A recent report from the Congressional Budget Office (CBO) has projected a significant increase in income tax revenue following the expiration of the Tax Cuts and Jobs Act (TCJA). The report predicts an 11% jump in income tax revenue in 2026, followed by another 10% increase in 2027, before returning to normal growth between 3% and 4% annually. However, this increase in revenue comes with economic costs and implications.
According to the CBO, the widening gap between government spending and tax revenues will reach $1.9 trillion in 2024, 27% larger than the projection made in February, primarily due to new government spending. Over the next decade, deficits will total $22 trillion, with public debt reaching $50 trillion in 2034, equivalent to about 122% of GDP.
These drastic increases in debt and deficits are expected even with the higher projected revenues from the expiring TCJA provisions. As these provisions expire, the CBO estimates total federal government revenue will rise from 17% of GDP in 2025 to 18% of GDP in 2027. This increase is primarily driven by higher individual income tax revenues, which are expected to climb from 8.6% of GDP in 2025 to 9.8% in 2027.
However, the Tax Foundation estimates that if the TCJA is allowed to expire, about 62% of taxpayers would see higher tax burdens. Furthermore, the CBO predicts that the expiration of the TCJA will lower the labor force participation rate and reduce output due to higher tax rates.
If lawmakers were to make the TCJA’s lower individual income taxes permanent, it would permanently increase the return to labor, boosting incentives for workers and leading to more total hours worked and more output. However, this would result in much lower revenue, dropping by $3.6 trillion conventionally and $3.2 trillion dynamically.
As lawmakers consider ways to rein in budget deficits, they should recognize that higher taxes come with trade-offs: less economic growth, business investment, and employment. Now is the time for lawmakers to pursue long-term fiscal sustainability, but primarily through reduced government spending, not increased taxes. However, to the extent that a deficit reduction package includes modest tax increases, a better-designed tax system should be the goal.
While neither full expiration nor a deficit-financed full extension of the TCJA would be appropriate, lawmakers should consider the incentive effects of whichever tax reform they pursue. Because taxes affect the economy, they also affect the sustainability of debt reduction. For more insights, visit Tax Foundation.