Trump's Big Beautiful Bill
Congress passes the OBBBA
President Trump celebrated our nation’s 249th birthday by signing the One Big Beautiful Bill Act, which he described as the “biggest bill of its kind ever done…..the biggest tax cut, the biggest spending cut [and] the largest border security investment in American history”. At the signing ceremony, the President declared that “the golden age of America is [now] upon us”, with “zero people now crossing our borders…trillions of dollars pouring into America for investment purposes…the stock market at an all-time high… jobs at an all-time high…with no tax on tips…no tax on overtime… and no tax on Social Security for our great seniors”. It seems there has never before been such a great time to be an American, and this One Big Beautiful Bill will ensure our continued prosperity for generations to come. Or at least this is what our President would like us all to believe.
Not everyone seems quite so keen on the new legislation as is our President, however. Recent polling summarized by Forbes suggests that the OBBBA may be the “most unpopular piece of major legislation since President Trump’s 2017 tax cut”, with the total number of opponents of the bill exceeding supporters by a factor of nearly 2:1. Economists from the left, right and center of the political spectrum have decried the fiscal impact of the bill. And MAGA supporters of the President are coming to the realization that many of their own will likely suffer from the cuts to Medicaid and SNAP (food stamps) embedded in the bill, while the vast majority of the bill’s tax benefits flow once again to the top income earners.
The OBBBA is a 900-page bill which was rushed through Congress in order to meet the President’s July 4th signing deadline. And while the bill has received a lot of media coverage and commentary, not all of it is has been particularly well informed. And so I think it is worth digging a bit deeper to find out what exactly is in this bill and why it is proving to be so controversial.
Let’s explore
Passage of the OBBBA. The OBBBA passed the Senate by a vote of 51-50, with all Democrats voting no and the deciding yea vote cast by Vice-President Vance. The vote in the House was similarly close, 218-214, again with all Democrats voting no. Five Congressional Republicans voted against the OBBBA, two in the House and three in the Senate, albeit for different reasons. And the bill became law when President Trump signed it in a Rose Garden ceremony on the 4th of July.
It is worth noting here that the OBBBA was able to become law without any Democratic support only by virtue of a legislative process known as “budget reconciliation”, bypassing the Senate’s normal 60-vote filibuster rules. The budget reconciliation process requires among other things that any bill under consideration be determined not to increase the federal debt for more than a decade. In 2017, Republicans used this same procedure to pass the Tax Cut and Jobs Act (TCJA), which they accomplished by making a number of their tax cuts ‘temporary’ with a scheduled expiration date at the end of 2025 (and so not increasing deficits and the debt beyond that date). But this time around, the Republican leadership in Congress elected effectively to disregard the budget reconciliation rules on debt impact by assigning a zero cost to the OBBBA’s permanent extension of the TCJA temporary tax cuts, a feature of the new bill which by most estimates will add $4 trillion to the federal debt in the next ten years (and potentially trillions more after that).
What is in the OBBBA? Most press coverage of the OBBBA has focused on three main components of the bill: (1) the permanent extension of President Trump’s 2017 TCJA tax cuts; (2) additional tax cuts promised by President Trump on the campaign trail (“no tax on tips, overtime and Social Security”); and (3) reduced spending for Medicaid and SNAP (food stamps). The bill also features large increases in federal spending on defense and immigration/border control, including a fourfold increase for ICE, which now has a budget larger than that of all the DOJ law enforcement agencies combined (FBI, DEA, ATF, the Federal Prison Bureau, etc). It rescinds a number of Biden administration energy credits (including for EV purchases) and mandates large expenditure cuts to a variety of environmental, infrastructure and student loan programs. And this is not all. The OBBBA is a classic “Christmas tree bill” of the sort which the President and the former First Buddy Elon Musk so famously derided just a few months ago, but this time with all the ornaments hung by Republicans.
The Committee for a Responsible Federal Budget (CRFB) has published a short summary of the major tax and spending items in the bill, with the estimated fiscal impact of each item, which I encourage you all to review. I for one was surprised by some of what is in this bill, and I think you may be too.
The fiscal impact of the OBBBA. As the OBBBA made its way through Congress, Republicans played down any adverse fiscal impact of the bill, claiming that what the President called the “biggest tax cut in history” would actually reduce federal deficits over the coming decade due to the bill’s large cuts in entitlement, environmental and educational spending, with aggressive estimates of the impact of lower tax rates on future economic growth.
