Federal Tax Reform: Analysis of the Tax Cuts and Jobs Act and Subsequent Proposals

The U.S. federal income tax system generates approximately $2.6 trillion in individual income tax revenue and $420 billion in corporate income tax revenue annually, representing the federal government's largest revenue sources. The Tax Cuts and Jobs Act, enacted in December 2017, represented the most significant reform of the Internal Revenue Code since the Tax Reform Act of 1986. The TCJA's proponents sought to reduce tax rates to spur economic growth, simplify the tax code, and enhance U.S. competitiveness in the global economy.

Prior to the TCJA, the United States had one of the highest statutory corporate tax rates among developed nations at 35%, though the effective rate was lower due to various deductions and credits. The individual income tax featured seven brackets ranging from 10% to 39.6%, with numerous deductions and credits that created significant complexity. International tax provisions generally deferred U.S. taxation of foreign earnings until repatriated to the United States, incentivizing corporations to hold profits overseas.

The TCJA established seven individual income tax brackets with reduced rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%), nearly doubled the standard deduction to $12,000 for single filers and $24,000 for joint filers (indexed for inflation), eliminated personal exemptions, increased the child tax credit from $1,000 to $2,000 per qualifying child, and limited itemized deductions including the $10,000 SALT cap. The qualified business income deduction allows eligible owners of pass-through businesses to deduct up to 20% of qualified business income.

On the corporate side, the TCJA permanently reduced the corporate rate to 21%, repealed the corporate alternative minimum tax, allowed full expensing of qualified business property (phasing down beginning in 2023), and limited the deduction for net business interest expense. International provisions shifted toward a territorial system with a one-time transition tax on previously deferred foreign earnings and established the Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) provisions to deter profit shifting.

With most individual TCJA provisions expiring after 2025, Congress faces a critical decision point. Full extension of all expiring provisions would cost an estimated $4 trillion or more over ten years. Options include permanent extension of all provisions, selective extension of popular provisions such as the increased standard deduction and child tax credit while allowing rate cuts to expire, or allowing all provisions to sunset and using the resulting revenue for deficit reduction or alternative priorities.

Reform proposals range from progressive approaches that would increase taxes on high-income earners and corporations to fund expanded social programs, to further rate reductions paired with base broadening. Specific proposals include raising the corporate rate, taxing capital gains at ordinary income rates, imposing a wealth tax, expanding the earned income tax credit, and reforming the estate tax. International tax reform continues to evolve with the OECD/G20 Inclusive Framework's two-pillar solution for global minimum taxation and reallocation of taxing rights.

Congressional debate over TCJA extension has intensified as the 2025 expiration date approaches. The Joint Committee on Taxation and Congressional Budget Office have published updated revenue estimates for various extension scenarios. Several proposals have been introduced addressing specific provisions, including increasing or eliminating the SALT deduction cap, expanding the child tax credit, and modifying business expensing rules. The corporate alternative minimum tax and stock buyback excise tax enacted in the Inflation Reduction Act are being implemented, with Treasury issuing guidance on their application.