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A contentious budget strategy is emerging on Capitol Hill that aims to solidify the tax cuts enacted during Donald Trump’s first term while also accommodating further tax concessions he promised during his campaign.
This approach, however, could significantly escalate the national debt, adding trillions of dollars to the financial burden beyond what is presently anticipated.
The strategy involves framing the expense of prolonging the 2017 Tax Cuts and Jobs Act as negligible, at least from an accounting perspective. This could be achieved by applying a so-called current policy baseline, a technical financial measure with potentially vast implications.
Regardless of the method of calculation, prolonging Trump’s 2017 tax cuts is projected to increase the national debt by approximately $4 trillion. Critics, particularly fiscal conservatives, have voiced strong opposition, labeling it as a “massive budget gimmick,” as noted by some analysts.
The tactic being considered by congressional leaders involves classifying this year’s tax rate as “current policy,” effectively rendering the price of its extension zero for legislative assessment.
This political maneuver holds clear appeal; it could alleviate a significant mathematical challenge for lawmakers eager to implement substantial tax cuts.
In a recent episode of Yahoo Finance’s Capitol Gains podcast, Kevin Brady, who was instrumental in formulating the 2017 tax cuts, acknowledged that while this approach facilitates the permanence of tax cuts—a priority for Trump—it also entails certain compromises.
Brady characterized the current policy approach as “a curious way of Washington thinking” but reinforced the necessity of maintaining the awareness and cooperation of fiscal conservatives. He predicted that a formidable deficit reduction target would eventually be essential, likening the situation to “two rock climbers tethered together.”
This critical deficit reduction will significantly influence the potential scale of any tax legislation, a detail that appears to be on the radar of Brady’s successor, Rep. Jason Smith of Missouri.
The consideration of this maneuver appears to be gaining momentum, with House Speaker Mike Johnson showing increased support this week, diverging from earlier efforts by Republicans to pursue a different accounting approach.
Johnson expressed his alignment by stating, “The policy makes a lot of sense to me,” following discussions at the White House with Trump’s aides and Senate leaders advocating for the tactic.
Additionally, Rep. Smith, Johnson’s principal tax advisor, has indicated his support for the idea while simultaneously expressing “huge concerns” regarding its feasibility, as reported in an interview with Politico.
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This policy discussion is nearing a critical point following a recent victory for House Republicans, who pushed for a budget resolution that passed narrowly at 217-215, in line with Trump’s vision for “one big, beautiful bill.”
House Concurrent Resolution 14 outlines a framework allocating $4.5 trillion for tax cuts, supplemented by $1.5 trillion in proposed federal spending reductions to offset some expenses.
If lawmakers adopt a more conservative “current law” baseline, the entire $4.5 trillion tax allocation might solely be utilized to extend the 2017 legislation.
However, if the cost of this extension is considered zero, this creates substantial room not only to make the tax cuts permanent but also to entertain additional proposals, including Trump’s plans to eliminate taxes on tips, overtime, and Social Security benefits, as well as to reduce the corporate tax rate for domestic producers.
While the lower estimates of the overall fiscal implications of Trump’s tax agenda suggest a deficit impact of around $10 billion, more extensive projections could lead to nearly $18 trillion in new deficits over the next decade.
This proposal has raised serious concerns among budget-conscious legislators, as one analysis from the nonpartisan Committee for a Responsible Budget categorizes it as “a massive budget gimmick” that could permit trillions in new borrowing.
Their findings suggest that utilizing the “current policy” approach might inflate deficits by an additional $3.4 trillion to $4.6 trillion over the next ten years.
Several potential pitfalls loom for this accounting strategy. Numerous fiscal conservatives within the House could oppose the initiative, potentially undermining momentum. Furthermore, it remains uncertain whether the Senate parliamentarian might also challenge this approach, which could lead to complications with Senate leaders advocating for the initiative.
Conversations with former Congressman Brady underscore the urgency with which Trump is likely to advocate for any approach that paves the way for his tax proposals. Congress seems poised to explore any feasible methods to fulfill his agenda.
Reflecting on past experience, Brady remarked, “I didn’t pay so much attention to the president’s tweets each day. I paid attention to his campaign promises because that’s what he was calling me about.”
Source
finance.yahoo.com