HOME
X
Washington

This New Tax Deal Will Tack $700 Billion onto the National Debt

By , Money Morning

There's a new tax deal being debated in Congress right now, and it comes with a 10-year price tag of about $700 billion in foregone revenue.

You see, for every tax break that is passed, the budget deficit balloons in order to "finance" that lost revenue.

And this new tax package would extend approximately 50 temporary tax breaks that have either expired or will soon lapse. By combining Republican business breaks with Democratic tax credits for lower-income workers and families, representatives are hoping the new legislation will escape the common partisan roadblocks for which Congress has become notorious.

As it looks right now, the deal will likely pass before Congress breaks for the year.

While it's nice to see everyone at last getting along, we're a little worried about the $700 billion budget deficit…

One Senate aide initially projected the package would cost $500 billion over 10 years, reported The Hill earlier today. But a House aide later set the price tag closer to somewhere between $700 and 800 billion over 10 years, reported The New York Times this morning.

Since the deficit has been falling for six consecutive years – from $1.4 trillion in 2009 to $439 billion in 2015 – this $300 billion discrepancy is also a little worrisome. The centrist group Committee for a Responsible Federal Budget has called the emerging package "a fiscally irresponsible bipartisan deal," reported The New York Times on Friday.

So let's have a look at what makes the new tax deal so expensive…

The New Tax Deal Is Pricey Thanks to These 3 Core Provisions

Democrats are pushing for stimulus-era expansions of the Earned Income Tax Credit (EIC) and the Child Tax Credit (CTC), which are scheduled to expire at the end of 2017. They would like to:

Combined, these provisions would cost $100 billion, according to U.S. Treasury estimates.

Democrats' demands aren't stopping there. Part of their new tax deal agenda includes indexing the child credit for inflation. This means that as inflation rises, so does the amount you and I claim for our children.

"If we don't [raise the child credit], within four years or so, 700,000 children fall back into poverty," said Sen. Sherrod Brown (D-OH), a member of the tax-writing Finance Committee.

For their part, Republicans are worried about oversight of fraud with both the EIC and the CTC. So part of what is being negotiated is significant improvements to the programs' verification process – though specifics haven't been given.

The Republicans are also responsible for the new tax deal's costliest provision…

"Bonus depreciation." This provision – which expired on Dec. 31, 2013 – allows businesses to fully deduct the cost of new equipment upon purchase, instead of gradually deducting the costs as the equipment depreciates. The total cost of bonus depreciation over a decade is roughly $280 billion.

And then there's the corporate research and development provision – a tax credit that allows for significant corporate expenditure write-offs relating to R&D (among them: wages, supplies, contract research, and research payments). This credit was initially adopted in 1981 and has been extended more than a dozen times. Both sides of the aisle (and President Barack Obama's administration) support the R&D provision (a rarity!), which pretty much guarantees its inclusion in the new tax deal. It comes with a $180 billion price tag.

Tax credits, bonus depreciation, and R&D alone make up about $560 billion worth of the new tax deal so far. That leaves some 40-plus provisions to be considered. Perhaps even a $700 billion price tag is a conservative estimate…

Follow us on Twitter @moneymorning or like us on Facebook and keep yourself apprised federal budget issues like this new tax deal or this $305 billion U.S. transportation bill that you can invest in!

The Markets Will Crash Again: The cracks are already showing. But the impending collapse is also an opportunity. By understanding these five "Super Crash" inevitabilities and making key adjustments, investors can protect their portfolios from the downside while positioning for the upside. This is your last chance to act before it's too late…