While Donald Trump's so-called Big and Beautiful Bill may deliver a short-term boost to the American economy and provides an emergency infusion of money to address the government's mounting debt, it is essentially a stopgap measure that risks undermining future growth.
After a series of twists and turns, the bill was passed in both the U.S. House of Representatives and the Senate, not only highlighting Trump's firm grip on the Republican Party but also underscoring the priorities of his economic agenda.
First, the bill aims to offset the impact of Trump's trade and immigration policies and to unlock consumer spending. It extends the income tax cuts of the 2017 Tax Cut and Jobs Act and reduces taxes on tips and overtime. It takes effect immediately and retroactively. The bill aims to deliver for targeted groups, raises disposable income and attempts to revive consumer confidence.
Second, the bill aims to galvanize business expansion. For Silicon Valley investors, it broadens the qualified small business stock exemption, allowing startup investors to sell larger stakes sooner without incurring a capital gains tax. The per-issuer cap on eligible gains rises from $10 million to $15 million, and the required holding period is shortened.For semiconductor manufacturers, the legislation raises the tax credit for building new factories in the United States from 25 percent to 35 percent (provided that construction begins by the end of 2026) to accelerate onshore production of artificial-intelligence technologies. For the manufacturing sector overall, the bill allows companies to immediately deduct the full cost of new factories that break ground after Jan. 19 this year — which was the day before Trump's inauguration —and become operational by 2031. It also introduces faster, permanent deductions for equipment purchases and R&D spending.
Third, the bill aims for a quick revival of traditional energy production. It mandates new oil and gas lease sales in Alaska, the Gulf of Mexico and on public lands and federal waters in the West, reinstates lower royalty rates and expands subsidies for carbon capture and projects that use the technology to boost oil extraction. Producers can also immediately deduct a portion of their drilling and development costs.
The bill also provides an emergency infusion of cash into the U.S. government. By raising the debt ceiling by $5 trillion and adjusting spending, it creates more headroom for the government to raise funds and avoid a potential default in August, thereby stabilizing the economy. In effect, the bill reshapes asset-price expectations, with U.S. equities rallying on stronger corporate earnings prospects. The S&P 500 has climbed and the 10-year Treasury yield has fallen from 4.2 percent to 4.0 percent, easing short-term liquidity strains. Trump declared that the U.S. will make up all the losses with faster growth than ever before.
But the stopgap measure risks undermining future growth. While the bill's aggressive tax cuts may provide a short-term boost to consumption and investment, it essentially borrows against future growth.
Most of its provisions only extend existing policies. By prolonging key elements of the 2017 Tax Cuts and Jobs Act that were set to expire on Dec. 31, the bill offers little new stimulus. The Penn Wharton budget model estimates that, compared with allowing the 2017 cuts to lapse, real GDP will be only 1 to 1.2 percent higher by 2027.
Also, the stimulus is front-loaded, so the drag from spending cuts will emerge later. Some tax reductions will expire within a few years, and cuts to Medicaid and other programs will not take effect until after next year's midterm elections. The Committee for a Responsible Federal Budget predicts that by the end of 2034, the economy will be 0.3 percent smaller than if the 2017 cuts had expired, with the negative impact widening over time. U.S. GDP could be 4.6 percent lower and wages about 3.5 percent lower three decades from now.
Massive deficits are becoming the U.S. government's default mode. Markets may tolerate a surge in borrowing during crises such as wars or COVID-19, viewing it as a “reasonable and temporary” response to sharp economic slowdowns. But Washington is now piling up debt even in the absence of an emergency. In the long run, this quick fix — one in which the remedy is worse than the disease — will only heighten America's economic fragility and uncertainty.
