A roadmap to Trump’s 2025 fiscal policy agenda

If Republicans manage the fiscal challenges of 2025 effectively and lower taxes again, the U.S. may enter an era of significant economic and budgetary changes.

The president’s speaking podium at the White House
Washington, D.C., June 29, 2018: Preparations for President Trump’ event celebrating the six-month anniversary of his tax cut in the East Room of the White House. © Getty Images
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In a nutshell

  • The Trump administration aims to push major tax cuts through Congress
  • Thin Republican majorities in both houses pose a formidable difficulty
  • A soaring deficit and divergent agendas among lawmakers complicate efforts

Fiscal and economic policy in the United States will encounter crucial moments in 2025. On January 20, Republican Donald Trump was sworn into office for his second term as president, and the Republican Party has low single-digit majorities in both chambers of Congress. This Republican-dominated Washington will face significant fiscal deadlines that demand politically perilous action.

The year culminates with the expiration of more than $400 billion worth of tax cuts (just shy of 8 percent of projected 2026 federal revenue). The automatic tax increase on most American families will provide a political imperative for Congress to act. Before the end-of-year tax deadline, Congress will also have to address government funding deadlines, raise the debt limit to increase government borrowing authority and deliver on President Trump’s campaign promises to secure the border and unleash domestic energy production. 

While each priority will be important, the most consequential fiscal and economic decisions will follow the tax expiration deadline. The sprawling legislation necessary to address the tax cliff has innumerable margins on which the debate will play out. What follows is a brief guide to some of the most important decision points affecting domestic and international economies. 

The expiring tax cuts 

At the beginning of President Trump’s first term, Republicans passed the Tax Cuts and Jobs Act of 2017, which cut taxes for individual Americans at every income level (even high-income citizens in high-tax states mostly got tax cuts due to lower rates and changes in the alternative minimum tax), lowered business taxes to boost domestic investment and made significant reforms to the structure of the U.S. tax system – simplifying taxes for individuals and adding new complexity for many businesses. 

These two business tax cuts are responsible for most of the resulting economic growth, additional domestic investment and significant pre-pandemic wage gains.

The key piece of the reform for driving long-term economic growth was the permanent reduction of the corporate income tax rate from 35 percent – one of the highest tax rates in the developed world – to 21 percent, which, after accounting for state-level taxes gives the U.S. a rate that is slightly above the Organisation for Economic Co-operation and Development (OECD) average. The lower corporate income tax rate was paired with immediate deductions for the cost of new investments – called full expensing – which began to phase out in 2023.

The key piece of the reform for driving long-term economic growth was the permanent reduction of the corporate income tax rate from 35 percent – one of the highest tax rates in the developed world – to 21 percent, which, after accounting for state-level taxes gives the U.S. a rate that is slightly above the Organisation for Economic Co-operation and Development (OECD) average. The lower corporate income tax rate was paired with immediate deductions for the cost of new investments – called full expensing – which began to phase out in 2023.

These two business tax cuts are responsible for most of the resulting economic growth, additional domestic investment and significant pre-pandemic wage gains.

The remaining components of the 2017 tax package – tax cuts and other changes affecting individual taxpayers – expire on December 31, 2025. These include lower income tax rates, larger tax credits for children, simplifying and consolidating personal deductions and exemptions, special provisions for personally owned small businesses and lower taxes on estates at death. 

Republicans have campaigned to extend and expand these tax cuts, but the exact path forward is unclear. 

Constraints of process and politics 

Republicans will use an arcane budget procedure known as reconciliation to fast-track their tax package and avoid the need for Democrat votes in the Senate (the same process was used in 2017). Even with fast-track authority, slim vote margins in both chambers of Congress and large budget deficits will make piecing together a final package difficult. 

Without careful consideration, Republicans risk repeating the debacle of John McCain’s no vote – with an iconic thumbs-down gesture on the floor of the Senate – ending their quest for healthcare reform in the summer of 2017 and kicking off the sprint to pursue tax reform by year-end. Balancing political factions when any small group of members can veto the package will be perilous. 

Many Republicans in Congress will be concerned about worsening the U.S. fiscal situation, so an extension of the 2017 tax cuts without any additional changes is unlikely. This will open the door to including spending cuts in the package. However, each new issue adds another potential failure point for the final bill. The 2026 budget deficit is projected to be $1.9 trillion, or 6 percent of gross domestic product (GDP), without extending the tax cuts. Extending or expanding the tax cuts will add to the 2026 projected $32 trillion national public debt, surpassing the size of the U.S. economy ($30.9 trillion according to the Congressional Budget Office) in that year. 

The complete set of proposals from the Trump campaign could add almost $8 trillion in additional deficits over 10 years.

Various political factions also want changes to the tax law that will increase its fiscal cost. Some of these changes include expanding access to deductions for subnational taxes (the state and local tax deduction), more significant child tax credits, expanded subsidies for at-home caregiving and additional access to charitable deductions. President Trump also campaigned for more tax cuts, including removing taxes from tipped, overtime and Social Security retirement income. 

