As Senate Republicans work to develop their own version of the “One Big Beautiful Bill” (OBBB) passed by the House last month, one of their biggest priorities is making temporary tax provisions permanent. In a recent interview, Senate Finance Committee Chairman Mike Crapo argued that “certainty in the tax code” is essential for businesses to plan their operations. Senate Majority Leader John Thune also recently said that his conference “believe[s] that permanence is the way to create economic certainty.” But there can be no certainty in any tax policy so long as there remains an unsustainable mismatch between federal revenue and spending levels — which the OBBB would make significantly worse.
The United States is already on anincreasingly unsustainable fiscal path. The national debt today is almost the same size as the country’s gross domestic product (GDP), while annual interest payments on that debt are bigger as a percent of GDP than at any other point in American history. If the OBBB becomes law, the government will be on track to borrow another $2 trillion to cover the difference between spending and revenues every single year going forward. But debt cannot grow faster than our economy forever because, at a certain point, there will not be enough economic activity for the government to tax or borrow from to continue paying ballooning interest costs. The policies in OBBB would only increase the probability that our economywill experience such a fiscal crisis within the next few decades.
Whether they do it to prevent a crisis or react to one, lawmakers will inevitably have to change fiscal policies that result in unsustainable deficits. So if Senate Republicans were truly interested in using permanent policy to provide certainty to taxpayers, they would prioritize policies that reduce the budget deficit over those that increase it.
Fortunately, there have been many policy options discussed in recent months that the Senate could adopt to bring down the OBBB’s costs. Lawmakers could tighten the deduction for state and local income taxes paid by businesses — as PPI suggested in our last Budget Breakdown. Preventing wasteful overpayments in Medicare Advantage, which the Senate considered this week before backing off, could reduce spending by hundreds of billions of dollars without cutting benefits. The Senate could also incorporate tax changes previously considered by their colleagues in the House, such as increasing the excise tax on stock buybacks to create parity with dividends or further limiting the business deduction for employee compensation. President Trump has proposed several possible offsets of his own that were omitted from the bill, such as closing the carried interest loophole or introducing a new top income tax bracket for households with the highest incomes. And lawmakers can find even more possible offsets in the budget blueprint published last year by PPI, which includes enough savings to put the budget on a path back to balance by 2050.
If Senate Republicans refuse to incorporate any of these common-sense proposals to mitigate the OBBB’s deficit impact and put the nation on a more sustainable fiscal path, whatever tax provisions they enact would be permanent in name only. Under pressure from out-of-control debt and interest costs, future Congresses will inevitably have to revisit the policies put in place by today’s. Senate Republicans must remember that the only way to truly provide tax certainty is by building a sustainable fiscal foundation.
According to new analysis from the nonpartisan Congressional Budget Office, passing the OBBB would cause the bottom 10% of American households to lose roughly $1,600 per year, while the top 10% would gain $12,000 per year.
From our Budget Breakdown series highlighting problems in fiscal policy to inform the 2025 tax and budget debate.
PPI warned last week that Republicans’ “Big Beautiful Bill” was shaping up to repeat and compound many of the problems that doomed Joe Biden’s “Build Back Better” plan in 2021, such as bloating the legislation with a partisan wishlist and relying on budget gimmicks to mask its outrageous costs. But as House Republicans unveiled and began marking up legislative text this week, the details proved to be even worse than anticipated.
They also relied on even more budget gimmicks than expected to hide the legislation’s true cost. It was widely anticipated that Trump’s many campaign proposals, such as exempting auto loan interest payments, overtime income, and tips from income taxes, would be made temporary to lower the bill’s sticker price. But the bill included several additional tax cuts, such as an enhanced Child Tax Credit (for everyone but low-income families) and a larger standard deduction, which are also set to expire after only a few years.
In reality, Republicans don’t intend to allow any of these provisions to ever expire. They used the same tactic to reduce the scored cost of the Tax Cuts and Jobs Act (TCJA) in 2017, only to now argue that preventing the scheduled expiration of that bill’s tax cuts should cost nothing at all because they are not creating “new” tax cuts. As a result, the debt impact of Republicans’ BBB would be substantially higher than they claim. While the “official” cost of the bill’s tax cuts is roughly $3.8 trillion over 10 years, they would actually cost around $5.3 trillion — plus as much as $900 billion in interest costs — if enacted permanently.
