As Senate Republicans deliberate modifications to the reconciliation budget bill that the House of Representatives passed on May 22, one thing looks increasingly clear. Namely, the all-encompassing bill that President Trump favors will likely be enacted in July, despite protests from some Republican senators on various elements of the package.
In that case, it would become the signature legislation of Donald Trump’s second term, just as the Tax Cuts and Jobs Act of 2017 was in his first term.
So, how do the two bills compare?
One of the major accomplishments of the Tax Cuts and Jobs Act was to make the U.S. corporate tax code competitive with the rest of the world by lowering the marginal tax rate from 35 percent to 21 percent.
According to economists Kevin Brady and Douglas Holz-Eakin, it did so by making the corporate rate cuts permanent, which proved to be highly successful. They point out that economic growth and business capital spending accelerated after the bill was enacted, and the U.S. did not lose a single multinational headquarters following a decade of large exoduses.
The legislation currently being considered, by comparison, is focused on extending cuts in personal tax rates that are set to expire at the end of this year.
Proponents claim that if the personal tax rates expire, most Americans will face tax increases that could weaken the economy. Democrats, however, argue that the tax cuts in the Tax Cuts and Jobs Act primarily benefit the very wealthy rather than middle-class or lower-income families, and they favor boosting taxes on the wealthy and corporations.
Jeff Stein of the Washington Post observes that to counter this, Trump pivoted during the 2024 campaign by proposing new tax cuts that were easier to sell to specific groups of voters. The proposals included an end to taxes on tips, overtime and Social Security, as well as a tax deduction on borrowing costs to buy American-made cars.
Senate Majority Leader John Thune (R-S.D.) said the Republicans in his chamber expect to deliver on these campaign promises, according to Bloomberg.
Stein points out that, in the process, there has been a significant change in the way the Republican leadership views tax policy since Trump’s first term.
Most of the policies in the 2017 law were developed over the course of many years by think tanks in Washington, with former House Speaker Paul Ryan (R-Wis.) and former Rep. Kevin Brady (R-Texas) serving as the principal architects. Their overriding goal was to simplify the code and lessen distortions without adding to budget deficits.
In comparison, the current Republican approach to tax policy is more populist-oriented and designed to provide tax relief to select groups of voters. Politico reports that Republicans are piling on new tax breaks in hopes of boosting tax refunds ahead of next year’s midterm elections. The provisions include a larger child tax credit, a larger state and local tax deduction and others that would be made retroactively.
One challenge is that the extension of the 2017 tax cuts and the new initiatives are estimated to cost the federal government about $4 trillion over the next 10 years. Accordingly, there is little chance that the budget deficit will be brought under control, with spending cuts of only $1.5 trillion below current projections contemplated over that period.
Another concern is that the tax cuts in the bill passed by the House are less oriented to promote long-term growth than the Tax Cuts and Jobs Act was.
The Tax Foundation estimates that it would increase long-term GDP by only 0.8 percent (not annualized). It states that, “by introducing narrowly targeted new provisions and sunsetting pro-growth provisions like bonus depreciation and [research and development] expensing, it leaves economic growth on the table.”
Senate Republicans are trying to address this by including more permanent business tax cuts and full expensing for equipment and research and development in their version of the bill.
The Wall Street Journal Editorial Board argues that one of the most constructive changes in the 2017 bill was letting businesses immediately deduct the full cost of capital outlays rather than spread them out. It boosted capital spending until full expensing was phased out in 2022.
Another critique relates to fairness. The Center on Budget and Policy Priorities contends that the House bill is skewed to the wealthy, costs more than extending the 2017 tax law and fails to deliver for families. It concludes that instead of changing course and prioritizing people with low and moderate incomes, the tax bill only offers more of the same.
When the impact of proposed Medicaid cuts is factored into the equation, the Republican bill is unpopular with the public at large. For example, recent polls undertaken by Quinnipiac, the Washington Post-Ipsos and KFF all show that a plurality of voters oppose the House bill, with many citing the attempt to pare back Medicaid funding.
Finally, my take is that Trump is making the same mistake Joe Biden did by believing that all-encompassing legislation is better than more targeted bills that spell out clear policy objectives. The principal difference is that Trump favors a grab-bag of tax cuts and spending cuts, whereas Biden was enamored with massive spending bills.
In my book about Trump’s economic policies in his first term, my assessment was that investors would respond enthusiastically to the Tax Cuts and Jobs Act, which they did as the stock market rose steadily leading up to its passage.
In comparison, the market’s response this time is more ambiguous amid confusion about the objectives of the “big, beautiful bill” and uncertainty about the global trade conflict.
Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has written three books, including “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”