April 15th is just around the corner. While we settle up our 2025 taxes, it is a good time to take stock of all the fiscal changes that have occurred. While some have been good, others were bad, and still others were simply ugly.
The Good
Starting with the good, the current affordability pinch could have been a lot worse. The One Big Beautiful Bill Act (OBBBA), signed into law last July, repealed scheduled increases in tax rates for taxpayers across the income spectrum, and stopped the standard deduction from being cut in half. Had these planned changes become effective, your monthly paycheck would be smaller today.
Avoiding a tax increase that you did not know was coming surely feels different than changes that reduce your actual tax payments. However, imagine the income pinch you would be managing had the current rise in energy costs been combined with a smaller after-tax income. Last year’s tax reform avoided this possibility and is helping many families better navigate current economic uncertainties.
Also helping to buoy the economy is the restoration of provisions that improve the incentives for businesses to invest in capital equipment and R&D. These changes will encourage more business investment, which is widely recognized as a critical driver of income growth in both the short- and long term.
That’s the good news.
The Bad
Despite these beneficial changes the tax reform was chock full of giveaways. Because of these giveaways, your federal income tax rates are higher than necessary, and the tax code has become even more complex.
The beneficiaries of tax giveaways vary depending on who controls the White House and Congress. Yesterday, it was green energy projects. Today, it’s people who work for tips. Tomorrow, who knows. The ultimate problem is that the government continues to pick winners and losers to the detriment of overall economic growth.
Particularly troubling, the OBBBA increased the cap on the state and local tax deduction (the SALT cap). The SALT deduction is a giveaway to wealthier taxpayers who itemize their taxes, especially the rich living in high tax states. While that sounds great, there’s a catch.
Because it blunts the impact from high taxes for some taxpayers, the SALT deduction incentivizes states like California to impose higher tax burdens on everyone. In other words, more generous SALT deductions at the federal level lead to higher tax burdens at the state and local level. One of the better parts of the 2017 tax reform capped the SALT deduction at $10,000. Thanks to the OBBBA, the cap has now increased to $40,000.
All these tax giveaways exemplify what is wrong with our tax code. The OBBBA did the economy a disservice by worsening the tax complexity problem.
The Ugly
As soon as the president took office, he imposed a 25% tariff on imports from Canada and Mexico. The tariff increases only worsened from there. Tariffs are taxes, plain and simple; and higher taxes diminish our economic vibrancy.
Tariffs are now significantly higher than when Trump’s second term began. These tax increases offset the benefits from his income tax reductions. For some families, the income tax reductions will more than offset the tariff increases; for others, the tariff increases will overwhelm any income tax savings. Either way, the president’s tariff policy is decidedly anti-growth and is making the country poorer.
Just as bad as the high rates have been the excessive volatility that has scuttled businesses’ ability to effectively plan. Greater uncertainty is detrimental to economic growth, which may explain why economic growth in 2025 was disappointing.
Also harming our prosperity is the overall burden of government spending. Nobel laureate Milton Friedman presciently noted that government spending is government taxation. This makes sense. Every dollar that the government spends is first taxed or borrowed from the private sector. This means that if spending is rising, then so are current or future tax burdens.
Total government spending equaled 25% of the economy in 2025 – the same burden as 2024 and significantly higher than the long-term average of 22%. What’s even more troubling, tax revenues equaled 17% of the economy, which is its long-term average.
In other words, the government is raising the same amount of revenue as it always has but is spending even more. These data demonstrate that, despite the drama surrounding Elon Musk’s DOGE efforts, the government’s spending problems persist.
On Net
The OBBBA was a wasted opportunity. While it avoided a troubling tax increase and extended some important tax reforms, the legislation unwisely narrowed the tax base and increased overall complexity. These flaws could perhaps be overlooked had the Administration not burdened the economy with growth killing tariffs. But they did. Making matters worse, and despite the DOGE rhetoric, the federal government continues to slouch toward insolvency.
So where does this leave us? Simply put, the fiscal picture is not bright. Fixing this unsustainable position should be Congress’ and the president’s top priority.
Wayne Winegarden, Ph.D. is a Senior Fellow in Business and Economics at the Pacific Research Institute. He can be reached at wwinegarden@hotmail.com