These problems are only likely to grow worse as Republicans make changes needed to win over uncommitted votes. Blue-state Republicans in the House are demanding a far greater increase to the $10,000 cap on State and Local Tax (SALT) deductions than the $30,000 level included in the bill, which they called an “insulting” offer. A critical mass of members in both the House and Senate have opposed the bill’s rollback of clean-energy tax credits from the Inflation Reduction Act, which they say will kill emerging technologies and cost their constituents jobs. Many oppose the bill’s deep Medicaid cuts that would leave 7.6 million more Americans uninsured — with one senator referring to them as “morally wrong and politically suicidal.” Meanwhile, Conservative hardliners in both the House and Senate are still demanding deeper spending cuts that might be more fiscally responsible but could make the bill even more difficult for swing-district Republicans to support.
Ironically, Republicans are repeating the same mistakes that helped sink President Biden’s BBB plan in 2021. That bill also relied on arbitrary expiration dates to cram in a disjointed wishlist of policy priorities, even if they risked exacerbating budget deficits and inflation. As a result, the version that passed the House in 2021 lacked a clear strategy and made it easier for critical lawmakers to walk away when inflation continued to worsen. Yet Republicans have taken this playbook to an even greater extreme by proposing a bill that would add roughly three times as much to the annual budget deficit in its worst year as Biden’s BBB would have — despite the fact that inflation remains a pressing concern for voters.
If Republicans continue down this road, their BBB could very well fall apart entirely as Biden’s did. However, if they do successfully manage to jam their partisan megabill through Congress, the fallout would be substantially worse: stuffing the tax code with a myriad of giveaways, cutting critical social services for working families, and risking another round of inflation by blowing up the budget deficit – leaving Americans to pay the price for years to come.
Uncapping the SALT deduction would provide nearly three-quarters of the benefits to households making over $430,000, with an average annual tax cut of roughly $140,000 for the top 0.1% of households.
For many, annually navigating a tax code they overwhelmingly feel is unfair and complex is a frustrating experience. But the Trump administration’s many new tax pledges — including no taxes on tips, auto loan interest, overtime pay, and more — could make it even worse. If enacted, they would provide only limited benefits to working Americans, while further complicating the tax code with arbitrary exemptions and loopholes.
Tax breaks should always strike a balance between the benefits they are creating and the costs they impose. While tax provisions can be used for laudable goals — including stimulating investment, promoting retirement savings, or reducing poverty — excessive or poorly designed exemptions can erode the tax base, create loopholes, and increase the cost of compliance for taxpayers and administrators. To be worthwhile, a tax break should deliver more in benefits than it costs in complexity. Trump’s various proposals don’t come close.
Trump argues that his “no tax” proposals are intended to alleviate the cost burden of middle and lower income Americans, but few would receive significant benefits. Most tipped workers already pay little to no income tax, so the exemption would do almost nothing for them. And worse, a broad tax exemption could even give high-earners a new way to game the system by reclassifying their wages as tips. Moreover, providing tax exemptions based on how people earn their paychecks inherently leaves many working Americans behind. While a waitress might qualify for tax exemptions on tip or overtime income, a truck driver or teacher wouldn’t.
But while most Americans receive few benefits from Trump’s “no tax” proposals, they will still be stuck with the costs. Since enacting these broad exemptions drastically shrinks the tax base, taxpayers who are unable to qualify for special treatment would be left to shoulder a greater share of the overall tax burden. Even if this doesn’t lead to immediate tax increases, the lost revenue from these expensive proposals would add to the national debt, crowding out vital government programs, driving up borrowing costs, and forcing an even larger tax hike in the future.
Furthermore, when numerous exemptions add layers of complexity to the tax code, it becomes more difficult for taxpayers to understand what they owe and for administrators to ensure the law is being followed. This creates opportunities for individuals and businesses to avoid taxation, whether through intentionally exploiting loopholes or unintentionally misinterpreting complex rules. A complicated tax code also becomes more difficult for the IRS to enforce, resulting in a larger “tax gap” — the difference between taxes owed and taxes actually collected — which both costs the federal government billions in lost revenue and undermines the fairness of the tax code
As Congressional Republicans begin to craft major tax legislation enabled by the budget resolution they passed last week, they should aim to craft a tax code that is simpler, fairer, and easier to navigate – not one that is even worse than the status quo.
