If you’ve been on social media or tuned into the news lately, you may have heard about Project 2025, a 900-page policy blueprint from the Heritage Foundation. This includes everything from public education and the Federal Reserve to the IRS and the United States tax system.
It is important to remain informed about potential tax changes that could affect your finances.
Changing to two income tax rates: 15% and 30%
Currently, there are seven different income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These marginal rates are tied to inflation-adjusted federal income tax brackets. The Project 2025 playbook suggests that the 30% tax rate should begin “at or near the Social Security wage base,” currently $168,600.
I am all for simplifying the tax code. However, the complexity is with calculating taxable income, not the number of tax brackets. When you actually dive into your tax return, the process of calculating taxable income can get pretty complicated. Just think about all those lines, schedules, and calculations you have to go through! And then, after all that, you've got the tax liability line, which, let's be real, is usually calculated by tax software in a snap. Saying that reducing the tax brackets simplifies the tax code is disingenuous at best.
Let's look at two examples:
A couple with $90,000 in taxable income currently pays 10% on the first $23,200 and 12% on the remaining $66,800. Under Project 2025 all this income would be taxed at 15%
A Couple with $500,000 in taxable income currently pays 32% on income between $383,900 and $487,450 and 35% on the remaining income. Under Project 2025 this income would be taxed at 30%
Imposing a 15% tax on capital gains and dividends
Advocates suggest this would incentivize investment and entrepreneurship. However, those opposed argue a 15% capital gains tax rate is too low. This is tied to existing concerns that lower capital gains rates disproportionately benefit the wealthy and that cutting capital gains tax rates can lead to a loss of government revenue.
Additionally, some argue that maintaining a separate capital gains tax rate alongside ordinary income rates works against simplifying the tax code.
Extending and expanding the 2017 Tax Cuts and Jobs Act
Supporters argue that this would stimulate economic growth. However, critics point to studies suggesting that these cuts have contributed to the national debt. (The Congressional Budget Office estimates that extending the 2017 tax cuts alone would increase the deficit by $4.6 trillion by 2028.)
Another concern is data indicating that nearly half of the tax benefits in the TCJA have benefited the top 5% of U.S. taxpayers. Aside from potentially adding to wealth inequality, it would be difficult to maintain the 2017 tax cuts without significant reductions in federal spending.
Lowering the corporate tax rate from 21% to 18%
Supporters have argued that this reduction might stimulate economic growth by encouraging business investment and job creation. They also contend that a lower corporate tax rate would make the U.S. more competitive, potentially attracting foreign investment.
Meanwhile, opponents worry that reducing the corporate tax rate could significantly reduce government revenue. There’s also the longstanding debate over studies showing limited economic benefits associated with corporate tax cuts. Additionally, some say that lowering corporate taxes shifts the tax burden to individuals and encourages tax avoidance.
Other Changes
Replace Income Tax with Consumption Tax
In different “reform stages,” Project 2025 proposals include eliminating individual and corporate income taxes in favor of a consumption tax. Proponents argue this would simplify the tax system and encourage saving and investment. However, critics warn that such a shift could burden people with lower and middle incomes who spend more on essential goods and services.
Changes to the IRS
Project 2025 also proposes significant changes to the IRS, including budget cuts and increased presidential appointments within the agency.
Additionally, the project advocates a three-fifths vote threshold for future tax increases. In an “intermediate tax reform” stage, the project would repeal the clean energy tax breaks and “all tax increases passed as part of the Inflation Reduction Act.”
While supporters argue changing the IRS would reduce government overreach, opponents worry it could hamper the agency's ability to enforce tax laws and collect revenue effectively. (The IRS has recently increased its compliance efforts relative to high earners and large corporations.)
Project 2025 taxes: Bottom line
Project 2025 is seen as a conservative roadmap for overhauling federal government structure and policy if a Republican administration regains the White House in 2024.
Supporters argue that proposed tax "reforms" would simplify the tax code and boost economic growth and competitiveness. (*Revenue estimates don't appear in the Project 2025 playbook.) However, opponents warn of negative consequences like increased income inequality, ballooning national debt, reduced government capacity to provide essential services and unchecked authority.
In any case, and especially in the current highly charged political environment, it’s important to remain informed about potential tax changes that could affect your finances.
