President Donald Trump and Republicans in Congress are pushing ahead with their tax reform, relegating concerns about the federal debt to the background.

The initiative has provoked the fury of Elon Musk, a former ally of Trump and the party's main financial backer in the 2024 elections. He denounced the plan as a "repugnant abomination," publicly distancing himself from the president and supporting a handful of deficit-conscious Republicans.

Despite this, Republican leaders, buoyed by a slim majority in the Senate and the House, are working to deliver on Donald Trump's campaign promises. Senate Finance Committee Chairman Mike Crapo has rejected the criticism outright, calling the deficit projections "absolutely false."

More deficit but no more growth

However, the Congressional Budget Office (CBO) estimated last week that the reform would increase the deficit by $2.4 trillion over ten years, or even $3 trillion with interest. According to the Committee for a Responsible Federal Budget (CRFB), the bill would rise to $5 trillion if corporate tax cuts became permanent. By 2029, the debt would then reach $46.9 trillion, compared to $20.2 trillion in 2017.

Supporters of the plan base their arguments on two points: the growth generated would cover the revenue losses, and the CBO's projections are exaggerated. Oklahoma Senator Markwayne Mullin claims that "the CBO's estimates have lost all credibility."

But economists point out that the unexpected rise in tax revenues in 2024 is due to post-COVID inflation and not to tax reforms. According to William McBride, chief economist at the Tax Foundation, the new plan will have a "modest" economic impact and "will not pay for itself."

In fact, the vast majority of tax cuts are simply an extension of those passed in 2017, so there is little additional fiscal stimulus. This means that the effect on economic activity will be fairly neutral.

This also explains the concern of most investors. Normally, a tax cut plan is welcomed by the markets. However, this time, the limited impact on growth and the widening deficit in an already heavily indebted country call for caution. In short, this plan is seen less as a fiscal boost than as an act of fiscal irresponsibility.

Finding a compromise in the Senate

But despite the warnings, Republicans seem determined to push through their reform at any cost.

They will nevertheless have to overcome internal divisions within the party. Several points in the plan are still the subject of intense negotiations.

First, there is the SALT (State and Local Tax) deduction, which allows local taxes to be deducted from federal tax payments. In the version passed by the House, the cap has been raised from $10,000 to $40,000 (for taxpayers with incomes below $500,000). This measure is estimated to cost $350bn.

Some senators want to revisit this provision and limit it, which is a red line for members of the House of Representatives. Ultimately, they will have the final say, as the plan will return to the House for a final vote.

On the other hand, senators want to make three tax cuts for businesses permanent. These cuts concern the deduction for research and development, the possibility of using depreciation and amortization to calculate interest expenses, and the additional 100% depreciation for certain assets, such as most machinery and factories.

To offset these measures, temporary reductions on tips and overtime could be restricted. This is against the advice of the White House, which does not want to backtrack on a key campaign promise made by Donald Trump.

On the savings side, Republicans are divided over the tax credits in Joe Biden's Inflation Reduction Act, which finance energy transition projects. The cuts in the bill passed by the House amount to $600bn. A group of Republican senators would like to limit these cuts and spread them out over time. These tax credits fund many projects in Republican districts.

Finally, GOP (Grand Old Party) lawmakers are seeking to make savings in social programs, particularly Medicaid and Medicare. But these budget cuts would affect the working classes, who make up Donald Trump's electorate. The US president insists that these cuts are simply part of the fight against "waste, fraud, and abuse." But according to the latest estimates from the CBO, 10.9 million people would eventually be excluded from Medicaid.

Party leaders remain confident that they will reach a compromise that preserves the essence of the bill. Republicans aim to pass the bill by July 4, US Independence Day.