During the busiest time of the year, the Trump administration has laid off or bought out roughly one-third of IRS staff, with plans for even more layoffs in the future. This will disrupt the agency’s progress in both modernizing its systems and improving its customer service and enforcement capabilities.
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.
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.
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.
WASHINGTON — With key provisions of the Tax Cuts and Jobs Act set to expire at the end of 2025, Congress faces a critical opportunity to reshape the nation’s tax code. Amid debates over how to balance revenue needs with economic fairness, the Progressive Policy Institute (PPI) offers a bold new framework to transform how intergenerational wealth transfers are taxed.
A new report titled “A Better Way to Tax Unearned Income,” authored by PPI Vice President for Policy Development Ben Ritz and Policy Analyst Alex Kilander, offers federal policymakers a detailed technical framework for a new inheritance tax that would progressively raise revenue and counter the political vulnerabilities that have hobbled the current estate tax. If enacted, PPI’s proposal could generate several hundred billion dollars in revenue over the next decade without slowing economic growth, providing tax writers with a promising option to extend some income tax cuts for workers without increasing the national debt.
“Nobody should pay more in taxes on income they earn through their own hard work or risk-taking investments than they do on the income they inherit simply for being born into a wealthy family,” saidRitz. “Every dollar raised by taxing unearned inheritance is one that does not need to be raised by taxing the earned incomes of working Americans.”
Although polls consistently show high levels of public support for taxing wealthy Americans who are exclusively affected by the current estate tax, the tax itself has become deeply unpopular with the general public after years of anti-tax advocates 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. The estate tax is further undermined by large exemptions and loopholes that make it easy to avoid for even the wealthiest families.
PPI’s proposal tackles these challenges by:
Replacing the estate tax with a system that instead taxes inheritance when it is received by heirs as income
Reforming the taxation of capital gains, gifts, and trusts to ensure the system cannot be exploited by wealthy Americans
Expanding protections to prevent heirs from needing to sell family-owned farms, homes, or small businesses to pay their tax obligations
The new report expands upon one of six dozen ideas PPI’s Center for Funding America’s Future proposed this summer as part of a comprehensive blueprint for putting the federal budget on a path to balance within 20 years. That blueprint can be found here.
Launched in 2018, the Progressive Policy Institute’s Center for Funding America’s Future works to promote a fiscally responsible public investment agenda that fosters robust and inclusive economic growth. To that end, the Center develops fiscally responsible policy proposals to strengthen public investments in the foundation of our economy, modernize health and retirement programs to reflect an aging society, transform our tax code to reward work over wealth, and put the national debt on a downward trajectory.
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.
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.
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.
TRADE FACT OF THE WEEK: Tariffs are a poor form of taxation.
THE NUMBERS: Countries’ reliance on tariffs as share of government revenue* –
County / Region
Percentage
Gambia
41.6%
West Bank and Gaza (pre-war)
37.6%
Liberia
30.0%
St. Lucia
29.2%
United States Trump/Vance proposal
25.6%?**
Argentina
24.6%
Bahamas
19.6%
Somalia
18.0%
India
4.5%
China
2.9%
Brazil
2.0%
United States current
1.8%
Canada
1.6%
Korea
1.4%
New Zealand
1.3%
Japan
1.2%
United Kingdom
0.7%
European Union
0.5%
* World Bank, Taxes on International Trade (% of Revenue)
** Assuming the $2.18 trillion personal income tax is scrapped and replaced with a tariff yielding the maximum feasible revenue, likely $780 billion at rates of 50%.
