In Pennsylvania, Senate candidate Mehmet Oz earned President Donald Trump's endorsement for being "very strong" on tax cuts. In Georgia, Republican Herschel Walker says it's "not right" to tax the wealthy. And Arizona Representative David Schweikert has proposed a federal law to limit state taxes on the rich.
Grand tax cuts have long been a centerpiece of Republican economic orthodoxy, appealing to the well-to-do who want to keep more of their income and stock market gains.
There's one problem, economists say: Now perhaps more than ever, that message might not resonate.
It's not that the wealthy are suddenly willing to pay more to Uncle Sam. Rather, rising interest rates and high inflation have made proposals to reduce taxes a specter of possible economic calamity, with their potential to drive up fiscal deficits. That's a lesson former U.K. Prime Minister Liz Truss quickly learned this month, after her plan for a slew of unfunded tax cuts tanked markets and ultimately forced her to resign.
While the U.S. has a number of economic advantages over the U.K., market turmoil this year in the U.S. — which has erased more than $6.2 trillion in American household wealth — shows just how dangerous it is, for either political party, to take lightly the threat of a
"The days of trillion-dollar tax cuts are likely over," said Brian Riedl, a former Senate Republican aide who's now a senior fellow at the conservative Manhattan Institute. "The deficit is just too big, spending is growing too fast, interest rates are rising too fast and politically tax cuts just don't pack much of a punch anymore."
After decades of unfunded cuts that failed to live up to GOP promises to pay for themselves, there aren't many taxes left to reduce. The current 21% corporate tax rate is the lowest since the Great Depression and the 37% top individual rate is among the smallest settings in recent history. Pushes to lower U.S. taxes further may fade over time as economic realities set in. A series of fiscal challenges lies ahead, including raising the debt ceiling next year and the looming depletion of the Social Security trust fund in roughly the next decade.
Core assumptions that underpinned record growth in recent years no longer hold.
Even so, for Republicans, tax cuts and reducing government spending still unite a party that has grown increasingly fractured in the wake of former President Trump's refusal to accept the results of the 2020 election, and due to infighting over trade and immigration policy.
In fact, the first item on House Republicans'
An end to the tax-cut era would be a blow to corporations and wealthy individuals who have spent decades and tens of billions of dollars building up lobbying infrastructure to push for reductions, which has consistently paid off when Republicans control the White House.
Federal lobbying spending in 2022 is set to reach records, based on expenditures so far this year. Citigroup, FedEx and Intel were three of the 1,715 companies and industry groups that reported lobbying on taxes in 2022 disclosures, according to
Democrats may also be constrained by the lack of fiscal wiggle room. It could mean their spending programs — health-care for all, universal preschool and free college — would need to be offset by large tax hikes, something that has caused moderate party members to balk.
Progressives in California have seized on the current economic conditions to try tax-hike ideas that have failed to gain traction at the federal level. Voters there will decide next month on a
In Washington, Republicans haven't held enough power to try tax cuts recently. But they've remained popular at the state level, with Utah, Georgia and Indiana among those that have cut income-tax rates this year.
With a larger economy and the world's reserve currency, the U.S. doesn't face as much risk from lowering taxes, said Kimberly Clausing, who until May was a top official in President Joe Biden's Treasury Department.
"There's more leeway for us to do things that are financially irresponsible without the consequences coming home to roost as quickly," said Clausing, now a professor at UCLA. "But Congress is known for being somewhat provincial and focusing a lot on the American perspective and ignoring the likely market reaction."
A lucrative deduction for luxury vehicles used at least half the time for business will start tapering come 2023.
Unfunded major tax-cut packages have become commonplace in Washington in recent decades, a trend started by President George W. Bush in 2001 and 2003. President Barack Obama ended up making many of those tax cuts permanent a decade later — the price for winning approval for some of his own agenda items.
Trump followed with his $1.5 trillion 2017 tax cut. If history is any guide, those rate cuts and reductions for small businesses, which are set to expire at the end of 2025, will be made permanent no matter which party controls Washington.
Congress has lowered tax rates without working to balance those reductions by eliminating the scores of small, but collectively expensive, deductions and credits for specific groups, Doug Holtz-Eakin, a former director of the Congressional Budget Office, highlighted.
"The missing piece of this has always been broadening the base — get rid of the special treatments and loopholes," said Holtz-Eakin, who now is the president of the American Action Forum.
Members of both parties aren't used to having to take deficits and interest rates seriously, because they haven't been a problem in recent decades, the Manhattan Institute's Riedl said.
"We've gotten the idea that fiscal crises are impossible and that debt limits don't matter," said Marc Goldwein, a senior vice president for the Committee for a Responsible Federal Budget. "The U.K. is a wakeup call that this simply isn't true."
