The tax cuts enacted under the first Trump administration largely expire at the end of 2025. President Trump and his fellow Republicans are eager to extend them, but doing so without concurrent spending cuts would raise deficits by more than $5 trillion through 2035.
How might policymakers pay for extending the 2017 tax cuts? Various sources suggest that the new administration is considering broad cuts to spending programs, including Medicaid and the Supplemental Nutrition Assistance Program, also known as SNAP or food stamps. This one-two punch would leave almost all low-income households — as well as many middle- and high-income households — worse off.
Worse still, the distribution of the extended cuts would be quite regressive. Only 1.7% of the benefits would go to the bottom 20% of households by income, compared with nearly 65% to the top quintile and more than 23% to just the top 1%. The average tax savings for the bottom quintile would be just $130 a year, compared with $70,000 a year for the top 1%. And the super-rich, top 0.1% would enjoy an average annual tax savings of more than $275,000.
Estimates from the Urban-Brookings Tax Policy Center’s microsimulation model illustrate these effects. If an extension of the tax cuts were financed by reducing federal assistance equally across households, more than three-quarters of families would be worse off. In the bottom two income quintiles, more than 99% of households would be worse off, facing an average annual tax increase of $1,515. Even in the middle fifth, 76% of households would be worse off.
And if the spending cuts target safety net programs like those the administration is reportedly eyeing — as opposed to more general spending cuts — poor households will be hurt even more. Even if the spending cuts were proportional to household income, 63% of households would be worse off.
Proponents of tax cuts often argue that they promote economic growth and help everyone across the income spectrum. However, a recent Congressional Budget Office analysis found that extending the expiring income tax provisions would produce only a small, short-term bump in gross domestic product. After just four years, by increasing the federal budget deficit, the cuts would lead to slightly lower GDP growth than if they were allowed to expire.
Meanwhile, several recent analyses of decades of policy in the wealthy nations of the Organization for Economic Co-operation and Development found that cutting taxes for the rich has no meaningful effect on economic growth. But it does significantly exacerbate income inequality.
We now have ample evidence that investing in children’s health, education, nutrition and other resources pays long-term dividends, both to the people directly affected and the economy at large. That suggests Congress should allow the tax cuts to expire and instead invest in programs that serve lower- and middle-income children and families. Renewing the 2017 tax cuts and financing them with spending cuts is the right policy only if the “problem” is that the poor are not poor enough and the rich are not rich enough.
William Gale is a co-director of the Urban-Brookings Tax Policy Center and was a senior economist for President George H. W. Bush’s Council of Economic Advisers.