WHAT THEY MEAN:
In PPI’s newest paper, It’s Not 1789 Anymore: Why Trump’s Tariff Agenda Would Hurt America, Fiscal Policy Analyst Laura Duffy examines the Trump campaign’s apparent hope to replace the U.S. income tax with a much higher tariff. Drawing from modern analysis and the Tariff Act of 1789 — Congress’ first-ever tax bill — she bluntly concludes that:
“Contrary to Trump’s claims that imposing Depression-Era level tariffs will restore America to a supposed former state of greatness, leaders of the past long recognized the weaknesses of relying on tariffs for revenue, and their concerns offer valuable lessons today. In particular, tariffs:
1. Fail to raise enough revenue to finance a modern federal government
2. Are especially non-transparent taxes that invite preferential treatment
3. Undermine equity by imposing arbitrarily unequal tax burdens on different households
4. Cause damage to downstream industries and the economy as a whole.”
Background: At least twice this fall, Mr. Trump has suggested replacing the U.S. personal income tax, and possibly the corporate income tax, with tariff revenue. This would scrap a broad-based revenue tax and swap in a big national surcharge on energy, OTC medicines, clothes, food, and other goods purchased abroad. His argument for this is a claim that in the 19th century (until the creation of estate and income taxes in the 1913 and 1916 Revenue Acts), the U.S. government relied mainly on tariffs for revenue; that during the 1890s, a period of particularly high tariff rates, the U.S. was the “wealthiest we ever were” (quite wrong: see “Further Reading” for a look at that impoverished and unpleasant decade); and that 19th-century tax policy is therefore right for 21st-century America.
To put real-world numbers to this, in 2023, the personal income tax raised $2.18 trillion. This was just under half of the Treasury’s $4.44 trillion total. Tariffs got $0.08 trillion, or 1.8%. Tax scholars report that the most money a theoretical high-tariff system could raise (setting aside the trade policy* and other economic problems it could cause) is about $780 billion. Assuming repeal of personal income taxes but no other tax changes, this would mean about 25.6% of U.S. revenue. No “developed” country now uses tariffs for more than 2.7% of revenue; World Bank tables find Gambia, whose government gets 41.6% of its money from tariffs, the most tariff-reliant country in the world. At 25.6%, the U.S. would be below Gambia, but in the neighborhood of tariff-heavy jurisdictions such as Somalia, the Bahamas, pre-war West Bank and Gaza, Nepal, and Ethiopia — that is, countries too small, politically disordered, and/or poor to operate professional bureaucracies able to assess and collect revenue from broader sources such as income, wealth, or consumption.
Going to the really primary sources, Duffy notes that the original U.S. tax writers in 1789 — sophisticated analysts such as then-House of Representatives figures James Madison and his Federalist sparring partner Alexander Hamilton at the Treasury Department — did not choose tariffs as the main early-republic and 19th-century revenue source because they believed tariffs were a particularly great form of taxation. Nor did they think a tariff would somehow off-load taxation onto foreigners. (With the Tea Party events and “taxation without representation” in recent memory, no early-republic politician would ever make such a claim.) Rather — much like governments in today’s high-tariff small island state and least-developed countries — they were aware that with no professional civil service and no way to calculate income or consumption, the U.S. could not tap broader revenue sources. By contrast, tariffs are easy to collect – seaports are few, and ship arrivals easy to monitor – and therefore the best of their unattractive options.
What would happen if someone tried to cut and paste this 18th- and 19th-century approach into the 21st century? Duffy makes the obvious point that it is not 1789 anymore, our options are better than theirs, and a Trump-like attempt to return to the distant tariff-based tax past would immediately run into one big problem and then cause another three:
(1) Tariffs can’t raise enough money: Very high tariff rates cause trade to collapse rather than raising money; with $3.1 trillion in goods imports and the theoretical maximum tariff revenue at $0.78 trillion, the income tax/tariff arithmetic doesn’t work at all. Replacing a $2.18 trillion income tax with an $0.78 trillion tariff system would nearly double annual U.S. fiscal deficits to $3.1 trillion — even before adding in the effects of lower growth, foreign retaliation, and the Trump/Vance campaign’s many additional trillions of dollars in tax cuts and spending increases over the next decade. The likely result is fiscal crisis and some combination of interest spike, inflation, and collapse of public services.
