Donald J. Trump, the once and future President of these United States, will swagger into Washington D.C. on January 20, 2025, his effective electoral mandate and his metaphorical plumber’s monkey wrench in hand, and he will begin fixing (in the eyes of MAGA Republicans) or messing up (in the eyes of left-leaning Democrats) the indoor plumbing of the United States government.
One of the things The Donald will no doubt ponder carefully is the unique architecture and complex piping of the Internal Revenue Code. The Code, as it is known among aficionados, is a fascinating document that arguably provides the defining economic principles of the United States government and is the final, highest authority on the functioning of American democracy. Is it more important to Americans’ everyday lives than the U.S. Constitution? You bet. More important than the Declaration of Independence? Be serious. The Code determines an overwhelming portion of the critical issues in American governance and in our civic life, defining who gets what, when, where and, most importantly, who the heck pays for it all.
An actual printed version of the Code—no light-hearted and winsome tome, this—is now in the vicinity of 4 million words. To put this word count into the context of something you might actually consider reading, the Code is now seven times the length of War and Peace, and approximately four times the length of all the Harry Potter books put together. The Code could be considered a four-million-word homage to wise government and noble human ideals—but, then again, maybe not. Most Americans, whatever their political stripes, probably lean more toward the NOT category these days. Bear in mind that during full breadth of human history and across all civilizations the most despised occupation of all, even more so than hangman, is that of tax collector.
Interestingly, fixing the Internal Revenue Code will likely not be one of The Donald’s most immediate priorities, but it is nonetheless probably the single most important thing that he needs to accomplish, and relatively quickly. This bald comment needs some further elaboration. In 2017, Trump and the Republican majority in Congress passed the Tax Cuts and Jobs Act (the “2017 Tax Act” or “TCJA”) over the strenuous objection of the entire Democratic Party. It proved to be the single biggest accomplishment of Trump’s first administration. The U.S. corporate income tax rate was cut from a disastrously high 35% (then essentially the highest in the world, and a direct cause of embarrassing “inversion” transactions whereby large U.S. corporations left the United States and moved legal residency to more congenial jurisdictions, including Ireland and even the United Kingdom).
Personal tax rates were also more modestly reduced, and the federal estate tax lifetime credit amount was doubled to $10 million and indexed (taking all but the very rich out of the highly unpopular estate tax regime). Many privately owned U.S. businesses got an (at least) 20% reduction in taxes under the Qualified Business Income (QBI) Deduction, 100% bonus depreciation led to a large investment in business assets, the like-kind exchange provisions were scaled back to cover only real estate (eliminating a loophole that allowed the super-rich to sell art, airplanes and automobiles tax-free). In an alliance between Republican Senator Tim Scott of South Carolina (and, somewhat startlingly, Democratic Senator Corey Booker of New Jersey), the 2017 Tax Act also adopted the Opportunity Zone tax incentives (just about the ONLY provision the Democrats actually supported).
All in all, the 2017 Tax Act was a rousing success and a major factor in growing the (pre-COVID) U.S. economy during the Trump years, but it was also a ticking bomb. In order to pass under the complex Congressional reconciliation rules, the Act needed to be revenue neutral, and so it was structured so that many of its provisions were “temporary” and were set to expire at the end of 2025. Indeed, a largely undiscussed (but huge) issue in the 2024 election was the fact that the Democrats could “enact” a large tax increase on tax-paying Americans by simply doing nothing – just sit on their hands and allow the expiration provisions to do the heavy lifting – and then, of course, blame Trump. [President Obama successfully played the expiration game back in 2012, allowing the higher estate tax exclusion amount to expire on December 31, 2012, before cutting a last-minute tax deal that was literally passed the next day on what was sardonically referred to as December 32, 2012. Some families who suspected the administration would let the exclusion expire made large 2012 gifts to their children and ceded control of assets -- they did not know December 2012 had a 32nd day and many soon regretted their haste.]
Extending the temporary provisions of the 2017 Tax Act—and possibly making many of them permanent—is both necessary and popular (especially among Republicans), the political equivalent of a layup. But now comes the fun part, namely, the politics of the Republican Party. The 2017 Tax Act was arguably the only major legislative mandate around which the entire Republican Party coalesced during the first Trump administration. Plenty of other Trump priorities were far less important to some members the Republican establishment – those often-maligned political actors derided as Republicans In Name Only or RINOs. Frankly, Trump is a fast learner, and I suspect that he will initially hold back on extending the 2017 Tax Act unless and until he gets full Republican support for some of his other high priorities, ranging from border security, to dealing with illegal aliens, to reversing the influence of DEI policies in the federal government and public life, to promoting oil and gas drilling, to reducing government regulations and getting the U.S. economy back on track and running strongly.
