Both Sides In DC Are Already Drawing Red Lines Over A 2025 Tax Fight

(Yahoo! Finance) - A mammoth tax debate that will dominate Washington in 2025 is already well underway in 2024.

The latest example came Monday with a speech from Sen. Elizabeth Warren, the leading Massachusetts Democrat, where she called on Democrats to "stiffen our spines" for the fight ahead.

She also laid out a series of what she termed red lines during her remarks, including her desire for new taxes for corporations and billionaires.

Republicans, meanwhile, are set to do everything they can in the months ahead to make sure those red lines never come into play. And they are laying out ideas of their own.

Donald Trump floated a range of tax ideas as he criss-crossed Washington DC during a recent visit as he continued his overall push for a straight extension of those 2017 cuts.

The flood of ideas are perhaps most instructive not as likely policies. They instead act as a window into the partisan best-case scenarios as well as attempts by both sides to nudge the conversation to friendlier ground.

Which ideas survive the winnowing process in the months to come very much remains to be seen.

The true parameters of the debate will be decided by the results of this fall's election when it becomes clear who will control the White House and the two chambers of Congress.

At this point, there are perhaps only two things that both sides agree on.

The first is that the key deadline is December 31, 2025 — a full 560 days from now — when a range of provisions from the 2017 Trump tax cuts are set to expire. The second is that they would both like to put additional items on the table for discussion.

The corporate tax rate is a key example. The 2017 Trump-era law lowered that tax rate to 21% from 35% but made the level permanent and technically not up for debate next year.

That's unlikely to be true in practice with Republicans pushing for further lowering and Democrats wanting to bring it back up, at least somewhat.

"We know historically that when major tax provisions expire, that prompts a new conversation in Congress about where the tax code should go," said Bharat Ramamurti on a recent call with liberal allies. He is a former top Biden economic aide who is now focused on the issue from the outside,

"We need to widen the frame and broaden people's perspective beyond the provisions that are expiring," he added.

A flood of ideas

During Donald Trump's recent visit to Washington, the former President seemingly workshopped his 2025 tax platform on the fly.

Before CEOs, he talked up a notion of reducing the corporate tax rate to 20%. Before House Republicans, he floated another idea of scrapping the entire US income tax system in favor of higher tariffs.

Trump allies on Capitol Hill are likewise working on their own proposals — and being a bit more methodical about it.

Rep. Jason Smith, the Missouri Republican and chair of the House's tax-writing committee, has already formed 10 'tax teams' made up of lawmakers to present ideas in areas ranging from taxes and community development to global competitiveness.

"We're not holding our breath!" quipped Tobin Marcus, the head of US policy and politics at Wolfe Research, in a recent note to clients.

He was discussing Trump's idea to scrap the US income tax system, but it's a comment that could be applied to the many trial balloons currently floating around Washington.

From the left, much of the focus right now is on laying out ambitious plans while also making a moral case for voters as to why taxes on billionaire and big corporations need to go up.

In Warren's speech, which took place at a tax event put on by the Washington Center for Equitable Growth, the senator predicted that the tax issue would help drive President Joe Biden to re-election.

She added that either way "if Democrats take the coward's way out and sign our names to a half-baked deal that lets the wealthy off the hook, it will be a huge failure — and one the American people cannot afford."

"Taxes reflect our values,"she added.

For his part, Biden has often discussed his plan for taxes in 2025 if he wins as focused on renewing provisions from the 2017 tax cut that impact Americans making under $400,000 a year, while letting the provision for the rich revert to pre-2017 levels.

Biden also released a budget that pushes for an increase in the corporate tax rate to 28%.

Different scenarios depending on who controls Washington

Voters will set Washington's 2025 power matrix this fall, with this November's results shaping the actual debate coming in 2025.

Nearly every scenario is likely to require significant compromises on both sides.

Experts have been hard at work laying out the various scenarios. Everything from a "full Trump" scenario — where Trump wins and Republicans control both sides of Capitol Hill — to a "Dem Trifecta" (the opposite) remain real possibilities.

But a split decision by voters could not just be welcomed by markets but also force lawmakers into detailed negotiations. It's a scenario figures like Sen. Warren and Rep. Smith are clearly preparing for now in order to gain the strongest possible hand next year.

A sweep by either party would require less compromise.

A Republican sweep is a scenario Republicans discuss often and one they are already making plans for.

They would almost surely try and push their tax cut ideas through on a party-line basis using a process known as reconciliation that requires only a simple majority in the Senate.

"We believe we're headed for a great November," House Speaker Mike Johnson said recently, adding if they take full control of Washington "we will not waste a moment."

But even that scenario is likely to require at least compromises. An intra-GOP debate is already underway about how (or if) to pay the $4 trillion price tag that would come with extending the tax cuts.

Ben Werschkul - Washington Correspondent


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