(2) Tariffs are less transparent than income or consumption taxes: Since tariffs are more ‘opaque’ than income, consumption, or other broad-based taxes, more reliance on tariffs would mean less public understanding of taxation. On the government and policy side, the Treasury Department publishes no annual analysis of tariff revenue by product or incidence by income level; in daily life, American shoppers never learn how much the tariff system adds to the prices they pay for shoes, food, bicycles, etc. The extreme complexity of nearly all tariff systems amplifies this failing. Even the 1789 Tariff Act, Duffy shows, immediately evolved from the simple across-the-board 5% rate Madison proposed to an unwieldy system awarding well-connected industries with especially high rates on nearly a hundred products — from rope, beer, nails and tacks, to soap and shoes. The 1789 Act’s descendant, today’s 11,414-line U.S. Harmonized Tariff Schedule, is far worse (though less important as a revenue source), with only a few specialists knowing the main rates and fewer still knowing who pays. Trumpist ideas, with their new layers of complexity, would spread this opacity across half the tax system.
(3) Tariffs are by nature regressive and typically get worse over time: Reliance on tariffs makes taxation more ‘regressive’ and tougher on low-income and working people. In principle, as a tax on goods but not services, a tariff system taxes low-income families more heavily than wealthy households, because lower-income families spend more of their income on clothes, food, and home goods. Likewise, tariffs tax goods-intensive businesses (e.g., retail, manufacturing, construction, and farming) more than they tax investment- or service-buying industries such as real estate, law, or financial services. And in real life, 19th-century experts — say, Albert Gallatin, Treasury Secretary for the Jefferson and Madison administrations — knew by experience that the opacity of the tariff systems makes them easy for wealthy people and businesses with direct connections to government to manipulate. This means tariff systems usually grow more regressive over time, as rates fall on expensive luxuries but stay high for cheap goods whose buyers don’t know they’re paying. Again, the contemporary U.S. Harmonized Tariff Schedule illustrates the point, taxing cheap stainless steel spoons much more heavily than sterling, infant formula more than champagne, polyester shirts more than silks, and women’s clothes more than men’s.
(4) Economic harm: Finally, tariff increases invite economic harm — directly through damage to ‘downstream’ industries buying tariffed goods, and indirectly by encouraging foreign governments to retaliate against successful U.S. industries. Mr. Trump’s tariff increase on fertilizer, for example, will raise farming costs and simultaneously invite angry foreign governments to block American agricultural exports. In the same way, a new tax on metals, paint, and wiring, meanwhile, means higher costs and lost competitiveness for American auto plants and machinery manufacturers, higher prices for families buying homes, and more retaliation.
All this set out, here’s Ms. Duffy’s close:
“Replacing tariffs with direct taxes on incomes [in the 1913 and 1916 bills] was a huge step in making American public finance more rational and equitable. … Returning to tariff-heavy policies, as suggested by Trump, would be fiscally irresponsible and counterproductive. Beyond their revenue-generating limitations, tariffs are extremely susceptible to lobbying from protected industries at the expense of other businesses, workers, and consumers. Finally, the distortionary effects of returning to pre-modern tariff rates would be extremely damaging to the American economy and undermine the strong wage and job gains the country has seen in the past three years.”
* For example, abrogation of international agreements, and of basic Constitutional principles if a hypothetical Trump administration attempted to impose a tariff by decree; unprovoked harm to U.S. allies; retaliation against successful U.S. farm and manufacturing industries; etc.
FURTHER READING
Laura Duffy on Trumpism, tariffs as taxation, the Tariff Act of 1789, transparency and regressivity, and the folly of using tariffs as a 21st-century revenue source.
U.S. background:
Revenue from income taxes, tariffs, and other sources from OMB’s Historical Tables. See Table 2.1 for overall revenue shares, and Table 2.5 for “other revenue” sources for tariffs, excises, and other small taxes.
And the 1890s weren’t a good time at all. Four points:
Life and health: An American’s average life expectancy in 1900 (Table 13) was 47. To put this figure in context, World Bank tables find the world’s lowest current national life expectancies in Chad and Lesotho, both at 53. The short lives of 1890s Americans reflected very high infant mortality — more than one child in ten died before the age of one — and frequent death in early life and middle age to accident, infection, and contagious disease. (No vaccines, blood transfusion, antibiotics, or anti-inflammatory drugs.)
