Introduction
A government’s economy is a critical indicator of its overall health. To maintain and improve the economy’s mechanisms, state departments, the President’s Office, and Congress collaborate. One of the primary tools they utilize is the budgeting process, through which the government can identify economic gaps by carefully reviewing tax expenditures and revenue sources. Once these gaps have been identified, policymakers can work to develop targeted solutions that address specific needs and promote overall economic growth.
By taking a holistic approach to budgeting, government officials can help ensure that the economy remains strong and resilient, even during times of uncertainty or hardship. The objective of the given paper is to review the budgeting process in effect in the context of the Inflation Reduction Act of 2022 and the Tax Cuts and Jobs Act of 2017.
This paper provides an overview of the budgeting process, the Tax Cuts and Jobs Act, the Inflation Reduction Act of 2022, and its implications. Adjustments of tax brackets and standard deductions in both policies help the government control the budget deficit, employment, economic growth, and inflation within the budgeting process.
Budgeting Elements and Steps
Before analyzing the revenue and expense streams of the governments, it is vital to understand the basic facts of the budgeting process, which involves many parties. As a rule, the President submits a proposed budget for the forthcoming year to initiate the annual federal budget process. Such a budget proposal, which results from a collaborative process involving the President’s Office and federal agencies, serves three crucial purposes. The first reason is that it informs Congress of the President’s suggestion for actual national fiscal policy. This includes how much should be spent on public benefits, how much tax revenue must be collected, and how much of a deficit is allowed (CBPP, 2023).
Second, the President’s budget outlines the administration’s organizational importance for government programs, including how much money should be allocated to the military, farming, education, health care, and other sectors. Finally, although Congress is unlikely to consider such recommendations, the President’s budget typically includes certain suggestions to modify certain required programs and other areas of revenue legislation (CBPP, 2023). Therefore, the budgeting process implies allocating existing funds and coverage of revenue streams.
However, other government initiatives and steps are associated with the budgeting process. After questioning government representatives during hearings, Congress can create its budget proposal, known as a budget resolution. After the budget committees approve, the resolutions move to the House and Senate levels for amendment (CBPP, 2023).
The House and Senate must concur on a summit settlement before passing the same resolution; alternatively, one house must approve the resolution that the other has already passed (CBPP, 2023). Thus, the budget bill for the current fiscal year is said to have been enacted at this point. Consequently, understanding the various steps and procedures involved in the budgeting process is crucial for comprehensively understanding the matter and its potential impact on the citizens and businesses.
Finally, legislation that increases taxes and finances programs is a component of budgeting and programming, and revenue-related changes depend on one significant factor. The Treasury borrows money as needed if revenue is insufficient to cover the ensuing spending. However, there is a distinct dollar ceiling on Treasury borrowing. Once reached, the debt ceiling will become unconstitutional (DiIulio et al., 2021).
In other words, the Treasury will be prevented from financing to compensate for the government’s legal obligations to pay contractors who have completed their agreements, workers, Medicare bills, interest on its debt, and others. Instead of requiring the Treasury to break the law and unlawfully default on obligations, Congress always settles this legal problem by increasing the debt ceiling to a new dollar amount or suspending it for a certain time (CBPP, 2023).
As a result, discussions of legislation to increase the debt ceiling and the budgeting process may be contentious and time-consuming. Therefore, the budgeting process is an intricate procedure that entails not only establishing the amount of money required for the public good and the funds required by the government, but also aligning the federal budget with the debt ceiling and the state’s financial capabilities.
The Tax Cuts and Jobs Act
Purpose
The first legislation worth analyzing is the Tax Cuts and Jobs Act (TCJA), which was signed into law in December 2017 and was in effect from 2018 till 2021, representing the most significant overhaul of the U.S. tax code in decades. In general, as can be seen from the initiative’s name, it is founded on reducing tax burdens for both corporations and households. First, the corporate income tax rate was permanently reduced from 35% to 21%, along with other significant adjustments to corporate taxation (Tax Foundation, n.d.).
To mitigate the bill’s impact on the deficit and compensate for a substantially lower corporate tax rate, many additional company tax adjustments were either temporary or expected to change over the following ten years (Tax Foundation, n.d.). However, while the tax law from 2018 to 2021 was supposed to reduce the burden, companies will now be subject to several planned tax changes beginning in 2022 and continuing through another four years.
Another aspect of the Act is that it affects corporations by ceasing the amortization of research and development (R&D) spending. Before the TCJA, a business could instantly deduct the expense incurred for research or testing. Since 1954, the U.S. tax code has allowed companies to deduct their research and development expenses (Tax Foundation, n.d.).
However, under the TCJA, businesses that spend on research and development will often need to stretch out their investment expenses over five years, starting with tax years after 2021 (Tax Foundation, n.d.). Consequently, the modification increases the cost of investing in development in the United States and raises the tax liability of companies that undertake such investments.
The Act eliminated personal exemptions for individual taxpayers, such as healthcare and mortgage. Previously, taxpayers could write off the interest costs on the first $1 million in debt used to buy (or significantly renovate) a permanent residence and another residence, as well as the first $100,000 in home equity credit (Tax Policy Center, n.d.).