The White House Council of Economic Advisors estimates that the OBBBA will increase real (inflation-adjusted) economic growth by five percentage points over the next four years and reduce the federal debt as a share of GDP by 23 percentage points over the next ten years, a stark contrast to the forecasts of independent analysts who expect the bill to increase the federal debt as a share of GDP by seven percentage points or so over that same period. In a similar vein, the Office of Management and Budget forecasts that the OBBBA alone will reduce deficits by $1.4 trillion over the next ten years and that the full package of Trump administration economic policies, including deregulation and tariffs, will reduce deficits by at least $6.7 trillion over this same period.
This is not the view of most economists outside of the Trump administration. The non-partisan Congressional Budget Office estimates that the OBBBA will add $3.4 trillion to primary fiscal deficits over the next ten years—$4 trillion including the associated increase in interest on the federal debt—and will raise the level of federal debt to GDP in 2034 by seven percentage points (from a forecast 117% to 124%). The independent Committee for a Responsible Federal Budget estimates that the OBBBA will increase deficits by over $3 trillion during the next ten years and by $5 trillion if the various sunset provisions in the law are made permanent. The Penn Wharton Budget Model forecasts are broadly in line with those of the CBO and the CRFB, with an estimated $3.6 trillion increase in primary deficits over ten years. And the libertarian-leaning CATO Institute estimates that the OBBBA, which it calls a “fiscal disaster”, will increase federal deficits by $6 trillion over the next ten years, after incorporating what it calls “realistic” assumptions about the impact of the law on economic growth and the cost of extending tax cuts and expenditure increases beyond their sunset expiration date.
As for the distributional impact of the bill, the general consensus seems to be that the OBBBA is strongly regressive, with an estimated 80% of the net benefits accruing to the top 10% of the US income distribution. (Source: Penn Wharton Budget Model, link above)
Fiscal impact compared to what? What explains this huge difference in the various estimates of the OBBBA’s fiscal impact, from a $1.4 trillion reduction in deficits (per the Trump administration) to a $4-6 trillion increase in deficits (CBO et al)? Well, a number of factors come into play here, including wildly differing estimates of the impact of the OBBBA on future economic growth. But the single largest contributing factor is the use of two very different baselines against which the fiscal impact of the OBBBA has been measured.
As noted above, in choosing to pass the OBBBA via the budget reconciliation process Congressional Republicans took the position that future deficits under the OBBBA should be compared to the current baseline deficit, ignoring entirely the large ($4+ trillion) future revenue impact from the increase in tax rates which by law was scheduled to take effect with the expiration of the temporary TCJA tax cuts at the end of 2025. The CBO on the other hand took a very different approach (as it was required by law to do) and measured the fiscal impact of the OBBBA relative to a counterfactual in which the TCJA cuts did in fact expire after 2025, which of course is what would have happened if the OBBBA had not become law.
At one level the Republican approach does not seem unreasonable, comparing future tax revenues under the OBBBA to the current level of tax revenues. After all, the permanent extension of the TCJA tax cuts does not actually reduce taxes (or tax revenues) below their current levels, it simply negates any impact of increased taxes which would have occurred starting in 2026 had the TCJA cuts not been extended permanently. President Trump and the Republican chair of the House Ways and Means Committee may like to call the OBBBA a “giant tax cut”, but this is not how Congressional Republicans characterized it when they decided once more to go down the budget reconciliation path.
While not entirely unreasonable, this approach is more than a touch disingenuous. Recall that Congressional Republicans in 2017 mitigated the adverse fiscal impact of the TCJA by making the tax cuts ‘temporary’ with a 2025 sunset date, cuts which have now been made permanent under the OBBBA. In passing the OBBBA, Republicans have not only elected to disregard entirely the fiscal impact of an estimated $4 trillion of future foregone tax revenues upon expiration of the TCJA, they have also employed the same sunset strategy to reduce the fiscal impact of $1 trillion or so of new ‘temporary’ tax cuts and spending increases mandated by the OBBBA, which if made permanent would add another $1.5 trillion to the future debt. Among these new ‘temporary’ items are the President’s “no tax on tips etc” pledge, with sunset dates beginning as soon as 2028.
What happened to the DOGE spending cuts? B&B readers may recall a prior post, Who Let the DOGEs Out?, in which I discussed Elon Musk’s claims that his Department of Government Efficiency would reduce federal government expenditures by $1 trillion per annum, simply by eliminating “fraud, waste and abuse” in the federal budget. Needless to say this did not happen, and Elon Musk has now left Washington with his personal reputation in shreds. But how much of the DOGE-identified savings did the Republican budget hawks in Congress choose to make permanent in the OBBBA?