But still, in the end, the Internal Revenue Code needs to get fixed. Thus, even if Trump initially holds tax reform back as an enticing carrot, well, that carrot will still need to be served and eaten, and that is most likely to occur somewhere around the middle or end of 2025.
Secret Santa’s Tax Wish List
What tax policies is Trump likely to support? The following is a reasoned, practical and appropriately sardonic meditation on that question.
1. Keep the corporate tax rate at 21%, and maybe reduce it to 20% as a public relations stunt. The current tax rate is much more reasonable than the Clinton-Bush-Obama 35% tithe that prevailed from 1993 to 2017, but, realistically, this erstwhile “lower” U.S. corporate tax rate is not actually low (the U.S. is now in about the middle range of the EEOC in terms of aggregate corporate taxes, especially when state corporate taxes are taken into account). Before Trump, the U.S. was hemorrhaging large multi-national corporations under the Obama administration, and we simply cannot go back to imposing U.S. corporate tax rates that drive away businesses. [A business client from Sweden, who was appalled at the then-high U.S. corporate tax rates, once declared, “U.S. corporate taxes are higher than we have in Sweden and Sweden is a socialist country!”]
2. Extend (and likely make permanent) the higher life-time exclusion amount for the federal estate tax, currently about $14 million per person or $28 million for a married couple. Everyone hates the death tax, even poor people who are unlikely ever to pay it, but eliminating it entirely is unnecessary and would frankly be bad policy. Breaking up monstrously large concentrations of family generational wealth is good overall for the United States and for democracy (otherwise the Rockefellers would STILL be running the country), so a $28 million combined marital lifetime exclusion with further indexing seems pretty darn good to me and probably to Trump.
3. Extend or make permanent all the “temporary” provisions of TCJA, including the current individual tax rates, the QBI deduction, the higher standard deduction, the OZ incentives, 100% bonus depreciation, and on and on. All of this is a lay-up verging on a slam dunk for Trump – but probably AFTER he gets the Republican establishment types to go along with some of his other legislative priorities.
4. Fix Code Section 174 Research and Experimental Expenditures by going back to allowing expensing, notably for software development services. The changes to Code Section 174, which made software development expenses amortizable over five years rather than deductible immediately, were designed in 2017 to increase revenues to pay for other tax cuts, but this provision has been a disaster for the U.S. software industry. Everyone agrees that Section 174 needs to be fixed, but political dysfunction in 2023 and 2024 stymied all efforts to actually fix it. Trump wants to move quickly to address things that are clearly stupid governmental policies, and this should be somewhere near the top of his tax list.
5. End federal income taxation of tips. This was a shameless Trump campaign proposal that Kamala Harris immediately latched onto and parroted as well – but that doesn’t make it a bad idea. In fact, it may make a lot a sense because the tax enforcement of tip income is singularly difficult and self-defeating. According to the IRS, taxes owed on wages reported on Form W-2 are collected at a rate of 99% -- for the simple reason that tax withholding means the IRS gets virtually all the money in advance. Taxes on income reported on Form 1099, by contrast, is collected at a rate of about 91% -- still very good. Taxes on tips, on the other hand, have a really poor collection rate – the IRS has claimed that it collects maybe 60% of the taxes owed, but even that low number may be wildly over-stated. Meanwhile, the IRS is out chasing waitresses in hash houses all over the country for their unreported tips, creating immense ill will in the process. Trump is smart enough to understand the benefits of declaring that he will not try to collect taxes on income that is largely unreported and that is not likely to be collected anyhow. Therefore, the smart bet is that this proposal will be enacted – and then also please take notice of the tip cup on the front desk at my law firm. (Trump may want to limit the scope of tax-free tip income to food service workers, Uber drivers and other common tipping situations, and probably not let lawyers and accountants add a 20% “gratuity” to the monthly invoices.)
