As the legislation is set to expire on December 31, 2025, discussions about whether to extend or let it lapse are intensifying. The decision will have major implications for tax rates, the federal budget, and economic growth.
The TCJA lowered corporate tax rates, reduced individual income tax brackets, and increased deductions such as the Child Tax Credit. However, many of its provisions, particularly those related to individual taxes, are set to expire at the end of 2025.
In a Thursday note, economists at Wells Fargo highlight the key scenarios that could unfold depending on the election outcome.
A full expiration of the TCJA would lead to a tax hike starting in 2026, which could tighten fiscal policy. However, economists doubt this scenario alone would be enough to push the U.S. into a recession. The impact on economic growth would likely be modest, reducing GDP by a few tenths of a percentage point in 2026 and 2027.
“If the TCJA were to expire as scheduled, it likely would dent economic growth in the near-term—though not enough to knock the U.S. economy into a recession,” according to the note.
On the other hand, if the TCJA is extended in full, it would come at a significant fiscal cost, adding around $4.6 trillion to the federal deficit over the next decade.
Wells Fargo projects this would increase annual budget deficits to 7-8% of GDP, a level of borrowing rarely seen outside of wartime or recession. Despite this, the note suggests that extending the TCJA might not drastically alter economic growth projections:
“Extending the TCJA would avert fiscal tightening rather than expand fiscal accommodation,” economists explained.
Looking ahead, Wells Fargo considers potential policy changes depending on the election outcome.
Republicans generally favor extending or even expanding the TCJA, while Democrats are more likely to pursue a partial extension.
Vice President Harris supports extending the tax cuts for those earning under $400,000 per year but letting them expire for higher earners. The economic drag from such a partial extension would be relatively small, with GDP growth expected to slow by about a tenth of a percentage point in 2026.
Ultimately, the decision on the TCJA will depend on the results of the 2024 election.
A Republican sweep could pave the way for a full extension or further tax cuts, while a Democratic victory could lead to a more limited continuation of the law.
Either way, the macroeconomic effects of any changes to the TCJA are unlikely to be felt until 2026, Wells Fargo points out, giving lawmakers time to negotiate a solution.
Source: Economy - investing.com
