MMG RESEARCH

Trump Tax Cuts 2.0

Extending the Tax Cuts & Jobs Act and Introducing New Incentives For Businesses

In February 2025, the U.S. House of Representatives passed a budget resolution (H. Con. Res. 14, 119th Congress) aimed at reducing taxes substantially for American households and businesses. Known informally as “Trump Tax Cuts 2.0,” this resolution provides a legislative framework rather than a detailed tax plan, establishing broad fiscal guidelines for Congress. Although Republicans and the Trump administration have not yet released specific legislation, the resolution outlines potential tax and spending changes designed to stimulate economic growth. A key part of the proposed framework includes extending major provisions of the 2017 Tax Cuts & Jobs Act (TCJA).

Principal Framework of the 2017 Tax Cuts & Jobs Act (TCJA)

  • Reduced income tax rates and adjusted tax brackets
  • Increased standard deduction and child tax credit
  • Removal of the overall limit on itemized deductions
  • Creation of a 20% deduction for income from “pass-through” business entities
  • Elevated estate tax exemptions

Preliminary Framework of New Tax Legislation

Individual Income Tax Cuts

  • Make Tax Benefits from TCJA Permanent:
    • The proposal seeks to make permanent the individual tax cuts introduced in the 2017 TCJA, which are currently set to expire at the end of 2025.
  • Proposed New Individual Tax Exemptions:
    • President Trump has proposed eliminating federal income taxes on overtime pay, tips, and Social Security benefits.


Capital Gains & Investment-Related Tax Adjustments

President Trump has suggested several targeted adjustments to investment-related income and corporate taxes, aiming for Congress to incorporate these changes into this the TCJA 2.0 tax legislation. These proposed reforms seek to reduce tax burdens on investment income, encourage domestic manufacturing, and remove limitations on specific deductions to stimulate further economic growth.

  • Reduction of Capital Gains Tax Rate:
    • President Trump’s proposal includes lowering the capital gains tax rate for high earners from the current 20% to 15%.
  • Carried Interest:
    • President Trump proposes closing the carried interest “loophole.” Current rules allow managers of private equity and hedge funds to benefit from lower capital gains tax rates on carried interest if a three-year holding period is satisfied. Potential changes involve taxing carried interest as ordinary income, regardless of the holding period, or extending the required holding period.

Corporate Tax Reductions

  • Lowering the Corporate Tax Rate:
    • Republicans and President Trump are aligned on reducing the corporate tax rate from 21% to 20%, with a further reduction to 15% for companies that manufacture products within the U.S. This change is estimated to apply to approximately 40% of corporations.


State & Local Tax (SALT) Deduction Removal

  • Elimination of the SALT Cap:
    • President Trump has proposed the removal of the existing $10,000 cap on state and local tax deductions, allowing taxpayers to fully deduct these taxes on their federal returns.

 

Budgetary & Economic Implications

CLICK TO EXPAND EACH LIST OF PROS/CONS

  1. Overall taxes are estimated to decline by more than 1% of GDP in 2026
  2. Annual GDP is projected to increase by 0.5% in 2026 and 2027
  3. Lower taxes on work and savings are expected to drive higher economic output
  4. Economic growth could boost taxable incomes and raise Federal revenues
  1. Extending the TCJA likely would exacerbate the nation’s budgetary imbalance
  2. The Federal Reserve may be forced to maintain higher interest rates to prevent economic overheating
  3. Requires offsetting spending cuts that could reverse economic growth

Conclusion

The Trump Tax Cuts 2.0 resolution represents a significant expansion of the 2017 Tax Cuts & Jobs Act (TCJA), aiming to make its provisions permanent while introducing additional tax incentives. By extending individual tax cuts, reducing corporate tax rates, eliminating the SALT deduction cap, and lowering capital gains taxes, the plan seeks to stimulate economic growth, increase disposable income for households, and incentivize domestic investment. Additionally, proposed changes, such as exempting overtime pay and Social Security benefits from taxation, could further benefit middle-income earners.

Economists project that these tax cuts could boost GDP, with annual growth increasing by approximately 0.5% in 2026 and 2027. Lower taxes on work and savings are expected to enhance economic output, while corporate tax reductions and investment incentives could drive further business expansion. While the proposal is positioned as a means to sustain economic growth and encourage investment, its long-term success will depend on balancing tax relief with fiscal responsibility.

As the new tax legislation takes shape, policymakers must balance the benefits of tax reductions with the need for sustainable government revenue and economic stability. Some of President Trump’s proposals, particularly closing the carried interest loophole, may face resistance within the Republican Party due to strong lobbying from the financial sector. Striking the right balance will be essential to promoting long-term economic growth while avoiding a deeper federal deficit.

Sources: Tax Policy Center-Urban Institute & Brookings Institution, U.S. House Committee on Ways & Means, U.S. Department of the Treasury
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