Donald Trump speaks in Nevada on the 2024 campaign trail
Las Vegas, Aug. 23, 2024: Republican Presidential candidate Donald Trump speaks at a restaurant of his proposed policy to eliminate taxes on tips for service industry employees. © Getty Images

He also proposed adding new deductions for interest on car loans, a 15 percent corporate tax rate and tax cuts for Americans living overseas. The complete set of proposals from the Trump campaign could add almost $8 trillion in additional deficits over 10 years according to the Committee for a Responsible Federal Budget (with estimates ranging from $1.7 trillion to $15.5 trillion), leading to an almost doubling of the national debt over the same period. 

Read more from Adam Michel

It is unclear which of these priorities will ultimately be included in the final package. If the president decides something must be included or a group of legislators decide deficit concerns require offsets, they can independently stall the process. 

Tariffs

President Trump famously said on the campaign trail: “To me, the most beautiful word in the dictionary is ‘tariff.’ ” Since the election, the president-elect has already threatened new tariffs on Canada, Mexico and China – layering them atop his campaign promise for universal tariffs on all imports. His nominee for treasury secretary, Scott Bessent, is also tariff-friendly, laying out a “three-legged stool” approach in which tariffs can be used to raise revenue, protect domestic industries and serve as a negotiating tool. 

It is unlikely that significant new tariffs will be included in a legislative package, given their lack of broad support in Congress. However, the executive branch has wide latitude to impose tariffs without explicit congressional authorization. The first Trump administration imposed new levies on washing machines, solar products, steel, aluminum and Chinese goods. In his second term, President Trump can use a similar approach to impose new import levies. 

President Trump’s campaign proposals would “move U.S. tariff coverage from about 15 percent to 100 percent of U.S. goods imports, and it would send the average U.S. tariff rate from around 3 percent to more than 21 percent,” as Cato Institute trade scholar Scott Lincicome summarized

Following the general practice in the first Trump term, international observers should expect carveouts for strategic partners, essential goods, some countries with free trade agreements and other priorities. He may also pursue new trade agreements (big or small) with the United Kingdom, Argentina, South Korea and other crucial partners. 

If President Trump successfully cuts the corporate income tax rate to 15 percent and extends full investment deductions as part of the 2025 tax package, it could further erode the momentum for the OECD’s anti-tax-competition regime.

The actual impact on trade policy is likely to be less than the campaign’s threats and bluster, but it will most certainly result in higher costs for many imports.

Tax competition

The OECD had been working with the Biden administration on a two-pillar tax harmonization regime that fueled a race toward state-centric industrial policy and threatens higher taxes on global investments. The Financial Times reports that the OECD’s ambitious plans are “in peril” following the U.S. election. While many countries have begun implementing the domestic components of the OECD’s Pillar Two minimum tax, it is unlikely that the extraterritorial enforcement mechanisms – the so-called Undertaxed Profits Rule, or UTPR – will be implemented in a way that targets U.S. firms under a Trump administration for fear of American retaliation. 

The multilateral agreement under Pillar One is also likely shelved for now. The digital services taxes it was intended to replace may begin to return, but they will be the subject of broader trade negotiations as they were in 2019 and, like the UTPR, under threat of U.S. retaliation. 

If President Trump successfully cuts the corporate income tax rate to 15 percent and extends full investment deductions as part of the 2025 tax package, it could further erode the momentum for the OECD’s anti-tax-competition regime. Perhaps less likely, but still possible, it could even lead to the rollback of domestically implemented Pillar Two minimum tax components in countries worldwide. 

Degradation of the OECD framework could leave space for similar initiatives at the United Nations, but the countervailing pressures that weaken the OECD framework will also push against any similar work at the UN. 

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Scenarios

More likely: The reform succeeds

If Republicans can walk the highwire of the 2025 fiscal deadlines, the U.S. could emerge with generational economic and budgetary reform. That could include a permanent (or long-term extension) of the 2017 tax cuts, an additional corporate income tax cut, and some meaningful spending reforms to limit budget deficit growth. Paired with the administration’s deregulatory agenda and energy sector reforms, tax cuts would fuel a more significant and lasting supply-side stimulus than President Trump’s first-term initiative. 

Tariffs and trade uncertainty will be a countervailing force, undermining the power of the supply-side agenda. The magnitude of this cost will be determined by the tariff rates, scope and discrepancies between Mr. Trump’s applied and threatened trade levies. 

Less likely: Trump’s project fails 

The highwire act could also end in failure, as healthcare reform did in the summer of 2017. Under this scenario, the number of political factions accumulates too many pressure points, and the big grand bargain fails to gain enough Republican votes in both chambers of Congress (virtually every vote is required). Because taxes go up automatically in 2026, Congress will still pass a tax bill, but it will likely be a year or two extensions of the current law, continuing the political uncertainty and negating the economic benefits. 

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