The TCJA removed the deduction for interest on home equity loans and restricted it to the first $750,000 of the original loan for taxpayers who took additional mortgages after the law’s implementation. Moreover, previously, taxpayers could write off out-of-pocket healthcare bills that exceeded 10% of their adjusted gross income (AGI) (Tax Policy Center, n.d.). Therefore, a decrease in such exemptions could have a negative impact on many households.
The rules for healthcare are based on exemptions and required coverage. In 2017 and 2018, TCJA authorized deductions for out-of-pocket medical costs exceeding 7.5% of adjusted gross income (Congress, 2018). The previous law’s 10% AGI requirement will be effective after 2018. Additionally, starting in 2019, those who do not sign up for suitable health insurance coverage will not be penalized under the new rule (Tax Policy Center, n.d.).
The exclusion of the fine tax will result in fewer people obtaining free or discounted coverage. The decreased costs of Medicare Advantage, other incentives, and premium tax rebates under the Affordable Care Act will far outweigh the lost revenue from lowering the fine tax rate to zero (Tax Policy Center, n.d.). As a result, due to such actions, the federal budget deficit will decrease overall.
Finally, the rule related to consumers is founded on the new methods of inflation indexing. The weighted CPI-U replaced the Consumer Price Index for All Urban Consumers (CPI-U) under the Consumer Price Index Modernization Act (Congress, 2018). Since it considers customer alternatives for products whose prices grow more quickly than others, the chained CPI-U tracks shifts in consumer satisfaction brought on by price increases more precisely (Tax Policy Center, n.d.).
As such, the chained CPI-U grows more slowly than the standard CPI-U, resulting in higher tax rates for people and slower rate rises for indexed tax credits than they would have under the previous indexing method. Therefore, adopting the new inflation indexing creates a more precise system of assessing consumers’ quality of life and the necessity of protective measures.
Implications
The Act has far-reaching implications for individuals, businesses, and the economy as a whole. For instance, regarding the impact on individual taxpayers, it significantly changed the tax code. As was seen, the TCJA increased the standard deduction and decreased tax rates for most taxpayers. These changes resulted in lower tax liabilities for many individuals. However, it also limited or eliminated several deductions, which could result in higher tax liabilities for some taxpayers.
The implications of these changes for the economy are mixed. On the one hand, individuals with lower tax liabilities may have more disposable income, which could lead to increased consumer spending and stimulate economic growth. On the other hand, individuals with higher tax liabilities may have less disposable income, which could lead to decreased consumer spending and slower economic growth. Therefore, at this stage, the government may need to decide whether it requires additional measures to support underprivileged communities.
The Tax Cuts and Jobs Act also considerably modified the tax code for businesses. As mentioned, the decision to lower the corporate tax rate from 35% to 21% made the U.S. more competitive with other countries in terms of corporate tax rates. The implications of these changes for the economy are also mixed. Lower corporate tax rates incentivize businesses to invest in the U.S. and create more jobs, which could stimulate economic growth. By paying fewer taxes, corporations can invest more in development and production, ultimately benefiting consumers, shareholders, companies, and the government through increased GDP.
On the other hand, the new deduction for pass-through businesses could result in a loss of revenue for the government, potentially impacting government programs and services. Furthermore, when analyzing the given tax rule, it can be seen that the TCJA was designed to stimulate economic growth by reducing the tax burden on individuals and businesses.Considering the lower taxes for corporations and households, the government aimed to stimulate economic activity, improving employment rates.
The Act was additionally intended to simplify the tax code, making it easier for individuals and businesses to comply with tax laws. The implications of these changes for economic growth remain a topic of debate. On the one hand, it can be argued that the Act will stimulate economic growth by increasing consumer spending and business investment. On the other hand, it can lead to grown government debt and cause long-term financial problems.
Therefore, the Tax Cuts and Jobs Act has a significant impact on the U.S. economy. It brought significant changes to the tax code for individuals and businesses, which could lead to increased consumer spending, business investment, and economic growth. However, it also has the potential to increase government debt and create long-term economic problems. The full impact of the TCJA on the U.S. economy is still unclear, and the Act will likely continue to be debated and analyzed for years to come.
The Inflation Reduction Act of 2022
Purpose
Another legislation worth analyzing is the Inflation Reduction Act (IRA) of 2022, which aims to curb inflation in the United States by implementing measures that will reduce the growth of prices in the economy. The Act proposes changes to the tax code that will impact how taxes are levied and collected. The Senate provides an overview of the act, stating that it will significantly reduce the deficit to combat inflation, reinvest in local manufacturing and energy generation, and reduce carbon dioxide emissions by nearly 40% by 2030 (Senate, 2023).
The package will prolong the extended Affordable Care Act program for another three years through 2025 and enable Medicare to ultimately bargain for the cost of prescription drugs. For the next ten years, the FY2022 Budget Reconciliation bill plan will allocate approximately $300 billion for initiatives aimed at reducing deficits and $369 billion for those combating climate change (Senate, 2023). Reforming is necessary to enable domestic operations, reduce consumer costs, and assist the government in achieving the nation’s long-term emissions targets.
