The Senate’s version of President Trump’s domestic policy bill may not meet the ambitious goals set for economic growth and fiscal responsibility, according to economists.
While different from the House’s proposal submitted in May, the Senate’s bill retains a similar overall structure, highlighting Trump’s tax cuts as a primary feature.
Republicans assert that this measure will spur growth, create jobs, and avoid adding to the deficit.
A report from the White House claims the bill could boost economic growth by almost 5% over the next four years and result in the creation of about 7 million jobs, which is significantly higher than an independent analysis.
“This is one big beautiful bill projected to yield great economic benefits in the first four years,” said Treasury Secretary Scott Bescent in a post on Wednesday.
However, not everyone is convinced. Economists and tax experts have moderated their growth expectations, pointing to the bill’s redistributive effects and a possible increase in the deficit.
From a macroeconomic standpoint, Avi Jonah, a tax law professor at the University of Michigan, expressed skepticism about the growth potential driven by tax cuts. He mentioned that higher interest rates make an increase in the deficit even less ideal.
Modest Growth Forecast
The official growth forecast for the bill is rather conservative. The Joint Tax Committee (JCT) estimated that the House bill would increase growth by just 0.03 percentage points, resulting in a range of 1.83% to 1.86% by 2034.
This growth is less than what was seen from the tax cuts implemented in 2017, which were noted to boost potential GDP by approximately 0.2% according to the Congressional Budget Office (CBO).
GDP growth peaked at over 4% in the second quarter of 2018, likely driven by consumer demand stimulated by those tax cuts.
The Congressional Research Service (CRS) concluded in 2018 that the immediate impact of growth tends to be quite minimal, if present at all.
The current bill includes additional tax cuts targeted at working Americans. While the House version eliminated tips and overtime taxes until 2028, the Senate’s proposal places caps on those deductions.
Experts have indicated that these provisions probably won’t significantly affect growth.
Howard Greckman from the Urban Brook Center for Tax Policy noted that allowing tax-free tips simply shifts income sources without creating new economic activity.
Deficit Implications
The CBO projects that the House version can add $2.4 trillion to the deficit over the next decade, while the Senate’s version may add around $440 billion.
This latter figure is based on a “current policy baseline” that overlooks the revenue impact from extending the 2017 tax cuts.
Essentially, Senate Republicans calculated the bill’s total cost without considering certain crucial provisions that would otherwise expire.
Taking into account the costs of these extensions, the real expense of the bill could vary between $4 trillion and $5 trillion over a decade, nearly 14% of the total US debt, which is around $36 trillion.
Current estimates suggest that Senate tax cuts could exceed the deficit by $4.2 trillion, about $500 billion over the House’s proposal, rising to $4.8 trillion if temporary cuts become permanent.
Meanwhile, growing deficits and rising interest rates are causing significant concern in financial circles.
U.S. debt ratings have been downgraded from triple-A to double-A status, with agencies like Moody’s and Fitch pointing to “Erosion of Governance” as a factor.
Investment Forecasts Vary
The JCT presents different expectations regarding the House bill’s impact on investment and capital.
One model predicts a 0.3% increase in capital stock, while another indicates a possible drop of 0.9%, potentially reducing overall economic output.
Capital growth showed some improvement from 2017 to 2018, but it’s unclear how directly related this is to tax changes, especially concerning non-resident investments.
In 2019, the CRS noted it couldn’t definitively attribute increased investment rates to tax adjustments.
A UCLA study found slight investment increases in 2018 and significant jumps in 2019 due to the tax cuts, although there were mixed results for different types of corporations.
While some tax credits aimed at businesses have proved effective, evaluations show varying results, especially for research and development (R&D) credits.
Bradley Borden, a tax expert, mentioned that bonus depreciation could positively influence capital investments, especially seen during 2020 and 2021.
Impact on Employment and Wages
Models from the JCT indicate an anticipated increase in labor supply as a result of the legislation, which is a key factor in the bill’s predicted GDP contributions.
The CBO agrees that lower marginal tax rates will likely increase work incentives and projects a peak contribution of 0.6% in 2026.
Yet many analyses suggest this could be misleading regarding wage increases, as most benefits from the 2017 tax bill went to higher income brackets.
Although nominal wages grew by 3.2% from 2017 to 2018, real wage growth was negative, indicating minimal gains for average workers.
The CRS observed that tax changes mostly benefited high-income earners, as personal income tax cuts predominantly favored businesses.
UCLA research highlighted that while workers in the top income bracket saw about a $2,000 annual increase, those below the 90th percentile did not experience a statistically significant change.
Redistributive Effects
The bill appears set to shift wealth toward higher income groups, with wages and salaries likely concentrated at the top.
Although it doesn’t explicitly raise taxes on low-income individuals, wealth tends to remain within the upper tiers, leading to losses for the bottom decile.
The CBO predicts an increasing disparity, with top earners gaining an additional $12,000 annually, while earnings for the second ten percent hover around $3,200 and decrease further down the scale.
