What Would Real Tax Reform Look Like?*

Capitol at Dusk 2, by Martin Falbisoner, Wikimedia Commons

The debate over extending the tax cuts enacted in the 2017 Tax Cuts and Jobs Act (TCJA) highlights how misaligned our federal budget process has become. Previous Congresses made so many promises for low taxes and automatic spending increases that essentially every dollar of federal revenue was committed even before the 119th Congress first walked through the doors of the Capitol.

Extending these past tax cuts would further contribute to our massive debt buildup, but under conventional tax scorekeeping, not extending them creates “losers” relative to last year. It’s not just Republicans who have backed a bill imposing huge interest costs on tomorrow’s taxpayers; the Obama administration agreed to preserve most of the 2001 and 2003 tax cuts, and the last Biden administration budget would have done the same with most of the individual tax cuts enacted in the TCJA.

But real tax reform is possible. Former House Majority Leader Dick Gephardt (D-MO) and I recently discussed how we used a common set of textbook public finance principles in Congress and Treasury to lay the groundwork that led to the Tax Reform Act of 1986, the most comprehensive income tax reform to date. A similar set of principles, updated to reflect today’s needs and circumstances, would include equal justice, economic growth, sustainable budgets, efficiency, and transparency. Call it the “Pro-Worker, Pro-Family Budget and Tax Act of 2025.”

Instead of merely extending expiring TCJA provisions, this plan would emphasize (1) enhanced support for moderate-to-low-income workers and families who have been left behind in recent decades; (2) real tax reform through “efficient targeting of resources” and “equal justice among those with equal ability to pay;” (3) stronger economic growth through lower debt and fewer tariffs; and true budget transparency regarding long-term implications.

Support for moderate-to-low-income workers and families

Work and providing for future generations are essential for any society. My plan would achieve these goals as follows:

1. Similar to a proposal from my TPC colleague Margot Crandall-Hollick and The Hamilton Project’s Bob Greenstein, establish an individual worker credit of $1,000 or more for low-to-moderate-income workers. Most are largely excluded from the current earned income tax credit (EITC) because of marriage or the lack of children in the household. The credit mechanism would also be available to assist workers during a recession. It could serve as a first step toward a more universal basic wage (UBW), free from marriage penalties, for the long-neglected working class.

2. Similar but much stronger than the budget bill currently advancing through Congress, permanently raise the child tax credit (CTC) to at least $2,500 per child and index it for inflation. With 25 percent inflation since 2017, $2,500 is only equivalent to the $2,000 credit in 2017. The recently passed House bill schedules the real value of that credit to be reduced through inflation for 2025 to 2028 and by a further $500 reduction after that.

3. Retain the current standard deduction and continue to omit the personal exemption.

Real tax reform

Many existing tax provisions are inefficient or ineffective. These include itemized deductions that now benefit less than 10 percent of households, retirement account provisions that offer minimal help to many workers, and numerous egregious tax loopholes. Alternatively, Congress could:

1. Establish a more universal charitable incentive to restore some of the incentives lost under the TCJA, which reduced government subsidies for charitable giving by close to one-third. Limiting deductions to donations above 1 or 2 percent of adjusted gross income (less than average giving) would constrain costs. Requiring charities or designated organizations to provide information reports to the IRS would help ensure adequate enforcement. Allowing deductions for contributions made at tax filing time and reported through tax preparers would further increase giving at a very limited cost to the Treasury.

2. Replace gradually the itemized deduction for home mortgage interest with a first-time homebuyer credit, accompanied by recapture rules, to ensure that the subsidy applies over time, not just for a few years of living in the home.

3. Cap the total amount of exclusion for employer-provided retirement and pension deposits for each individual. In exchange, Congress could provide an enhanced government savers’ credit to accounts with minimum employer contributions and “opt-out” provisions for employees. For employers agreeing to such “maximum” cap and “minimum” deposit rules, Congress could remove many of the more complex rules that attempt but largely fail to ensure that lower-income employees receive a proportional share of tax subsidies.

4. Close various tax loopholes. These loopholes include the carried interest deduction, the exclusion from taxation of capital gains accrued until death, and the tax exemption for significant investment income earned by some non-charitable (i.e., non-(c)(3)) nonprofit organizations. These provisions would both promote “equal justice” or “equal treatment of those with equal income” and help achieve the debt-reduction goals discussed below.

Economic Growth

Tax reform can foster growth by reducing deficits, adjusting trade policies, and enhancing budget transparency.

1. Compared to a full extension of TCJA, the substitute provisions described above would reduce the national debt by tens of trillions of dollars over several decades. Even compared to no action by Congress or current law, the substitute would be designed to lower the rate of growth of national debt.

2. Congress could further suspend its delegation of tariff powers to the Executive Branch until it can agree on how to mitigate the risk of tariffs that spark trade wars that weaken the US and global economies.

3. Eliminating expiration dates for provisions intended for later extension would help restore a more transparent budget process. Such dates led a Republican Congress to drastically understate the cost of TCJA in 2017, just as a Democratic Congress did for various temporary COVID-19 provisions.

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Increased support for children and working taxpayers; enhanced and more effective incentives for charitable giving, homeownership, and private retirement savings; more equal treatment of labor and capital income, regardless of the source; reduced trade tariffs; and hundreds of billions of dollars in lower federal interest payments over a decade, and trillions of dollars over time—these are the kinds of features that genuine, principle-based tax reform would encompass.

It’s not too late for Congress to adopt a package that reflects these principles, or at least for some members to start a debate about what a better alternative should look like. After all, the types of packages currently being considered by Congress involve significant debt increases and expiration dates that merely postpone the inevitable reckoning.

*Reprinted largely from Tax Vox, May 29, 2025.