Note: The following is the testimony of Daniel Bunn, President & CEO of Tax Foundation, before the US Senate Committee on Finance hearing on September 12, 2024, titled, “The 2025 Tax Policy Debate and Tax Avoidance Strategies.”
Chairman Wyden, Ranking Member Crapo, and members of the committee, thank you for providing the opportunity to discuss the 2025 tax debate and tax avoidance strategies. I am Daniel Bunn, President of the Tax Foundation, a nonprofit think tank dedicated to studying tax policy at all government levels.
The stakes for the expiring tax provisions next year are significant. If Congress does not act, 62 percent of households will see a tax increase in January 2026. Proposals from both political sides raise questions about policy design, fiscal impact, and economic outcomes. A multi-trillion-dollar gap separates the positions of the major parties on key tax policy issues.
Concerns about tax avoidance should motivate bipartisan policy shifts toward a simpler, more neutral tax code devoid of numerous deductions, credits, and special interest provisions.
In my testimony, I will highlight three key principles essential for the upcoming debate: simplicity, neutrality, and trade-offs. While the Tax Cuts and Jobs Act (TCJA) made progress, the tax code still comprises expiring, confusing, and duplicative provisions. Simplification can offer relief to taxpayers without escalating costs or benefiting the tax advisory industry excessively. Neutrality should guide tax code design to foster growth and maintain US competitiveness.
Given our current fiscal landscape, evaluating trade-offs is even more crucial. Economic growth is vital to managing our debt, and tax policy can drive both growth and revenue. Economic analysis shows that certain options generate stronger growth and greater benefits for Americans compared to others. My colleagues and I at the Tax Foundation are ready to assist further as you explore various policy options in the upcoming months. Prioritizing simplicity and neutrality will ultimately benefit Americans the most.
Simplification Eases Tax Filing for Millions
Without congressional action, taxpayers will feel the negative impact of next year’s tax expirations immediately. Tax withholding tables will adjust, reducing take-home pay and complicating tax filing for millions. With most individual changes in the TCJA expiring in 15 months, analyzing what worked well can guide efforts to simplify the tax code further.
The expansion of the standard deduction and higher threshold for the alternative minimum tax (AMT) were powerful provisions that simplified tax filing for individuals.
The Tax Foundation, using IRS estimates, calculates that changes to the AMT and the standard deduction saved taxpayers up to $10 billion annually in compliance costs. However, other TCJA provisions, such as the Section 199A deduction, increased compliance costs. Improvement opportunities abound.
Consolidating tax brackets, limiting deductions, credits, and exemptions, and lowering marginal rates can simplify taxes. Further simplification could eliminate all itemized deductions to offset the revenue reductions from lowered rates and a larger standard deduction.
A larger standard deduction, lower marginal rates, and an expanded child tax credit were partially paid for by eliminating personal exemptions and limiting itemized deductions. These changes led nearly 90 percent of taxpayers to claim the standard deduction in 2018, compared to about 70 percent in 2016.
Limiting itemized deductions played a crucial role in tax reform. It is important to place those limitations in context to effectively simplify future provisions. For example, the $10,000 limit on the state and local tax (SALT) deduction and the $750,000 limit on mortgage interest deduction for home values, along with other changes, raised $668 billion in the TCJA.
In the context of the increased AMT, which denies SALT deductions, these changes tell an interesting story. In tax year 2015, 10.3 million taxpayers calculated AMT liability, and 5 million paid it. By 2016, 89 percent of AMT payers earned under $500,000, with a significant concentration in California, New York, and New Jersey. Currently, 5.7 million taxpayers calculate AMT, with only 220,000 owing AMT liability. This has simplified the process, saved time, and allowed SALT deductions.
Further work on the SALT deduction cap is necessary, as many state-level pass-through entity taxes function as workarounds. Tax Foundation modeling shows that a permanent SALT deduction cap could increase federal revenues by about $1.2 trillion from 2026 to 2033 and nearly $1.4 trillion if state-level workarounds are ended.
The Progressive Nature of the US Tax Code
The US tax code has remained highly progressive. In 2021, the top 1 percent of taxpayers paid 45.8 percent of all federal income taxes, while earning only 26.3 percent of all income. The bottom 50 percent of taxpayers paid 2.3 percent of all federal income taxes.