Wealth and poverty: Americans were poor and spent most of their money on life necessities. Per BLS’ “100 Years of Consumer Spending,” the average family spent 58% of its income on food and clothes as against today’s 12%. Even the top end of “Gilded Age” society had only 8,000 automobile owners and 600,000 mostly communal telephones, in a country of 76 million.
Civil rights: Work and daily life in 1890s America were deeply unjust and getting rapidly worse. Between 1890 and 1895, 16 states adopted segregationist constitutions and laws covering marriage, voting, education, railroads, streetcars, and other matters, validated by the Supreme Court’s 1896 “Plessy v. Ferguson” decision. The National Archives remembers.
Economy: Whatever the impact of high tariffs, the 1890s economy was bad. The decade’s main economic event, the four-year Depression following the “Panic of 1893,” introduced the word ‘unemployment’ to common English-language discourse. It also prompted the first mass protest in U.S. history, when “Coxey’s Army” of 6,000 desperate Ohio and Pennsylvania workers marched to the National Mall to appeal (unsuccessfully) for federal relief.
ABOUT ED
Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.
Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.
Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.
Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.
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.
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.
###
Media Contact: Ian O’Keefe – iokeefe@ppionline.org
“[W]e should find no advantage in saying that every man should be obliged to furnish himself, by his own labor, with those accommodations which depend on the mechanic arts, instead of employing his neighbor, who could do it for him on better terms.”
— James Madison
In a stark break from nearly a century of fiscal and trade policy, former president Donald Trump has made imposing significant import tariffs a central part of his policy agenda for a second term. At various times, he has campaigned to put a 10% to 20% tariff on all imports and a 60% tariff on goods from China, and he has even speculated about completely replacing the income tax with tariff revenue. If he were elected and made good on these promises, the average tariff rate would soar to levels not seen since Congress imposed the Smoot-Hawley Tariff of 1930.
Though Trump’s proposals to base the tax system on tariffs have been virtually unheard of in the post-World War II era, debates over tariffs are as old as our country itself. During the 18th and 19th centuries, when the federal government’s obligations were dramatically smaller than today, tariffs were indeed the major source of tax revenue. Contrary to Trump’s claims that imposing Depression-Era level tariffs will restore America to a supposed former state of greatness, leaders of the past long recognized the weaknesses of relying on tariffs for revenue, and their concerns offer valuable lessons today. In particular, tariffs:
1. Fail to raise enough revenue to finance a modern federal government.
2. Are especially non-transparent taxes that invite preferential treatment.
3. Undermine equity by imposing arbitrarily unequal tax burdens on different households.
4. Cause damage to downstream industries and the economy as a whole.
As a result of these weaknesses, the United States (in line with every other advanced economy) largely abandoned tariff-heavy fiscal policy by the mid-20th century to facilitate the federal government’s expanding socioeconomic goals and greater role in the world. Revisiting the contentious history of tariffs in the United States — going all the way back to the Tariff Act of 1789 — reveals why Trump’s promise to return to using tariffs as a basis of tax policy would severely undermine the United States’ fiscal stability, tax fairness, and economic growth today.
WASHINGTON — With major provisions of the Tax Cuts and Jobs Act set to expire at the end of next year, the president and Congress elected less than two weeks from today will have a historic opportunity to craft a new tax code that is fairer, more pro-growth, and more fiscally responsible. The Progressive Policy Institute (PPI) today released a new report, “A Real Tax Cut for Working Americans: Repealing and Replacing the Payroll Tax,” that offers a bold proposal to do just that by repealing the regressive and anti-work payroll tax, which is the biggest tax 123 million American households pay on their hard-earned wages.
This new publication, which is authored by Ben Ritz, Vice President of Policy Development for PPI, and Laura Duffy, a Policy Analyst at PPI’s Center for Funding America’s Future, is a key output of PPI’s Campaign for Working America, 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 cultural issues like immigration and education, and rally public support for the defense of democracy and freedom globally.
“Donald Trump has spent months pandering to workers by offering to exempt everything from tips to overtime pay from taxation. But these proposals would collectively add trillions of dollars to inflationary budget deficits while providing little benefit to the overwhelming majority of working Americans who earn most of their income through ordinary wages,” said Ritz. “PPI’s proposal, on the other hand, would increase most workers’ take-home pay while reducing our nation’s unsustainable deficits.”
