Decoding the 2025 Tax Fight

Trillions of dollars in tax revenue and the fairness of our tax code depend on this upcoming fight.

By William Rice

It’s fitting that the inaugural edition of the “Tax DeCode” should examine the federal tax issue that will figure most prominently in political debate for the next 18 months and play a big role in the crucial elections this fall: the expiring Trump tax cuts. Trillions of dollars in tax revenue and the fairness of our tax code depend on how well or poorly we handle that expiration, so every American should take a stand. But before you weigh in, it’s important to decode some of the language you’ll hear from Republicans to understand what’s really at stake.  

When you hear Republicans claim they want to keep certain provisions of the 2017 Trump-GOP tax law from expiring at the end of 2025 “to prevent a massive tax hike on the middle class,” what they really mean is: “We want to keep tax cuts that overwhelmingly benefit the wealthy.” 

If all the expiring provisions are extended, in 2026 almost two-thirds (63%) of the tax cuts will go to the highest-income fifth of American households. The top 5% alone would get 40%. Meanwhile, the middle three-fifths of society would get only a little over a third of the benefit. 

In dollar terms, the richest 1% would get an average tax cut of over $25,000.

The bottom 80% would on average get about $1.25 a day. 

Some expiring provisions that benefit working families—like the higher standard deduction and the expanded Child Tax Credit—should be permanently extended. President Biden has promised not to allow any provisions to expire that would raise taxes on households making less than $400,000 a year. 

But those aren’t the ones the GOP is concerned about. Their focus is on keeping the cuts that benefit their rich donors and friends, like the reduction in top income-tax rate from 39.6% to 37%—which this year only benefits couples making almost three-quarters of a million dollars.  

When you hear Republicans describe one of the provisions they want to preserve as a “small-business tax cut,” what they really mean is: “We want to keep open a loophole that mostly benefits big businesses like hedge funds, Wall Street law firms and real estate developers like Donald Trump.”

The “pass-through loophole” created by the Trump tax law allows non-corporate businesses to subtract 20% of their income before figuring their taxes. Almost all businesses—from corner groceries to big law practices—are pass-throughs: sole proprietorships, partnerships or S corporations. They’re called that because they don’t pay taxes as an entity, but profits and losses instead pass through to the owners who pay any tax due on their personal returns at individual rates. 

But even though there are a lot of pass-through businesses big and small, pass-through income is highly concentrated at the top. That’s why in a recent year more than half the benefit of the pass-through loophole went to households with yearly income over $820,000. Only 4% of the cut went to households with annual income below $80,000. The average small-business owner earns less than $61,000 a year.

Permanently extending the pass-through loophole would lose $700 billion in tax revenue over the ensuing 10 years. That’s money that could be used to expand small-business loans, improve physical and digital infrastructure to make it easier to deliver goods and services, and increase working-family tax credits to boost the purchasing power of customers. Those are the kind of public investments that would actually benefit real small businesses. 

When you hear Republicans warn that another expiring provision will “increase death taxes on family farms” what they really mean is: “We want to protect lucky descendants from having to pay any tax on their windfall inheritances.”

The estate tax is the only federal curb on the creation of family economic dynasties. Republicans have been weakening it for decades so that their rich contributors can pass along bigger and bigger fortunes to their children. Currently only .14% of families will ever be subject to any estate tax. These jumbo inheritances passed down tax-free undermine American principles of equal opportunity and personal responsibility while widening the nation’s destabilizing wealth gap.  

The Trump-GOP tax law doubled the amount that can be transferred tax-free between generations and indexed the amount to inflation. This year, a couple can pass on over $27 million without paying a penny of estate tax. If this provision expires, the estate-tax exemption would drop to a still very generous but somewhat more reasonable level of about $14 million. 

As for the estate tax being a threat to family farms: the Agriculture Department estimates that among farming families in which an owner died in 2020, only 50 in the whole country would owe any estate tax and under Biden’s plan, those families would have their tax payments deferred as long as the farm remained in the family.

Tax talk can be tricky. Politicians trying to sneak in more loopholes and special breaks for rich households and big corporations always claim they’re acting on behalf of working families and small businesses. But if you decode the language, you’ll know what they’re up to. Keep checking in with The Tax DeCode to get the real story.