House Republicans’ Tax Cuts Could Skyrocket U.S. Debt

The substantial tax cut package approved by House Republicans in May is projected to add trillions of dollars to the U.S. national debt, creating what some lawmakers believe could be a significant obstacle as the Senate prepares to review the legislation this week.

The Committee for a Responsible Federal Budget estimates that the proposed bill will contribute approximately $3.1 trillion to the national debt over the next decade when accounting for interest, resulting in a total of $53 trillion. The Penn Wharton Budget Model predicts an even larger figure of $3.8 trillion, also factoring in interest and economic consequences.

Experts predict that an increased national debt burden would likely mean consumers would face higher costs when financing homes, cars, and other significant purchases. Mark Zandi, chief economist at Moody’s, cautioned that this borrowing, coupled with rising debt, would lead to elevated interest rates.

“That’s the key link back to us as consumers, businesspeople, and investors: The prospect that all this borrowing, the rising debt load, mean higher interest rates,” Zandi added.

The House bill proposes a tax reduction of approximately $4 trillion for households, primarily benefiting wealthier constituents. However, the proposal aims to balance these tax cuts by drastically reducing spending on safety-net programs like Medicaid and food assistance for lower-income families.

Some Republicans, along with officials from the White House, contend that President Trump’s tariff strategies would mitigate a significant portion of the tax cuts.

Nonetheless, economists caution that tariffs are a precarious source of revenue, as future administrations can repeal them, and judicial decisions may remove them from implementation.

Higher interest rates for consumers are closely linked to perceptions about U.S. debt levels and their impact on Treasury bonds. Transactions such as mortgages and auto loans are often based on the yields from U.S. Treasury bonds, particularly the 10-year Treasury.

The market primarily drives yields (i.e., interest rates) for long-term Treasury bonds based on the supply and demand from investors. The U.S. government is dependent on Treasury bonds to finance its activities since it does not generate sufficient tax revenue to cover its expenses, leading to what is termed an annual “budget deficit.” Treasury investors receive interest as repayment.

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If the Republican proposal, known as the “One Big Beautiful Bill Act,” results in a substantial increase in U.S. debt and deficits, it is likely to alarm investors, which could diminish demand for Treasury securities, economists suggest.

In that scenario, investors might require a higher interest rate to compensate for the perceived risks that the U.S. government may default on its debt obligations in the future. Philip Chao, chief investment officer and certified financial planner at Experiential Wealth, noted that as the risk increases, interest rates associated with the 10-year Treasury must similarly ascend.

The recent downgrade of the U.S. sovereign credit rating by Moody’s reflects concerns over the escalating federal budget deficit and indicates an increased credit risk for investors, resulting in a spike in bond yields.

Zandi explained that, generally, for every 1-point increase in the debt-to-GDP ratio, the 10-year Treasury yield rises about 0.02 percentage points.

If the debt-to-GDP ratio were to climb from its current level of around 100% to 130%, the 10-year Treasury yield could increase by approximately 0.6 percentage points, pushing the yield to over 5% relative to the present level of about 4.5%.

“It’s a big deal,” Zandi underscored.

A fixed 30-year mortgage rate could rise from nearly 7% to about 7.6%, which would make homeownership increasingly unattainable for many first-time buyers, according to experts.

This increase in the debt-to-GDP ratio would see it balloon from around 101% at the end of 2025 to an estimated 148% by 2034 under the current House bill, according to Kent Smetters, an economist involved in the Penn Wharton Budget Model.

Not only consumers are affected; specific investors may also experience losses, experts warn.

As Treasury yields rise, existing bondholders may see the value of their current bonds decline, negatively impacting their investment portfolios.

Chao explained, “If the market interest rate has gone up, your bond has depreciated. Your net worth has gone down.”

In response to market fluctuations, some experts recommend shorter-term bonds, as the market for long-term Treasury bonds has experienced increased volatility.

However, those purchasing new bonds may benefit from higher rates, which could be seen as advantageous.

The cost associated with consumer financing has essentially doubled in recent years, according to Quinlan from Wells Fargo.

Average 10-year Treasury yields hovered around 2.1% from 2012 to 2022 but have surged to approximately 4.1% from 2023 to the present.

Zandi pointed out that the U.S. debt load is just one factor influencing Treasury investors and yields, citing instances where tariffs announced by Trump in April spurred a sharp increase in yields as investors questioned the safety of U.S. assets.

“Yet, it is reasonable to suggest that financial markets have become increasingly alarmed about debt levels over the last couple of years,” Quinlan noted.

Without intervention, the U.S. debt load is expected to continue its ascent. Smetters indicated that the debt-to-GDP ratio could reach 138% even if no legislation is enacted by the Republicans.

However, the current House proposal would serve as “pouring gasoline on the fire,” according to Chao.

He concluded, “It’s adding to the problems we already have,” a sentiment reflecting discontent within the bond market regarding the initiative.