Post-election tax policy

Macroeconomic impact of a looming fiscal cliff

• Extending the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA) could boost real GDP growth by 0.5 percentage points (ppt) in 2026 and raise the level of GDP by 0.9% in 2027 compared to a fiscal cliff scenario, but it would cost around $4 trillion through 2034. This extension would boost disposable income for those in the top income quintile by $3,125 but only lift disposable income by $100 for those in the bottom income quintile.
  
  
• Changes to the corporate tax rate could have substantial economic impacts. An increase in the statutory corporate tax rate from 21% to 28% would weigh on capital investment and reduce real GDP growth by 0.1 ppt in 2027 while a rate cut to 15% would stimulate greater capex and lift GDP growth by 0.1 ppt. These changes would also boost federal revenues by $880 billion and reduce revenues by $750 billion, respectively.
  
  
• Reinstating full bonus depreciation and immediate R&D expensing could lift GDP by 0.1% from late 2027 onward. This would significantly benefit capital-intensive sectors like manufacturing and real estate, potentially driving continued or increased investment in these areas.

The tax policy outlook will be influenced by the new balance of power in Congress post-election. Since tax bills can be voted into law by a simple majority in Congress, tax legislation could be passed if one party controls both Congress and the White House.

But even with a split Congress and White House, the main debate will center around the looming expiration of the 2017 TCJA. With numerous individual and small-business tax provisions slated to expire in 2025, Congress will have to decide on how to manage the incoming fiscal cliff. Extensions may require new revenue generation, and Congress could decide to reopen corporate provisions, including the 21% corporate tax rate, bonus depreciation, and research and development expensing.

As our public policy team reports, the debate around tax policy will likely pit priorities like domestic spending, deficit reduction and economic growth against each other. Former President Trump publicly supports an extension of the TCJA and, in contrast, President Biden has laid out a series of proposed tax increases on corporations and wealthy individuals to fund other programs. These were recently detailed in his FY25 budget proposal and include increasing the top US corporate tax rate to 28% and corporate alternative minimum tax (AMT) to 21%, imposing ordinary income rates on capital gains for high income earners, and creating a 25% “minimum income tax” on income earned by wealthy taxpayers.

2017 Tax Cuts and Jobs Act

Extending the expiring provisions of the TCJA would cost $4 trillion through 2034 (see figure 1), according to new estimates from the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO). The major elements of the TCJA that are scheduled to expire include individual income tax rate cuts, a near-repeal of the Alternative Minimum Tax (AMT), expansions of the standard deduction and child tax credit, limits to the state and local tax (SALT) tax deduction and other itemized deductions, and cuts to the estate tax.

Figure 1

Without a sudden increase in individual income taxes in 2026, households would benefit from higher after-tax income, which would in turn support increased consumer spending. Using the Oxford Economics’ Global Economic Model, we calculate that a full extension of the TCJA would boost real GDP growth by 0.5 ppt in 2026 and 0.4 ppt in 2027 compared to a fiscal cliff scenario (see Figure 2). The real GDP level difference versus a fiscal cliff scenario would peak at 1.1% in early 2027.

Importantly, assuming the Fed reacts to modestly higher inflation in this scenario by easing monetary policy less rapidly, the boost to real GDP would be mildly lower. In this scenario, the 2026 effect would be largely unchanged, but the peak impact would reach 0.9% of GDP in early 2027, and the boost to real GDP growth in 2027 would only be 0.2 ppt.

Figure 2

Personal household income would be greater by around $120 billion in 2027, representing an average gain of $925 per household. Importantly though, the distributional effects would be highly uneven.

Using CBO’s estimate of the average income change after taxes and transfers, we calculate that for households in the bottom income quintile, the boost would be a mere $100 per household but for those in the top income quintile, the boost would represent $3,125. This would translate into a 0.8% and 3.5% boost in income for families in these two income quintiles (see Figure 3).

Figure 3

Statutory corporate tax rate change

While the statutory corporate tax rate cut from 35% to 21% was a permanent change in the TCJA, President Biden and former President Trump have floated the idea of altering it with potentially significant consequences for corporate profits and federal revenues.

If Democrats sweep the elections in November, they could vote to reverse half of the 2017 TCJA corporate rate cut and bring the statutory rate up to 28%. This would push the US corporate rate near the highest among major economies (see Figure 4). Conversely, a Republican sweep could favor a cut to 15%, which would be among the lowest in major economies and match the lowest rate since 1935.

It is important to remember that the effective tax rate is much lower than the statutory tax rate and that a large share of corporate taxes stems from individual income taxes from business owners, unlike in other parts of the world.

Figure 4

The CBO estimates that each percentage point change in the corporate tax rate is worth around $130 billion in tax revenues. As such, a rate increase to 28% would equal to a $880 billion increase in revenues while a rate cut to 15% would translate into a $750 billion decrease in revenues — a wedge worth over $1.5 trillion, explaining the outsized interest from corporations across the country.

We estimate that lowering the corporate tax rate to 15% in 2026 would boost business investment and lift real GDP growth by 0.1 ppt in 2027 and lift the level of GDP by 0.2% by the end of 2027 (see Figure 2 and Figure 5). This implicitly assumes a fiscal multiplier of 70 cents on the dollar – meaning that for every dollar in tax cuts there is a commensurate 70 cents increase in nominal GDP.

Conversely, an increase in the corporate tax rate to 28% in 2026 would reduce real GDP growth by 0.1 ppt in 2027 and curb the level of GDP by 0.2% by the end of 2027.

Figure 5

Bonus depreciation and R&D expensing

The TCJA also changed depreciation rules so that the 100% bonus depreciation for qualified business equipment purchases has begun being phased out over five years (with 80% in 2023, 60% in 2024 and so forth). Beginning in 2022, the TCJA also determined that domestic R&D expenses must be amortized over a five-year period (15 years for foreign research) instead of immediately.

We estimate that reinstating full bonus depreciation and immediate R&D expensing would boost real GDP growth by 0.1 ppt in 2027 compared to a fiscal cliff scenario. From 2027 onward, the level of GDP would be lifted by around 0.1% (see Figure 2).

Extending bonus depreciation would have significant implications for capital-intensive sectors (see Figure 6). Manufacturing, real estate, rental and leasing, and wholesale trade would benefit the most, as they currently claim the largest shares of bonus depreciation, primarily driven by large businesses. This extension could incentivize continued or increased investment in these sectors, potentially enhancing productivity and growth. Conversely, sectors like educational services and arts and entertainment, which utilize bonus depreciation less, would see minimal impact.

Figure 6

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.