How much does it cost the government to prevent taxes from going up: trillions of dollars or zero dollars? This isn’t a trick question. It’s precisely what Republicans are debating right now, and the answer they settle on will be simultaneously meaningless and highly consequential. As GOP lawmakers look at extending the 2017 Tax Cuts and Jobs Act, an obscure but fierce argument has cropped up about what baseline they should use in determining how much doing so would add to the U.S. debt. They can look at current law, under which a wide swath of provisions expire at the end of the year. Under that approach, an extension would deprive the Treasury of trillions of dollars in revenue over the next decade. Or, they can look at current policy, where an extension would just mean keeping everything the same. Price tag: zero. First of all, there are some immutable facts here that make this debate seem meaningless. Much more debt would be issued in a world where TCJA is extended (excluding other factors) than in a world where it is not. How the legislation is scored doesn’t change that. On the other hand, the debt question that matters most is: How will it affect borrowing costs? And extending the 2017 tax cuts might not affect yields on U.S. debt much at all because bond investors are forward-looking. Guy LeBas, chief fixed income strategist at Janney Capital Management, told MM that, all else being equal, “more U.S. Treasury issuance and deficit spending in a growing economy will lead to higher interest rates.” “It is my sense, however, that most market participants expect the TCJA to be extended and maybe even expanded,” he added. And other policy questions are likely to matter more for Treasury yields, according to Kevin Gordon, senior investment strategist at Charles Schwab. “As an example, I’m not sure businesses’ or consumers’ unchanged tax rates will matter more than the uncertainty associated with volatile tariff policy,” he said. Meanwhile, keeping everyone’s tax rates the same wouldn’t provide the kind of economic boost that you might normally expect from deficit spending. You could count extending TCJA as avoiding a hit to growth — allowing people’s tax rates to go up would give them less spending money — but you can’t use that argument if you’re using current policy as the baseline. And yet, there are practical reasons why this still has huge implications for the debt. Most obviously, if Congress is counting TCJA extension as costing nothing, it’s not going to feel the need to raise revenue or cut spending to offset the increased trajectory for the debt. This approach would also make it much easier for the tax cuts to be made permanent, which would lead to more guaranteed debt than would otherwise be the case. And it would be easier to layer on new tax cuts — like Trump’s proposed no tax on tips. “It may affect the legislative incentives, so the outcomes will be different than it would’ve been,” said Douglas Holtz-Eakin, a former head of the Congressional Budget Office who now leads the American Action Forum. “But I’m not seeing a lot of appetite to cut spending, to be honest.” Holtz-Eakin said Republicans should be deliberate in how they approach this question because it could permanently alter the incentives for adding to the debt on both the spending and revenue sides, and could get complicated fast. “How would you define current policy related to Ukraine, for example?” he said. Current policy is already used as the baseline in some cases, such as for many mandatory spending programs, and Holtz-Eakin argued that the cleanest approach would just be to treat tax and spending programs symmetrically. There’s a practical hurdle here too, though. The entire point of the budget reconciliation process – which allows Republicans to pass their agenda by a simple majority rather than needing to work with Democrats – is that the policies involved must change, well, the budget. Therefore, this requirement could violate the so-called Byrd rule. Finance Chair Mike Crapo (R-Idaho) told reporters that the plan could work if the “major provisions” of the tax plan are tweaked so they all have budgetary impacts, according to my colleague Benjamin Guggenheim. Senate Majority Leader John Thune also told Ben that Senate Budget Chair Lindsey Graham (R-S.C.) ultimately has the authority to make that call. “But obviously it’s something that we will be discussing and having conversations with the parliamentarian,” Thune said. IT’S MONDAY — Sam is on vacation. Your next host is Michael Stratford, so send tips to mstratford@politico.com. And feel free to reach me with news, feedback and commentary at vguida@politico.com.
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