As Senate Republicans debate the Settlement Budget Bill that the House passed on May 22, one thing is becoming increasingly evident. Most of the comprehensive bills that have been backed by President Trump are likely to be implemented in July, despite some Republican senators expressing concerns about various aspects of the package.
If that happens, it would mark the signature law of Trump’s second term, similar to the Tax Cuts and Employment Act of 2017 from his first term.
So how do these two legislative efforts stack up against each other?
A primary accomplishment of the Tax Cuts and Employment Act was its aim to align U.S. corporate tax codes with global standards by lowering the marginal tax rate from 35% to 21%.
Economists like Kevin Brady and Douglas Holtz Arkun pointed out that this was achieved by making the corporate tax cuts permanent. They noted that economic growth and capital spending rose following the bill’s approval, and interestingly, the U.S. didn’t lose any of its multinational headquarters during a period of significant corporate migration.
In contrast, the current bill focuses on reducing personal tax rates, slated to expire at the end of this year.
Supporters of this effort argue that if the personal tax rates do expire, most Americans could see their taxes go up, which might harm the economy. However, Democrats counter that benefits from these tax cuts mainly favor wealthy families at the expense of middle and low-income households, advocating instead for tax increases on high-income earners and large businesses.
In response to this, Jeff Stein from the Washington Post noted that during the 2024 campaign, Republicans are pivoting by suggesting new cuts targeted to specific voter demographics. This proposal hints at changes around overtime, tax termination on Social Security, and credits for borrowing costs related to purchasing American-made vehicles.
Senate Majority Leader John Tune (Rs.D.) stated that Republicans, in collaboration with their Chamber of Commerce allies, are keen to deliver on these campaign promises.
Stein observed a notable shift in how Republican leadership now perceives tax policy compared to Trump’s first term.
The majority of the policies in the 2017 bill were crafted by Washington think tanks aiming to simplify tax codes and reduce distortion without increasing the budget deficit.
This time around, the Republican tax approach appears to cater more to populist sentiments, focusing on appealing to voter segments. According to Politico, Republicans are incorporating new tax credits in hopes of garnering voter support ahead of next year’s midterm elections. This includes larger child tax credits and increased state and local tax deductions.
One challenge, however, is that estimates suggest the 2017 tax cuts and new initiatives could burden the federal government by around $4 trillion over the next decade. This raises concerns about whether the fiscal deficit will remain under control, being reduced by only $1.5 trillion compared to existing forecasts.
Moreover, there are worries that the newly proposed tax cuts are less geared toward fostering long-term growth compared to the Tax Cuts and Employment Act.
The Tax Foundation has projected that long-term GDP growth might only see a 0.8% increase (not annualized). They argue that the bill introduces narrowly targeted provisions but doesn’t promote broad economic growth effectively.
In an attempt to address these concerns, Senate Republicans are looking to include more permanent business tax cuts and full cost recovery for equipment and R&D in their bill.
The Wall Street Journal’s editorial board believes one of the constructive changes compared to the 2017 bill is that businesses would be able to quickly deduct all capital expenditure costs, rather than spreading them over time. This was suggested as a way to enhance capital spending until those costs were completely deducted by 2022.
Another critique lies in fairness; many believe that the current House bill disproportionately benefits the wealthy and may end up costing more than extending the 2017 tax law. Critics argue it remains focused on the same groups instead of prioritizing low and moderate-income individuals.
Once the effects of proposed Medicaid funding cuts are taken into account, the Republican bill appears less favorable to the public. Polls indicate a significant opposition to the House bill, particularly due to its implications for Medicaid funding.
Ultimately, I think Joe Biden may be making a similar mistake, believing that Trump is more adept at targeted legislation than articulating clear policy goals. The key difference is that while Trump leans towards a mix of tax and spending cuts, Biden seems focused on sweeping spending bills.
In my view, Trump’s economic policy during his first term energized investors due to the Tax Cuts and Employment Act.
In contrast, the current market response to the ambiguity surrounding this “big and beautiful bill” and ongoing global trade disputes seems quite mixed.
Dr. Nicholas Salgen serves as an economic consultant for investment advisors at Fort Washington and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books, including one related to the impacts of economic policy on financial markets.