The report proposes adopting a value-added tax to replace the revenue lost by repealing the payroll tax, which would spread the burden of taxation from workers’ wages to other forms of business income and previously accumulated wealth. PPI estimates that the swap could increase after-tax income for up to 90% of working families while also reducing annual budget deficits by up to $300 billion. It would also lower marginal tax rates on most workers’ wages, boosting individuals’ incentives to work and driving the innovations that grow our economy.
“Virtually all of the United States’ peer countries rely on value-added taxes to finance their social programs because they’re good at raising revenue in a relatively pro-work and pro-growth way,” Duffy added. “Transforming the U.S. tax code to tax consumption instead of payrolls would therefore be a progressive and fiscally responsible way to reward work and improve the lives of working families.”
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 visitingprogressivepolicy.org.Find an expertat PPI andfollow uson Twitter.
###
Media Contact: Ian O’Keefe – iokeefe@ppionline.org
Regardless of who wins in November, the next president and Congress will have to rewrite our nation’s tax code. At the end of 2025, the individual tax provisions in the Tax Cuts and Jobs Act (TCJA) enacted by Republicans in the first year of Donald Trump’s first term will expire. Simply extending all the expiring provisions would saddle future generations with at least $4.6 trillion in debt over the next ten years, with nearly half of the benefit going to the top 5% of households. Working Americans will pay the price for any unfunded extension of these tax cuts, whether it is through higher inflation today or higher taxes needed to fund larger interest payments on the ballooning national debt down the road.
Donald Trump seems to be hoping that working Americans will give him a second term and overlook the costs of extending his 2017 tax cuts by sweetening the pot with additional tax cuts that sound better targeted toward their interests, such as by exempting tips and overtime pay from taxation. But while working-class Americans disproportionately work jobs with hourly wages that are supplemented by tips and overtime pay, many have income tax liabilities that are too low to significantly benefit from such a tax cut. Meanwhile, many working Americans who don’t earn tip income or overtime pay would end up facing higher tax burdens than higher-earning workers who do, such as service workers at high-end establishments.
Trump has also proposed income tax cuts for high-income Social Security beneficiaries that would do nothing for working families other than hasten the insolvency of the program and put their benefits in greater jeopardy. The hole will be even deeper because Trump has also called for repealing one of the few TCJA provisions that actually raised revenue — a $10,000 limit on the amount of state and local taxes that itemizers can deduct from their federal taxes, which would effectively result in a $2 trillion transfer from working families and future generations to the highest-income households. Altogether, the pandering grab bag of Trump Tax Cuts 2.0 would more than double the cost of extending the original.
But Trump’s “plan” to pay for all this by imposing staggeringly high tariffs of 10% to 20% on all imports and up to 60% on goods from China is potentially his worst idea so far. Tariffs are largely passed through to consumers, so Trump’s tariff plan would raise the prices of everyday goods bought disproportionately by working families. It would also cause far greater economic harm by raising input prices for domestic industries, weakening the market for American exports, inviting retaliatory tariffs from other countries, and redirecting investment away from heavily impacted industries such that it would destroy far more jobs than it creates. Plus, the declines in both trade and household incomes that Trump’s tariff would cause mean that his idea would come nowhere close to paying for all of his other tax cuts, leaving current and future generations of working families to foot the bill.
Instead of expanding TCJA’s regressive and costly tax provisions, PPI proposes what would actually be the biggest tax cut on working Americans’ wages in history: repealing the regressive payroll tax. Unlike Donald Trump, who would add the cost of his unaffordable and inflationary tax cuts to the national debt, PPI proposes to more than make up for the lost revenue by adopting a progressive consumption tax. This transformational shift in the tax code would slash taxes for the vast majority of American workers, particularly the 123 million lower- and middle-income households who pay more in payroll taxes than in income taxes, while also reducing the deficit. Our approach would put working families first with a tax code that is both more progressive and more pro-growth.
“Tariffs are taxes—taxes that weigh most heavily on the poorest Americans. Protectionism is, and always has been, regressive, a fact most brutally illustrated by the tariff tables themselves, according to figures compiled by Ed Gresser of the Progressive Policy Institute.”