The IRA will generate millions of jobs and well-paying, high-quality positions that offer working families a route to the middle class, especially those traditionally disadvantaged in the building and manufacturing sectors. Companies that hire registered trainees or pay the prevailing wage are eligible for bonus credits under many clean energy tax laws (The White House, 2022-a).
Numerous sections encourage American manufacturing and labor by offering bonus credits for projects that satisfy specific domestic content standards for steel, iron, or other manufactured goods (The White House, 2022-b). Moreover, the Act’s historic investments in clean energy will provide numerous opportunities for small companies, particularly those owned by women and people of color, to thrive and create employment opportunities that support families.
First, the IRA proposes to adjust the income tax brackets to account for inflation. The income thresholds for each bracket will be increased to prevent taxpayers from being pushed into higher tax brackets due to inflation. This means taxpayers can keep more of their income and pay lower taxes. Second, the standard deduction is a fixed amount taxpayers can deduct from their taxable income before calculating their taxes (Senate, 2022). The Inflation Reduction Act proposes to increase the standard deduction to account for inflation. This will provide additional tax relief to taxpayers, reducing their tax liability.
Third, the act involves Medicare’s permission to bargain prescription prices, a $2,000 limit on out-of-pocket expenses, and a reduction in the costs of ACA health insurance for millions of Americans (Senate, 2022). Moreover, the Act proposes to increase the child tax credit to provide additional support to families with children. The credit will be fully refundable, meaning that even families with no tax liability can benefit from it. This will provide additional financial support to low-income families and reduce child poverty.
Furthermore, the Act proposes eliminating certain deductions, including state and local tax deductions and mortgage interest deductions. Taxpayers often use these deductions to reduce tax liability, but they disproportionately benefit wealthier taxpayers. Eliminating these deductions will make the tax code more equitable and relieve the tax burden on lower-income taxpayers.
According to the Senate (2022), the government will identify tax loopholes and uphold the tax system while ensuring additional taxes for people making $400,000 or less or small companies. This will help bring more revenue to the government, as wealthier citizens will pay higher taxes, while marginalized communities will not face such financial pressure.
Implications
The implications of the Act mainly involve the influence of policies aimed at reducing inflation and providing tax relief to most taxpayers. One of the primary goals of the IRA is to reduce inflation in the U.S. economy. The Act proposes several measures to achieve this goal, including adjusting tax brackets and eliminating certain deductions. These measures will help reduce the tax burden on lower-income taxpayers, increasing their disposable income and reducing the overall cost of living. As a result, businesses may lower their prices, potentially leading to a decrease in inflation.
Reducing inflation could lower the cost of goods and services, thereby benefiting businesses by reducing their expenses. Additionally, increased consumer spending could lead to higher demand for goods and services, ultimately benefiting businesses by boosting their revenue. However, eliminating certain deductions could increase the tax burden on some businesses, particularly those relying on them to reduce their tax liability.
Therefore, the Inflation Reduction Act proposes several significant changes to the tax code that could have far-reaching implications for the U.S. economy. The reduction in inflation, the increase in consumer spending, and the improved tax equity could all have a positive impact on the economy. However, the impact on businesses could be mixed, as some could benefit from the reduction in inflation and increase in demand. In contrast, others could be negatively impacted by eliminating certain deductions. Overall, the Act represents a significant tax code reform that could have positive and negative implications for the U.S. economy.
Conclusion
Hence, the government can regulate unemployment, economic growth, budget deficit, and inflation through changes to tax rates and the standard deduction in both policies within the budgeting process. The budgeting process implies allocating current resources and considering revenue sources. The Tax Cuts and Jobs Act went into effect in 2018 and was officially signed into law in December 2017. The policy’s implications include improving consumer spending, company investment, and economic growth. Additional implications involve a rise in public debt and long-term economic issues.
The Inflation Reduction Act of 2022 is another piece of legislation that merits consideration. It intends to control inflation in the United States by enacting policies that would slow the rise of prices in the market.The policy’s implications include the benefit of the decline in inflation, therise in consumer spending, and better tax equality. Other implications involve uneven effects on firms, as some may profit from the fall in inflation and rise in demand, while others may suffer from the termination of various deductions.
References
CBPP. (2023). Policy basics: Introduction to the Federal budget process. Center on Budget and Policy Priorities. Web.
Congress. (2018). An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. Web.
DiIulio, Jr., J. J., Wilson, J. Q., Levendusky, M. S., Bose, M. (2021). American government: Institutions and policies. Cengage Learning.
Senate. (2022). The Inflation Reduction Act of 2022. Web.
Tax Foundation. (2022). Details and analysis of canceling the scheduled business tax increases in the Tax Cuts and Jobs Act. Web.
Tax Policy Center. Web.
The White House. (2022-a). Building a clean energy economy. Web.
The White House. (2022-b). Inflation Reduction Act Guidebook. Web.