President Donald Trump and many of his allies in Congress are making grand claims about the economic growth they say will result from the recently proposed “One Big Beautiful Bill.” Trump has accused critics of not understanding the budget proposal, “especially the tremendous GROWTH that is coming.” A closer examination of the economic realities involved reveals that these claims are dramatically overstated.
I have no objections on principles to extending the expiring provisions of the 2017 Tax Cuts and Jobs Act. Allowing these cuts to expire would deliver some measure of pain to the economy and add to our troubles. Tax hikes at a time when individuals and businesses are expecting tax stability would undoubtedly depress investment, employment and overall economic confidence. Americans are already getting a huge tax hike because of Trump’s tariffs.
However, making a sound case for maintaining the current tax structure is fundamentally different from making the case that it will bring about substantial new growth. It’s largely a defensive move. Realistically, the economic boost will be modest at best.
In fact, the administration and congressional supporters of this bill admit that much without realizing it. On the Senate side, lawmakers argue that the fiscal cost of extending the 2017 tax cuts should be measured against today’s tax code rather than against the code to which we would revert if the cuts automatically expire. They argue that assuming the cuts will be extended reflects the common expectation among taxpayers and markets.
But if markets already expect extensions, then making the tax cuts permanent cannot generate significant additional economic growth. The growth that can be achieved by these tax cuts has largely been realized. Merely continuing with lower rates doesn’t unleash many new incentives or productivity.
In addition, the budget legislation does lots more than extend the 2017 tax cuts. In fact, about 25% of the bill consists of different tax breaks on tips or overtime, and spending hikes for the military and various special interests. These are not pro-growth policies — in addition to being expensive.
The Tax Foundation estimates that the bill would raise economic output by approximately 0.8% in the long run. The Economic Policy Innovation Center analysis pegs the economic gain at around 0.5% of GDP. Both are far from the revolutionary 3% figures that Trump’s most ardent fanboys are claiming.
Moreover, most economic models don’t adequately consider the negative consequences of ballooning federal debt on long-term growth. And according to the Congressional Budget Office, this bill will add a further $2.4 trillion to the debt. High levels of debt put upward pressure on interest rates, crowding out private investment and dampening long-term growth prospects. Historically, too much debt correlates with diminished economic performance.
Whatever blip in the growth rate we will see thanks to the tax bill, it won’t compensate for the damage done by the Trump administration’s ongoing trade wars. Tariffs disrupt supplies, increase costs for American businesses and consumers, and create considerable economic uncertainty. Even if we generously assume that tax cuts will deliver an additional 0.5% to 0.8% in annual GDP growth, the drag from tariffs easily surpasses this modest benefit.
The contradiction couldn’t be clearer. Proponents of the bill and the president himself trumpet its growth-enhancing powers while simultaneously piling up debt and enacting trade policies that are both guaranteed to undermine economic dynamism.
And yes, in addition to the expected opposition from Democrats, Sen. Rand Paul (R-Ky.) and a few other voices from the right side of the aisle have been highlighting the bill’s inadequacies, to the great displeasure of the president.
Among other things, they point to its subsidies and other distorting economic interventions and accurately observe that the economic benefits being touted are inflated and misleading. Paul understands that a true pro-growth agenda would extend the tax provisions while limiting the debt impact by cutting wasteful spending, closing tax loopholes and not loading the bill with lots of special-interest giveaways.
The legislation is now in the hands of the Senate. If senators are interested in genuine and productive tax reform, they will scrap the new provisions and do 10-year extensions of pro-growth policies that are currently temporary in the legislation as passed by the House (such as 100% bonus depreciation and research-and-development expensing) — and they’d still be left with room to lower the cost. If they keep the spending offset included in the House bill and Medicaid reform, this would become both pro-growth and fiscally responsible legislation.
Instead of indulging in the dangerous fantasy that any tax cuts will produce enormous growth, Congress needs to do the work and revise the bill so that it does produce growth and offsets the debt accumulation.
Veronique de Rugy is the George Gibbs Chair in Political Economy and a senior research fellow at the Mercatus Center at George Mason University.
