Anymore: Why Trump’s Backwards Tariff Agenda Would Hurt America,” authored by Laura Duffy of PPI’s Center for Funding America’s Future, which warns of the steep costs of Trump’s plans to impose taxes on all imports at levels not seen since the Great Depression.

In the report, Duffy draws striking parallels between Trump’s plan and the debates over and effects of historical tariff policies going back to 1789. She argues returning to tariff-heavy strategies would not only make it impossible to fund government spending commitments that have grown since the country’s founding, but would also harm downstream industries and greatly burden American taxpayers and workers.

“When the United States was much poorer and less developed, tariffs were one of the only feasible ways to collect revenue. But even as far back as 1789, leaders recognized the weaknesses of relying on tariffs as a basis of our tax system,” said Duffy. “Today, no developed country relies on tariffs as a major revenue source, and Trump’s tariff proposals would be fiscally irresponsible, economically destructive, and costly to American families.”

Duffy outlines four main problems with Trump’s tariff proposal:

  • Inadequate Revenue Generation: Modern government spending levels cannot be supported by tariffs alone, which generate far less revenue compared to income taxes.
  • Non-Transparency: Tariffs are complex and hidden, making them vulnerable to special interests and rent-seeking by domestic industries.
  • Equity Concerns: Tariffs likely place a disproportionate burden on low-income households, which tend to spend more on imported goods.
  • Economic Disruption: Tariffs raise costs for industries relying on imports and invite retaliation from other countries, leading to reduced production and lost jobs.

Because of these issues with tariffs, Duffy argues that the shift to tax income instead of trade was a success for progressive policy goals and the United States’ growing global leadership role alike. Instead of turning back the clock to a much earlier (and less prosperous) era of American history as Trump suggests, Duffy recommends the United States address its budget deficits and promote equity by shifting the tax code towards fairer and less destructive taxes like a value-added tax.

Read and download the report here.

The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org. Find an expert at PPI and follow us on Twitter.

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Media Contact: Ian O’Keefe – iokeefe@ppionline.org