Federal Tax Debate 2025
briefPresident-elect Donald Trump and Republicans in Congress have announced plans to pass a tax bill in spring 2025. This could have a significant impact on inequality and tax fairness in the United States.
The Trump tax law that Congress approved in 2017 dramatically cut taxes for the wealthy and allowed large, profitable corporations to pay lower tax rates. Most of the benefits went to the richest fifth of Americans, and a significant portion went to foreign investors who own stocks in American companies.
Lawmakers will soon debate the Trump tax law’s changes that expire at the end of 2025, as well as other tax policies that Trump proposed on the campaign trail. The figures below show what’s at stake as lawmakers consider these significant changes to our tax system.
(Click on each chart to expand)
If Trump’s tax proposals were in effect in 2026, the richest 1% would receive an average tax cut of about $36,300 and the next richest 4% would receive an average tax cut of about $7,200.
All other groups would see a tax increase with the hike on the middle 20% at about $1,500 and the increase on the lowest-income 20% of Americans at about $800.
As a share of income, the tax increases would fall hardest on working-class families.
The middle 20% of Americans would face a tax increase equal to 2.1 percent of their income, while the poorest 20% of Americans would face a tax increase equal to 4.8% of their income – all while the top 5% get a tax cut.
Former President Trump has offered several tax proposals, which are all included in these estimates:
- Extending the temporary provisions in Trump’s 2017 tax law that will otherwise expire at the end of 2025, except for the $10,000 cap on State and Local Tax (SALT) deductions, which Trump says he would not extend
- Exempting certain types of income from taxes (overtime pay, tips, and Social Security benefits)
- Reducing the corporate tax rate from 21 percent to 20 percent and then further reducing it to 15 percent for “companies that make their product in America”
- Repealing tax credits enacted as part of President Biden’s Inflation Reduction Act that provide incentives for the production and use of green energy
- Imposing a new 20 percent tariff on imported goods, with a higher rate of 60 percent for goods from China
Overall these proposals would, on average, lead to a tax cut for the richest 5 percent of Americans and a tax increase for all other income groups.
Figure 4: Trump’s plan to make most of the 2017 Trump tax law permanent would send a windfall to the wealthy
Trump’s plans to make permanent most of the temporary provisions of his 2017 tax law would disproportionately benefit the richest Americans. (This includes all major provisions except the $10,000 cap on deductions for state and local taxes (SALT) paid.)
Making permanent most of the temporary provisions of the 2017 Trump tax law would also be very expensive. The resulting impact would be a cost of $466 billion in the first year alone.
America’s largest, consistently profitable corporations saw their effective tax rates fall from an average of 22.0% to an average of 12.8% after the Trump tax law went into effect in 2018.
The 296 largest and consistently profitable U.S. corporations in ITEP’s study paid $240 billion less in taxes from 2018 to 2021 than if they had continued to pay the effective rates they’d paid before the Trump tax law.
The number of companies paying low taxes became more pronounced in the wake of the Trump tax law:
- Of the 296 companies examined in ITEP’s study, the number paying an effective tax rate of less than 10% rose from 56 in the pre-Trump period to 95 in the post-2017 period.
- The number of companies paying an effective tax rate of less than 5% rose from 41 in the pre-Trump period to 53 in the post-2017 period.
America’s largest, consistently profitable corporations saw their effective tax rates fall from an average of 22.0 percent to an average of 12.8 percent after the Trump tax law went into effect.
When corporations are allowed to pay less in taxes, the ultimate beneficiaries are mainly owners of corporate stocks. Because white households own a disproportionate share of stock, they disproportionately benefit.
White Americans receive 88% of the benefits that remain in the U.S. even though they make up only 67% of U.S. households. In contrast, Black and Hispanic households each receive just 1% of the benefits despite making up 12% and 9% of households respectively.
A huge portion of stock in American corporations is owned by foreign investors. This means a huge share of the benefits from lower corporate taxes flows out of the U.S. to foreign investors, and Americans overall lose out as a result.
When foreign investors are taken into account, the share of benefits flowing to nearly all major racial/ethnic groups is noticeably below their share of U.S. households.
Figure 10: Corporate tax breaks and corporate tax avoidance significantly contribute to the racial wealth gap
Corporate tax breaks and corporate tax avoidance significantly contribute to the racial wealth gap. In the middle of 1989, the average net worth of white households was 3.87 times that of Black households and this gap grew over time. By the middle of 2023, the average net worth of white households was 4.09 times that of Black households.
But this racial wealth gap would have declined if not for the part of household net worth made up of corporate stocks. If we consider households’ average net worth but exclude corporate stocks, we find the white to Black ratio actually falls over this time period, from 3.53 to 3.13.
These figures clearly show the 2017 Trump tax law largely benefited the wealthy and corporations, and the tax proposals Trump put forward during his 2024 campaign would do the same while costing trillions of dollars. Instead of going down this path, lawmakers should advance policies that raise new revenues from corporations and the wealthy, provide targeted tax credits to middle-class and low-income families, and use the money raised to invest in the public good.