The next administration must confront the consequences that the American people are finally facing from more than two decades of fiscal mismanagement in Washington. Annual deficits in excess of $2 trillion during a time when the unemployment rate hovers near a historically low 4% have put upward pressure on prices and strained family budgets. Annual interest payments on the national debt, now the highest they’ve ever been in history, are crowding out public investments into our collective future, which have fallen near historic lows. Working families face a future with lower incomes and diminished opportunities if we continue on our current path.
The Progressive Policy Institute (PPI) believes that the best way to promote opportunity for all Americans and tackle the nation’s many problems is to reorient our public budgets away from subsidizing short-term consumption and towards investments that lay the foundation for long-term economic abundance. Rather than eviscerating government in the name of fiscal probity, as many on the right seek to do, our “Paying for Progress” Blueprint offers a visionary framework for a fairer and more prosperous society.
Our blueprint would raise enough revenue to fund our government through a tax code that is simpler, more progressive, and more pro-growth than current policy. We offer innovative ideas to modernize our nation’s health-care and retirement programs so they better reflect the needs of our aging population. We would invest in the engines of American innovation and expand access to affordable housing, education, and child care to cut the cost of living for working families. And we propose changes to rationalize federal programs and institutions so that our government spends smarter rather than merely spending more.
Many of these transformative policies are politically popular — the kind of bold, aspirational ideas a presidential candidate could build a campaign around — while others are more controversial because they would require some sacrifice from politically influential constituencies. But the reality is that both kinds of policies must be on the table, because public programs can only work if the vast majority of Americans that benefit from them are willing to contribute to them. Unlike many on the left, we recognize that progressive policies must be fiscally sound and grounded in economic pragmatism to make government work for working Americans now and in the future.
If fully enacted during the first year of the next president’s administration, the recommendations in this report would put the federal budget on a path to balance within 20 years. But we do not see actually balancing the budget as a necessary end. Rather, PPI seeks to put the budget on a healthy trajectory so that future policymakers have the fiscal freedom to address emergencies and other unforeseen needs. Moreover, because PPI’s blueprint meets such an ambitious fiscal target, we ensure that adopting even half of our recommended savings would be enough to stabilize the debt as a percent of GDP. Thus, our proposals to cut costs, boost growth, and expand American opportunity will remain a strong menu of options for policymakers to draw upon for years to come, even if they are unlikely to be enacted in their entirety any time soon.
The roughly six dozen federal policy recommendations in this report are organized into 12 overarching priorities:
I. Replace Taxes on Work with Taxes on Consumption and Unearned Income II. Make the Individual Income Tax Code Simpler and More Progressive III. Reform the Business Tax Code to Promote Growth and International Competitiveness
IV. Secure America’s Global Leadership
V. Strengthen Social Security’s Intergenerational Compact
VI. Modernize Medicare
VII. Cut Health-Care Costs and Improve Outcomes
VIII. Support Working Families and Economic Opportunity
IX. Make Housing Affordable for All
X. Rationalize Safety-Net Programs
XI. Improve Public Administration
XII. Manage Public Debt Responsibly
Surprisingly, President Biden and former President Trump have common ground on a key workforce policy: more apprenticeships. Both presidents support “earn while you learn” opportunities by incentivizing apprenticeships with employers and using their executive powers to expand them. Earlier this year, President Biden issued an executive order focused on expanding Registered Apprenticeship programs in the federal government, while former President Trump established an apprenticeship advisory committee — led by notable CEOs — aimed at broadening their availability across the country.
A bipartisan policy of “more apprenticeships” is especially relevant now, when most good-paying jobs require at least some postsecondary education and employers report a serious shortage of skilled workers. It’s a policy that meets two needs with one deed — apprenticeships help reduce student debt and address employers’ workforce needs in a tight labor market. Tax incentives for apprenticeships have even gained bipartisan support in Congress, uniting conservatives and progressives. They have been successfully implemented in countries like Canada, the U.K., and Australia, where they have far more employer-sponsored apprenticeships on a per-capita basis.
Amidst this need and interest, many Americans still view a four-year degree as the only path to economic security. Yet the reality is that the majority, 62% of American adults, don’t have one. What’s more, the college earnings premium is declining due to skyrocketing tuition costs and low completion rates, and fewer young people attend college now than in 2018.