6. End federal income taxes on all Social Security payments. This proposal quickly segues into a discussion about government fiscal responsibility and the yawning federal budget deficits. Social Security and Medicare are funded by payroll taxes, but while there is a theoretical “trust fund” to hold this money, it is really just an IOU that the federal government owes from its left pocket to its right one. Getting federal deficits under control and showing fiscal discipline is likely to go hand in glove with any effort to make Social Security payments entirely tax free. Frankly, since Social Security is initially funded as a tax on income, the policy of taxing social security benefits a second time has always been vaguely offensive. I expect Trump to unleash Elon Musk and Vivek Ramaswamy to grapple with out-of-control federal spending, and if they are successful then eliminating the social security tax would be a highly popular way to share these savings. There is a good chance this proposal will be enacted as well.
7. End the cap on SALT deductions claimed on Schedule A. The TCJA capped the federal deductibility of state and local taxes at $10,000, which turns out to be a miniscule threshold in certain high-tax states (virtually ALL of them Democratic blue states like California, Massachusetts, New Jersey, Hawaii, etc.). The SALT Cap meant that the federal government was no longer financially subsidizing large and arguably excessive state taxation. Eliminating the SALT Cap is a hugely popular proposal in high-tax states, and hey, if I were Trump I would propose it on the political stump as well. It may also be a (large) chit that Trump can give to Democrats, and blue-state Republicans, if he needs cross-aisle support for his final tax package. But eliminating the SALT Cap is fundamentally a bad tax policy that pushes federal tax expenditures heavily (and unfairly) to high-tax states. The easy sales pitch on leaving the SALT Cap alone is that citizens in states that want higher taxes and higher spending are welcome to vote for that but they should then pay for those taxes themselves and not try to stick the bill to everyone else. It frankly seems doubtful that the Republicans in Congress will include repeal of the SALT CAP in the final 2025 tax law. Trump will just have to shrug as say it was “out of my control.” [Several blue-state Republicans have said that Trump needs to eliminate the SALT Cap or they won’t vote for the package – but Democrats in red states have the opposite problem, which is explaining why their constituents should pay for California’s exorbitant tax rate of 12.3%. In the end NO ONE likes to pay taxes and wants to stick the tax bill to someone else. In the immortal words of former Louisiana Senator Russell B. Long, “Don't tax you, don't tax me, tax the fellow behind the tree.”]
8. Impose high tariffs on all goods imported into the United States, e.g., 20%, and impose a special high tariff on good imported from China, e.g., 60%. These tariff proposals all sound like Trump campaign rhetoric to me and not serious legislative priorities. First, Trump was elected because middle-class and working-class people felt robbed by inflation, and a 20% boost on the cost of all imported goods is, among many other things, very inflationary. Trump threatened to impose tariffs in his first administration but then typically leveraged these threats to negotiate fairer trade deals and somehow did not need to impose many of the threatened tariffs. I think this is just Trump being Trump: He is very good at threatening and posturing, and most of this tariff bluster is merely good theater to help negotiate better trade deals. The bet here is that major tariff hikes do NOT get levied. [It was recently reported that Mexico has announced that it will stop caravans from crossing to the US border after Trump threatened to impose a 25% tariff unless Mexico helps stop drugs and illegal immigrants from crossing into the US. That, I think, is EXACTLY the point of Trump’s bellicose tariff threats.]
9. Allow a Schedule A deduction for auto loan interest. Sure, why not? Almost no one itemizes Schedule A deductions any more thanks to Trump and the huge bump in the Standard Deduction by TCJA. The Standard Deduction is now so large that in 2020 less than ten percent of US taxpayers bothered to item deductions on Schedule A.
10. Index capital gains tax to account for inflation. Investments in the stock market, for example, tend to rise just because of the effect of inflation, and so your taxable “return” on investment needs to be adjusted by inflation. (The point is you really did not “earn” anything if your stock doubled in value and the cost of everything you buy also doubled.) This idea has been around for a long time and because indexing of taxes has become pretty popular this idea may finally be Ready for Prime Time. A related question is, if you index for inflation, do you then tax the “real” return at the same rate as ordinary income, and maybe reduce the maximum tax rates on ordinary income? It gets very interesting very quickly, but the idea in principle is a good one.
11. Eliminate taxes on overtime pay. This sounds hard to administer and EXPENSIVE! I will happily create a 10-hour work week at my firm and exclude income on the other 50 hours I work that week! I just don’t think that is affordable unless it is limited to hourly workers—and then the employers may well decide that instead of double time or time-and-a-half they now pay time-and-five-percent (but we will give you overtime that is tax free!). There are too many ways to game this—and it is not likely to be part of the 2025 tax package.