Viewing the tax and transfer system broadly, the bottom quintile of households has an effective tax rate of negative 127 percent, while the highest quintile pays an effective rate of 30.7 percent. This demonstrates a significantly progressive tax and transfer system.
The progressivity of the tax code raises questions about the feasibility of raising significant additional revenue from high-income earners without broadening the tax base and simplifying the tax code to enhance neutrality and revenue generation.
Although targeting upper-income earners may seem fiscally responsible for addressing the deficit and tackling inequalities, it is unlikely to succeed alone. Brian Riedl from the Manhattan Institute suggests that even aggressive tax hikes on high earners would close less than one-third of our annual budget deficits.
Closing this gap would require substantial spending reductions or broader revenue-raising measures beyond targeting higher earners. Proposals like taxing unrealized capital gains would complicate the tax code, increase the burden on saving and entrepreneurship, and introduce new reporting and filing requirements.
Neutral Tax Policy Encourages Business Investment
In 2023, the Tax Foundation released its “Growth and Opportunity” tax plan, which increases tax revenue, grows the economy, and moves towards a neutral tax code over a 10-year window.
The Tax Foundation has long advocated for full and immediate expensing for business investments. Making 100 percent bonus depreciation permanent and canceling amortization for R&D investments are essential for ensuring neutral investment treatment. However, more extensive reforms are needed to orient our tax code for economic growth.
Our tax code should treat all business investments neutrally, allowing businesses to decide when and where to invest without tax code impediments. A lower, 21 percent corporate tax rate supports domestic business investment, increases wages, and creates more jobs.
The TCJA introduced valuable elements like 100 percent bonus depreciation, but fell short of creating true tax parity across all businesses. Integrating the corporate income tax to subject all businesses to a single tax layer is the ultimate solution. True parity is achieved through integration.
The Inflation Reduction Act improved neutrality by consolidating energy credits but moved the tax code away from neutrality in other areas. The new corporate alternative minimum tax and green energy tax credits add complexity and uncertainty.
New Treasury guidance on these complex provisions continues to roll out, complicating tax modeling and estimates. The corporate alternative minimum tax, intended to tax financial statement income, has proven difficult to implement and increased compliance costs for targeted companies.
Policymakers should also examine how tax-exempt entities compete with for-profit, taxable entities. The tax code should not take sides, allowing businesses to compete fairly.
Balancing Fiscal Responsibility and Economic Growth
When considering provisions for 2025, a “bang for the buck” analysis can help balance fiscal responsibility and growth. Highly ranked provisions can reduce the debt-to-GDP ratio by accounting for growth impacts.
This analysis helps identify where revenue reductions would most effectively boost growth. The TCJA significantly supported business investment and repatriation of foreign earnings.
Although the TCJA did not pay for itself, it raised historically average revenue post-passage. Comparing Congressional Budget Office (CBO) estimates reveals that revenues remained within historical norms and surpassed initial projections.
The upcoming expirations have a heavier price tag, and simple extension will not deliver significant economic growth relative to its cost. Policymakers should consider altering the corporate alternative minimum tax and green energy credits to simplify and ensure fiscal responsibility.
Conclusion
The TCJA moved the tax code towards simplicity and neutrality, but there is still work to be done. The coming months offer opportunities to simplify taxes, promote growth, and ensure fiscal stability for the United States. By learning from previous tax reforms, the next chapter can achieve even better results.
Thank you again for the opportunity to speak, and I look forward to your questions.
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[1] Erica York and Alex Muresianu, “The Tax Cuts and Jobs Act Simplified the Tax Filing Process for Millions of Households,” Tax Foundation, Aug. 7, 2018, https://taxfoundation.org/research/all/federal/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-americans/.
[2] Erica York, Alex Durante, Huaqun Li, Garrett Watson, and William McBride, “Options for Navigating the 2025 Tax Cuts and Jobs Act Expirations,” Tax Foundation, May 7, 2024, https://taxfoundation.org/research/all/federal/2025-tax-reform-options-tax-cuts-and-jobs-act/.
[3] Alex Muresianu, “How Did the Tax Cuts and Jobs Act Simplify the Tax Code,” Tax Foundation, Aug. 7, 2024, https://taxfoundation.org/blog/tcja-complexity-compliance/.
