The US Congress is pondering a tax package that would permanently extend a host of popular tax breaks and, critics say, make a mockery of five years of rhetoric about fiscal discipline.
A deal that could raise deficits by $500bn over the next decade was in doubt on Wednesday after President Barack Obama threatened a veto, but the outlines of the proposal show how far deficit-cutting has fallen down Washington’s agenda.
Agreement on a package could also change the politics of comprehensive tax reform, making it more palatable to Republicans by lowering baseline tax revenues, but less agreeable to Democrats for the same reason.
“The fact that everyone involved is willing to throw fiscal concerns out of the door – it really is kind of a shocker,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a lobby group.
Every year, Washington temporarily extends a variety of tax breaks that are too costly to make permanent. But a plan being negotiated between Democratic leadership in the Senate and Republicans in the House would not only make some tax breaks permanent but actually expand them.
In particular, the mooted deal would expand and make permanent the research and development tax credit for companies, which lets them write off R&D expenses against their tax bills. That could cost $160bn over 10 years.
It would also enshrine tax breaks vital to senior Democrats in the Senate: a state sales tax deduction crucial to Harry Reid of Nevada, where there is no state income tax; and college tuition and mass transit tax breaks important to Charles Schumer of New York.
But the deal would not make permanent the tax credit on earned income or the child tax credit aimed at low income families, prompting the White House to threaten a veto. It would allow a tax credit for wind energy to expire.
“An extender package that makes permanent expiring business provisions without addressing tax credits for working families is the wrong approach, at the expense of middle class families,” said Jack Lew, the Treasury secretary, on Monday.
Congress is normally willing to pass a package of tax extensions because parts of it are crucial to every member. Making some sections permanent threatens the rest because there will no longer be a broad coalition to pass them.
It also changes the starting point for future tax reform. If the R&D credit is permanent, for example, then research-intensive businesses would have less reason to back broader reforms. The base of tax income for a revenue-neutral package would also be lower.
But the most remarkable feature of the potential deal is the casual willingness to expand the budget deficit and take on debt after years of dire warnings – especially from Republicans – that US was heading for fiscal catastrophe.
That shows how the sharp fall in the federal deficit, down to 2.8 per cent of gross domestic product from more than 10 per cent in the wake of the financial crisis, has freed Congress to placate favoured interest groups via the budget.
Although the short-term deficit has been tamed, little has been done about long-term problems, with deficits forecast to start rising again at the end of the decade as the medical costs of the retiring baby boom generation accelerate.
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