How Trump and Republicans could pay for new tax cuts

President-elect Trump and Republican lawmakers are gearing up to push a massive tax-cut bill through Congress next year but will face pressure to find ways to cover the costs.

While Trump and many of his GOP colleagues argue that well-crafted tax cuts pay for themselves, a vocal band of fiscal hawks within the party are holding out for serious spending cuts.

The $36 trillion federal debt is a point of contention for many Republicans now as they start to consider a top-line budget reconciliation number, a key step toward advancing an eventual tax cut package.

Here’s a look at ways Republicans could consider paying for their tax cuts.

Tariffs

Trump’s campaign pitch for the economy centered on tariffs, a key pillar of his economic agenda during his first administration.

He proposed general tariffs at rates of 10 percent and 20 percent on imported goods, as well as a 60 percent tariff on products specifically from China, one of the U.S.’s main trading partners.

According to one estimate by the conservative Tax Foundation, a 10 percent general tariff would raise $300 billion annually in federal revenues.

Tariffs are levied on importers, who can respond in various ways. 

They can stop importing the good unless the exporter lowers their price; they can hold margins steady and pass a price increase along to a retailer; they can take a hit on margins and keep prices the same; they can also order extra goods in advance of the tariff and increase their inventories, as businesses have already been doing.

Prices in the consumer price index didn’t notably increase in 2018 following the first tranche of Trump tariffs, and certainly nowhere close to the scale of the postpandemic inflation.

There is conflicting research on whether consumers bore the brunt of the first round of Trump tariffs.

One study out of the Federal Reserve of New York and Columbia University found tariffs “were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers.”

Another study from the Harvard University and the University of Chicago business schools found that “tariffs’ impact on retail prices [was] more mixed,” suggesting “that many US retailers reduced the profit margin on their sales of the affected goods.”

That study noted how relatively little is known about how economies respond in the real world to tariffs, “particularly when these trade policies involve large countries that have the potential to influence prices.”

China also can devalue its currency to mitigate the effects of the tariff. Sebastien Breteau, CEO of supply chain company QIMA, told The Hill the Chinese were not concerned about the tariff and that currency adjustments could account for 3 percent to 4 percent of its effects.

Cuts to the Inflation Reduction Act

Republicans have expressed interest in making cuts to the Inflation Reduction Act (IRA), Democrats’ sweeping climate technology law passed in 2022.

A wholesale repeal of that law’s climate provisions would generate approximately $369 billion. But that’s unlikely because the IRA is popular in many Republican districts across the country.

Eighteen Republicans wrote to Speaker Mike Johnson (R-La.) in August, telling him not to repeal the law, arguing it would “undermine private investments and stop development that is already ongoing.”

Johnson has sounded varying degrees of intensity on potential IRA cuts, indicating it’s a touchy subject within the conference. As part of a plan for Trump’s first 100 days, Johnson said he wants to “repeal wasteful Green New Deal tax credits and anti-energy regulations.”

But the Speaker told CNBC in September he wanted to “use a scalpel and not a sledgehammer,” in walking back energy transition subsidies, “because there’s a few provisions in there that have helped overall.”

Trump is reportedly planning to get rid of the IRA tax credit for electric vehicle purchases, which would require an act of Congress.

Changes to international business taxes

The international tax regime that was updated in Trump’s 2017 tax law could also be a revenue raiser for domestic cuts, tax experts told The Hill.

“There’s also a lot of potential offsets in the international area that folks are looking at and constructing arguments [about], because there could be significant changes there,” Mark Prater, managing director of tax policy services at accounting firm PwC, said in an interview.

The individual taxes that could be toggled up or down range from the Global Intangible Low-Taxed Income (GILTI) to an alternative minimum tax for corporations that was recently implemented by Democrats, known as the corporate alternative minimum tax.

“These are all levers that could be used in different directions,” Martin Fiore, the Americas deputy vice chair of tax at accountancy EY, said during a recent online event.

Other tax experts think changes to the wide-ranging GILTI regime, such as implementing it on a country-by-country basis, are off the table because of potential pushback from industries with different tax interests.

“At the end of the day, GILTI is a Republican regime,” said Jose Murillo, EY’s international tax leader. “To me, it’s unlikely that in the next four years we see any changes to it.”

The employee retention tax credit

A tax deal that passed the House with wide bipartisan support earlier this year — but that failed to make it through the Senate over the summer due to Republican opposition — was largely paid for with a cancellation of the employee retention tax credit (ERTC).

That pandemic-era credit was designed to help businesses keep workers on payroll as the economy was shut down and was valued at more than $70 billion.

Aggressively marketed to businesses by advertisers in the tax and accounting world, the program has since become riddled with fraud, according to the IRS, and could still be on the minds of lawmakers as a potential revenue raiser.

Ways and Means Committee Chair Jason Smith (R-Mo.) and panel member Rep. David Schweikert (R-Ariz.) wrote to the IRS last year about problems with the program, asking about the “agency’s plan to resolve the backlog of unprocessed ERTC claims [and] prevent fraud.”

The growth and dynamic scoring argument

A common Republican argument in Washington about tax cuts is that they pay for themselves because they spur economic growth. The loss in linear revenue, they argue, is offset by the fact it’s taken from a larger overall output.

Official government tax accounting from bodies like the Congressional Budget Office and Joint Committee on Taxation does not take this into account, so Republicans often rely on broader, unofficial metrics known as “dynamic scoring.”

While tax experts acknowledge some degree of growth is associated with cutting taxes, most say the effects are much less pronounced than the political rhetoric suggests.

“Everybody in my profession agrees with me: Yes, there are dynamic effects to tax cuts. They can reduce the deficit and reduce the static cost. But 99.9 percent of economists do not believe that there’s going to be so much growth that it would offset any cost,” Marty Sullivan, chief economist at Tax Notes and a former member of the Joint Committee on Taxation, told The Hill.

In 2019, the Congressional Research Service (CRS) estimated the 2017 Trump tax cuts achieved only 5 percent or less of the growth needed to fully make up for the loss of revenue. 

Gross domestic product would have needed to grow by 6.7 percent in 2018 to offset the loss, when it actually grew by just 0.3 percent, according to CRS. Growth estimates from financial companies including Goldman Sachs, Moody’s Analytics and Barclays range from 0.1 percent growth to 0.5 percent.

“Sorry, folks. Large tax cuts will have large negative effects on the deficit,” Sullivan added.