[4] The Joint Committee on Taxation, “Estimated Budget Effects Of the Conference Agreement for H.R. 1, The Tax Cuts and Jobs Act,” Dec. 18, 2017, https://www.jct.gov/publications/2017/jcx-67-17/.
[5] Erica York and Alex Muresianu, “The Tax Cuts and Jobs Act Simplified the Tax Filing Process for Millions of Households.”
[6] Alex Muresianu, “How Did the Tax Cuts and Jobs Act Simplify the Tax Code.”
[7] Scott Eastman, “The Alternative Minimum Tax Still Burdens Taxpayers with Compliance Costs,” Tax Foundation, Apr. 4, 2019, https://taxfoundation.org/research/all/federal/alternative-minimum-tax-burden-compliance/.
[8] Scott Eastman, “The Alternative Minimum Tax Still Burdens Taxpayers with Compliance Costs.”
[9] Garrett Watson, “Policymakers Must Weigh the Revenue, Distributional, and Economic Trade-Offs of SALT Deduction Cap Design Options,” Tax Foundation, Dec. 7, 2023.
[10] Erica York, “Summary of the Latest Federal Income Tax Data, 2024 Update,” Tax Foundation, Mar. 13, 2024, https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2024/.
[11] Timothy Vermeer, Alex Durante, Erica York, and Jared Walczak, “America’s Progressive Tax and Transfer System: Federal, State, and Local Tax and Transfer Distributions,” Tax Foundation, Mar. 30, 2023, https://taxfoundation.org/research/all/federal/who-pays-taxes-federal-state-local-tax-burden-transfers/.
[12] Brian Riedl, “The Limits of Taxing the Rich,” Manhattan Institute, Sep. 21, 2023, https://manhattan.institute/article/the-limits-of-taxing-the-rich.
[13] William McBride, Huaqun Li, Garrett Watson, Alex Durante, Erica York, and Alex Muresianu, “Details and Analysis of a Tax Reform Plan for Growth and Opportunity,” Tax Foundation, Jun. 29, 2023, https://taxfoundation.org/research/all/federal/growth-opportunity-us-tax-reform-plan/.
[14] Erica York, Huaqun Li, Daniel Bunn, Garrett Watson, and Cody Kallen, “The Economic, Revenue, and Distributional Effects of Permanent 100 Percent Bonus Depreciation,” Tax Foundation, Aug. 30, 2022, https://taxfoundation.org/research/all/federal/permanent-100-percent-bonus-depreciation-effects/.
[15] Gabriel Chodorow-Reich, Owen M. Zidar, and Eric Zwick, “Lessons from the Biggest Business Tax Cut in US History,” National Bureau of Economic Research, Working Paper 326272, July 2024, https://www.nber.org/papers/w32672.
[16] E. Mark Curtis, Daniel G. Garrett, Eric C. Ohrn, Kevin A. Roberts, and Juan Carlos Suarez Serrato, “Capital Investment and Labor Demand,” National Bureau of Economic Research, Working Paper 29485, November 2021, https://www.nber.org/papers/w29485.
[17] Senator Orrin Hatch, “Statement at Finance Hearing on Corporate Integration,” United States Committee on Finance, May 17, 2016, https://www.finance.senate.gov/chairmans-news/hatch-statement-at-finance-hearing-on-corporate-integration.
[18] Alex Durante, “Higher Taxes Under House Ways and Means Plan Emphasize Need for Corporate Integration,” Tax Foundation, Oct. 13, 2021, https://taxfoundation.org/blog/corporate-integration-tax-reform/.
[19] See Table 2 in William McBride, Alex Muresianu, Erica York, and Michael Hartt, “Inflation Reduction Act One Year After Enactment,” Tax Foundation, Aug. 16, 2023, https://taxfoundation.org/research/all/federal/inflation-reduction-act-taxes/.
[20] William McBride, “Results of a Survey Measuring Business Tax Compliance Costs,” Tax Foundation, Sep. 4, 2024, https://taxfoundation.org/research/all/federal/us-business-tax-compliance-costs-survey/.
[21] Scott Hodge, “Reining in America’s $3.3 Trillion Tax-Exempt Economy,” Tax Foundation, Jun. 18, 2024, https://taxfoundation.org/research/all/federal/501c3-nonprofit-organization-tax-exempt/.