12. Eliminate “green” incentives, particularly the electrical vehicle credit. Trump wants to “drill baby drill” for U.S. fossil fuels, wants the U.S. to be energy independent and a net exporter of oil, gas and other hydro-carbon products, and is clear not a fan of the exorbitantly expensive and economically wasteful “green” energy subsidies. Reversing the spending priorities of the hilariously mis-named Inflation Reduction Act of 2022 will be a central part of Trump’s agenda. The writing is on the wall, and some people are already complaining that without the EV tax subsidies Trump’s new BFF, Elon Musk, and his company Tesla, will dominate the electric car market even more so than Tesla already does. But the counter argument is that if Musk can make electric cars profitably without federal subsidies, then more power to him—and don’t waste tax dollars on a technology that can’t be commercially viable without the subsidies. So expect to say good-bye to the EV credit. Other energy credit programs of longer duration, including wind and solar, may get a reprieve, but maybe not—neither renewable energy source has been particularly stellar as an alternative to fossil fuel and especially compared to nuclear energy. Nuclear energy, by the way, has been making a quiet but noticeable comeback of late, so keep an eye on small modular reactors. Trump does not buy into Green politics and he may just be willing to push heretical nuclear energy as the reliable and safe non-carbon generating energy source. We definitely live in interesting times.
13. Increase the tax on university endowment funds. Harvard University has been described, hilariously and with biting accuracy, as a tax-exempt hedge fund that also operates a small private college on the side. The 2017 Tax Act for the first time imposed an excise tax on (large) endowments of certain private nonprofit colleges and universities. This tax is assessed at the relatively paltry level of 1.4% on net investment income in cases where the college had at least 500 students and the endowment assets exceeded $500,000 per student. Harvard’s endowment has now grown to $54 billion, and I fully expect Trump to increase this excise tax and maybe expand it to public universities as well – hello University of Texas! Frankly, a great target tax rate would be to subject university endowments at the same income tax rate as corporations – currently 21%. Among other things, universities, famously hostile to for-profit businesses, would suddenly be taxed in the same basket as all other businesses. This seems entirely appropriate given that Big Education has become a huge economic sector in the U.S. economy and moreover acts EXACTLY like a profit-motivated business in most or all important respects.
We Are All Spectators Now To The Spectacle
In looking for an historical precedent to our suddenly wide-open array of dramatic new tax and fiscal policies, my thoughts were drawn to 1933, when the United States was wallowing in the Great Depression and Dr. Francis Townsend offered up a fascinating and wildly creative proposal that became known as the Townsend Plan. Townsend’s idea was to address, simultaneously, the Depression and poverty among senior citizens (this prior to the advent of Social Security) by sending each American age 60 years or older a monthly pension payment of $200 a month (a LOT of money at that time) provided that seniors then had to spend the money immediately within a month. On the surface, the Townsend Plan was an exotic combination of Keynesian economics and a Social Security Program all wrapped into one.
The Townsend Plan became improbably popular during 1933, and drew an impressive amount of populist support – shades of Trump. Then-President Franklin Roosevelt, along with the other establishment politicians, hated the Townsend Plan as irresponsible and unworkable – but it did force Roosevelt to introduce and promote his Social Security plan to counter Townsend’s growing popularity. Social Security was enacted in 1935 – and the initial benefits (around $35) were relatively paltry compared to Townsend’s $200 target, but Townsend was the catalyst that made Social Security a reality.
Tellingly, in the midst of this fairly serious and controversial Townsend Plan debate, H.L. Mencken, the legendary journalist who was both a fiscal conservative and a renowned curmudgeon, expressed unexpected support for Townsend. Asked how on earth he could support a crazy idea like the Townsend Plan, Mencken replied, “I would like to see the Townsend Plan enacted. I would also like to see a volcanic eruption and I have always wondered what it would be like to see New York City bombed from the air. I always love a spectacle.”
Mencken’s take on the Townsend Plan is arguably the best and indeed perhaps the only sensible viewpoint to hold as we wait in watch for the second Trump Administration. Trump has his mandate, his monkey wrench, and his powerful desire to change the fundamental plumbing of the American government. Like everyone else, I feel varying degrees of exhilaration, fascination, optimism and doubt. It should be interesting and startling and at times disconcerting.
There is really no way any of us really knows just now where all this creative chaos will take us. One thing, however, seems easy to predict: With Trump in charge, it will always be a spectacle.
Joseph B. Darby III, Esq., is an adjunct professor at the Boston University School of Law and the founding shareholder of Joseph Darby Law PC, a law firm that concentrates on sophisticated tax and estate planning for individuals and businesses.