The implications of Trump's proposed legislation, dubbed the 'Big Beautiful Bill', on the U.S. economy.
The One Big Beautiful Bill (OBBB), signed into law by US President Donald Trump on 4 July, has brought significant changes to the American tax system. The bill extends and expands tax benefits for individuals and businesses, resulting in large tax cuts that have stimulated economic activity for some sectors, but also contributed to a significant increase in federal deficits over the coming decade.
The OBBB makes permanent key provisions from the 2017 Tax Cuts and Jobs Act (TCJA), including lower individual tax rates, the Section 199A pass-through entity deduction, 100% bonus depreciation, and expanded business investment incentives. It also introduces new individual deductions such as for tip income, overtime pay, and car loan interest, targeting lower- and middle-income taxpayers.
One of the most notable changes is the increase in the state and local tax (SALT) deduction allowance. US taxpayers will now be able to deduct up to $40,000 in state and local taxes for a period of five years, a significant increase from the previous $10,000 cap. This change is expected to benefit many homeowners and high-tax states.
The bill also enacts the largest tax cut in history by making permanent trillions in expiring tax cuts and adding new ones. Companies are reporting improved cash flow and plans for increased investment due to these tax provisions. Analysts at global asset management firm BlackRock believe that US equities will "regain global leadership" due to the AI theme.
However, the Congressional Budget Office estimates that the OBBB will increase deficits by approximately $3.4 trillion over 10 years (FY 2025-2034), despite $1.4 trillion in projected reductions in other federal spending. The overall effect largely reflects a net decrease in federal tax revenues by about $4.5 trillion, owing mainly to extended TCJA tax cuts and new tax reductions, partially offset by increased spending in areas like the military and immigration enforcement.
Despite lower earnings growth forecasts, Chris Beauchamp, chief market analyst at IG, believes that a 5% earnings expansion in today's environment represents a genuine achievement. Analysts at BlackRock see scope for overall corporate earnings to stay solid, despite tariff-induced disruptions and corporate caution.
In addition to tax cuts, the OBBB also allocates funds for defence and border spending. Defence spending will receive an additional $150 billion, while border spending will receive an additional $100 billion. Over-65s will also benefit from increased tax breaks on their social security income.
The US dollar has fallen by around 10% this year, while US Treasury yields have risen as investors demand a higher premium for buying US debt. The S&P 500 soared to another record high last week, despite the second quarter earnings growth of 5%, down from a forecasted 9.4% in March.
In conclusion, the OBBB represents a significant shift in the American tax system, with far-reaching implications for the economy. While the tax cuts have stimulated economic activity, they have also contributed to a significant increase in federal deficits. As the effects of the bill unfold, it will be interesting to see how the US economy responds in the coming years.
- The OBBB's lower individual tax rates and increased deductions for tip income, overtime pay, and car loan interest could signal a focus on personal finance for lower- and middle-income taxpayers.
- The newsletter from the global asset management firm BlackRock suggests that US equities could regain global leadership due to the AI theme, which could impact personal-finance decisions related to investing.
- The increase in state and local tax (SALT) deduction allowance to $40,000 for a period of five years, as stated in the OBBB, may have a significant impact on business finances for homeowners and high-tax states.
- The enactment of the OBBB has affected politics, with the bill increasing deficits by approximately $3.4 trillion over 10 years despite federal spending reductions, which is general-news worth discussing in personal-finance circles.
