Reject the reckless one-party tax bill

The House recently passed the Tax Relief for American Families and Workers Act of 2024 with significant bipartisan support. The bill offers temporary tax relief to businesses and families with children and claims to do so in a fiscally responsible manner. Unfortunately, this is not the case. These are more reckless tax giveaways for the next two years while postponing dealing with the consequences and tax reform until later. This has to stop.

This approach highlights several problems with current fiscal policy, including Congress' propensity to pass temporary tax provisions, spend through the tax code, and run large annual deficits. At a time when inflation is running high and deficits are rising, this legislation would increase fiscal stimulus in the short term and require higher taxes in the long term.

The bill cuts business taxes by allowing immediate write-offs for research and development, increasing interest expense deductions, allowing 100 percent bonus depreciation and increasing expenses for short-term investments. Allowing companies to spend investments and write off research and development costs would boost economic growth by encouraging investment and innovation. However, giving companies tax breaks for past investments and research expenditures will reduce economic growth. Given the historic level of debt, policymakers should refrain from giving inefficient government aid to businesses.

In addition, the bill would increase the child tax credit for families with children by making several changes to the tax code, including increasing the maximum refundable credit, adjusting the maximum values ​​of the credit by number of children, and indexing the credit for inflation . These policies would bring an economic benefit to low-income families with children. However, its overall impact on reducing the adverse effects of poverty would be limited, as approximately a third of the benefits correspond to households in the three most important income quintiles. Policy makers should direct aid to those most in need and avoid fiscally irresponsible policies that are not well targeted.

Another problematic issue with the bill is the timing of the deficits it creates. In particular, the bill would roughly increase deficits 150 billion dollars in the first two years. As the Fed is battling persistent inflation, additional fiscal stimulus would stimulate the economy at the wrong time. Suppose the Fed responds by keeping the fed funds rate higher for longer or raising the rate to offset the fiscal stimulus. In this case, the economy will probably slow down. Since excessive fiscal stimulus played a role in creating the current inflationary environment, it is fiscally irresponsible for Congress to add more short-term stimulus to the economy.

As noted, the bill is revenue neutral estimates provided by the Joint Tax Commission. The bill raises revenue by disallowing claims of the employee retention credit (ERC), a poorly designed pandemic-era tax policy, after January 31, 2024. Using this provision as a tax offset is puzzling for several reasons. First, ERC reduced revenue by more than five times the initial estimate. Second, the provision was so messy that the IRS implemented a moratorium on new filings in September 2023. In testimony before the House Ways and Means Committee, IRS Commissioner Werfel declare that “The IRS has been inundated with ERC claims, and we are concerned that many of these claims are not being filed by qualifying businesses..” Although ERC should end as soon as possible, the savings should not fund temporary government aid. Congress must exercise more fiscal discipline. If the proposed policies are truly desirable, they should be part of well-designed tax reform.

With much of the individual tax code expiring at the end of 2025, tax reform will be a big issue in the next Congress. The cost of extending the expiring provisions is estimated to be approx 3.4 trillion dollars, but this cost increases substantially if the above provisions are extended beyond 2025. Policymakers must find the will to practice fiscal discipline. They should start by rejecting the need to increase government handouts and instead focus on fiscal reform and fiscally responsible spending.

John W. Diamond is the Kelly Fellow in Public Finance and Director of the Center for Public Finance at the Baker Institute at Rice University.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.

Latest messages from John Diamond (see everything)

We have zero tolerance for comments that contain violence, racism, profanity, profanity, doxing, or rude behavior. If a comment is spam, instead of replying to it, click the ∨ icon below and to the right of that comment. Thank you for engaging with us in a fruitful conversation.