As far as I can tell, essentially none of them. In fact, the only DOGE expense cuts which seem to have made it into the OBBBA are $1 billion of annual funding for PBS and another $8 billion of foreign aid. Together this is an annual savings of $9 billion in a $6.8 trillion federal budget, equivalent to what the federal government now spends in just twelve hours. Needless to say (but I will say it anyway), this seems quite a long way off from how President Trump initially described DOGE, as the “most sweeping and consequential government reform program in generations”.
Criticism from the left, right and center. President Trump’s One Big Beautiful Bill has been roundly criticized, and in many cases excoriated, by respected observers from the left, right and center of the political spectrum, admittedly for somewhat different reasons. The Economist magazine, for example, says that the OBBBA reveals the “hollowness of Trumponomics", which it predicts will “erode the foundations of American prosperity”, in large part by jettisoning longstanding principles of Republican financial orthodoxy, including a fervent belief in limited government, free trade, fiscal responsibility, central bank independence and respect for the rule of law.
As you might expect, Paul Krugman is not a big fan of the OBBBA. Krugman’s views should come as no surprise to anyone, as there is very little about the Trump administration’s economic (or other) policies that he has ever found to his liking. And he certainly doesn’t like the big cuts to Medicaid and SNAP embedded in the OBBBA, or for that matter the cuts to environmental and education programs. But Krugman’s critique of the OBBBA goes well beyond the legislated cuts in social spending to address what even he—a dyed in the wool deficit dove—considers to be the utter fiscal irresponsibility embedded in the bill. Krugman has long decried the manifest hypocrisy of Republican budget hawks, who seem to vote their fiscal consciences only during Democratic administrations, but when even Krugman thinks it is past time to bring deficits down, we should perhaps take note.
When it comes to commentary on matters of public policy or the federal fisc, David Stockman is not likely to be confused with Paul Krugman. As readers will recall, Stockman was President Reagan’s first budget director, by all accounts a true believer in conservative fiscal policy, who I profiled in my August 2022 piece, Reflections on Reaganomics. But like Krugman, Stockman is appalled by the OBBBA, which he characterizes as a “fiscal abomination” which should have been “killed deader than a doornail”. In Stockman’s view, the OBBBA is a “$30 trillion debt disaster” and a “fiscal time bomb”, the passage of which he attributes to the complete absence of fiscally responsible Republicans in Congress willing to stand up to the self-proclaimed “king of debt” now sitting in the Oval Office.
And from the center (OK, center-left), former Treasury Secretary Larry Summers has called the OBBBA a “shameful act by our Congress and our President”, passed for the purpose of funneling “a million dollars over 10 years to the top tenth of one percent of our population”. In an opinion piece published in The NY Times, Summers and Robert Rubin (former Goldman Sachs CEO and Summers’ predecessor as Treasury Secretary under Clinton) contrast what they characterize as Trump’s reckless approach to economic policy with the more conservative and cautious approach taken by their boss, Bill Clinton, the last American president to balance the federal budget. They discuss many aspects of Trump’s policies, including tariffs, the DOGE budget cuts and the President’s frontal attacks on Fed independence, as well as the OBBBA, which they describe as “more budget busting than big and beautiful”. And they identify some of the likely consequences of the current fiscal trajectory, made worse by passage of the OBBBA, including “higher interest rates and capital costs, reduced business confidence, crowding out of private investment, financial turmoil…and reduced flexibility to respond to economic or geopolitical threats”.
The Economist, Krugman, Stockman, Summers and Rubin all dislike the OBBBA for somewhat different reasons, but they all agree that now is a terrible time to be increasing the federal debt through tax cuts (or an extension of past tax cuts) with the US federal debt held by the public already at $30 trillion, equivalent to 100% of GDP and with large federal deficits continuing as far as the eye can see.
So, how did we get to this point? When George W. Bush succeeded Bill Clinton as President in January 2001, the federal budget was balanced and the size of the federal debt held by the public was around $3 trillion, equal to about 30% of GDP. Fast forward to July 2025 and the federal budget is now running at an annual deficit of almost $2 trillion and the federal debt held by the public is closing in on $30 trillion, equal to 100% of GDP. This is an increase in the federal debt of 10x over 24 years, a compounded growth rate of almost 10% per annum, over twice the rate of nominal GDP growth during this same period (4.2%).
This explosion in the US federal debt occurred under both Republican and Democratic administrations in roughly equal measure. The total gross federal debt—another measure of federal indebtedness which includes intra-governmental debt obligations— is now at $36 trillion (close to 120% of GDP), having increased by $6.5 trillion under George W. Bush (two terms), by another $8 trillion under Obama (two terms), by $8 trillion under Trump (first term only) and another $8 trillion under Biden (one term).
For almost twenty-five years now, Congress has authorized increasingly large amounts of deficit spending under both Republican and Democratic administrations. Some of this money has been spent in response to true emergencies (eg covid and arguably the GFC), but much of it has been spent on foreign wars of choice (post 9/11) and to expand the social safety net with so-called ‘entitlement’ spending. The impact on the federal debt has been compounded by two very large ($6 trillion) unfunded tax cuts during the Bush and the first Trump administrations. With last week’s passage of the OBBBA, the Republican-controlled Congress has made clear that it is not willing to get serious about restoring fiscal discipline if that means raising taxes, or for that matter saying ‘no’ to a president who has been handing out promised tax cuts like candy on the campaign trail.
The OBBBA and the legacy of Trumponomics. The OBBBA represents just one element of what is now being called “Trumponomics 2.0”, but it is a big one, likely to be the signature (possibly sole) legislative achievement of Trump’s second term in office. Congressional Republicans are patting themselves on the back for passing what they consider to be landmark legislation on the road to long-overdue entitlement reform, but in doing so they have essentially cast aside any concern they may previously have had about the federal debt.
As usual, the President is taking all of the credit for the OBBBA, which he insists on calling “the largest tax cut in history”, a false claim which Congressional Republicans will gladly reinforce with their constituents, most of whom will not appreciate the inaccuracy or irony of this statement given the procedural hurdles the Republicans had to leap in order to force the bill through Congress via the budget reconciliation process. [Trump also called the TCJA the “largest tax cut in history”, even though it was only 30% or so as large as the tax cuts under Reagan and Bush, as measured relative to GDP.]
To date, the capital markets reaction to the OBBBA has been largely muted. The US stock market remains at (or near) its all-time high and the market for Treasury bonds is holding more or less firm, with 10-year yields in a trading range around 4.3% or so. But the value of the US dollar in the FX markets is down 10% since President Trump took office, and the price of both gold and Bitcoin (‘digital gold’) are both up 20-25% this year (as measured in USD), which should give us all pause to reflect on what this may be telling us about the capital markets’ confidence in American financial leadership and global dollar dominance going forward.
In recent weeks, President Trump has threatened (effectively) to fire Fed Chair Powell; he has demanded that the Fed cut rates “by at least three percentage points”; and he has reportedly instructed his Treasury Secretary to increase the issuance of short-term debt in anticipation of future presidentially-directed Fed interest rate cuts. The Senate has passed stablecoin legislation (the GENIUS Act), which the Treasury Secretary says will help absorb a flood of new T-bills, but which many observers believe will be more likely to cannibalize bank deposits and contract bank credit, if it has any impact at all. The Trump administration is in the process of revising banking regulation in ways which will make it more palatable for US banks to increase their holdings of Treasury securities, perhaps under duress from the government. The Trump administration continues to work on plans for a US Strategic Bitcoin Reserve, after the President’s own media company loaded up on Bitcoin. And Congress continues to work on increasing the federal debt limit, by a reported $4-5 trillion, ironically after passing landmark legislation which the White House claims will reduce future deficits by $7 trillion or so in the coming years.
And of course there are Trump’s on-again, off-again tariffs, which the capital markets are evaluating with what seems to be a “wait and see” or more accurately perhaps a “hold your breath” attitude, with investors’ fingers poised over the “sell” button in the event the President decides once and for all that he will no longer tolerate the label of TACO.
It is anyone’s guess how all of this will turn out, but I think it is fair to say (as The Economist has, above) that the principles of Trumponomics, if there are any, are not ones which fiscal conservatives in the Republican Party would have recognized let alone endorsed in days gone by, before the GOP became the Party of Trump. But this is the world in which we all now live and the Republican Party has willingly embraced it. The effects of President Trump’s economic and financial policy initiatives will likely be felt for years and possibly decades to come, well after Donald J. Trump himself has left the political stage, leaving those who come after hims to clean up the mess he created, which may well be substantial.
Links
Trumponomics 2.0 Will Erode the Foundations of America’s Prosperity, The Economist, July 3, 2025
The OBBBA Reveals the Hollowness of Trumponomics, The Economist, July 2, 2025
Ten Charts to Explain Trump’s Big Beautiful Bill, The Economist, July 1, 2025
Trump’s Big Policy Bill Puts Nation on New, More Perilous Fiscal Path, New York Times, July 1, 2025
The Senate OBBBA in Charts, Committee for a Responsible Federal Budget, June 30, 2025
GOP Declares Tax-Cut Extensions ‘Free’ to Obscure Megabill’s Cost, WSJ, June 30, 2025
Breaking Down the Big Beautiful Bill, Committee for a Responsible Federal Budget, June 4, 2025
The OBBBA Improves the Fiscal Trajectory, White House, OMB, June 7, 2025