Proposed US Tax Changes
Donald Trump’s “One Big Beautiful Bill Act,” a comprehensive tax and spending package, narrowly passed the U.S. House of Representatives on May 22, 2025, with a 215-214 vote. This legislation, a cornerstone of Trump’s second term, aims to extend and expand provisions from the 2017 Tax Cuts and Jobs Act (TCJA), while introducing new tax breaks and significant spending cuts.
Tax cuts and deductions
The bill seeks to make permanent the individual income and estate tax cuts from the TCJA, which were set to expire at the end of 2025. Key provisions include:
> Lower Individual Tax Rates: Maintaining reduced tax brackets for individuals.
> Expanded Standard Deduction: Preserving the increased standard deduction, which has simplified tax filing for many.
> Enhanced Child Tax Credit: Raising the child tax credit to $2,500 per child.
> State and Local Tax (SALT) Deduction Cap: Increasing the SALT deduction cap to $40,000 for couples, up from the previous $10,000 limit, benefiting taxpayers in high-tax states.
Additionally, the bill introduces new tax breaks, such as eliminating taxes on tips, overtime pay, and certain auto loan interest.
Spending cuts and social programs
To offset the cost of tax cuts, the bill proposes significant reductions in social spending:
> Medicaid and Food Aid: Imposing stricter work requirements, potentially reducing coverage for millions.
> Planned Parenthood Funding: Cutting Medicaid funding to Planned Parenthood.
> Clean Energy Incentives: Phasing out clean-energy tax credits sooner than previously planned.
These measures are expected to reduce federal spending but have faced criticism for potentially harming low-income households.
Border security and defence spending
The bill allocates $46.5 billion to border security and mass deportation efforts, including funding for new Border Patrol and ICE hires. It also increases defence spending, with nearly $150 billion earmarked for national security investments, including a missile defence shield and naval expansion.
Economic and fiscal implications
While some market participants believe the bill will increase federal deficits by up to $5 trillion over the next decade, the real impact depends on the assumptions used. For example, Republicans assume that the economy will grow at a faster pace and that the government will continue to pay 3.5% in average yield, hence they project a slight reduction in the federal deficit compared to current levels. The Congressional Budget Office instead projects an increase, as it maintains real GDP growth at +1.8%. Then there are (potential) revenues that may come from tariffs. In short, it is complicated to determine the real impact on the deficit. What is clear though, is that additional spending will come first, and cuts to Medicaid and others will come later in the decade. While proponents argue that the tax cuts will stimulate economic growth, critics warn of potential long-term fiscal challenges.
Next steps
Having passed the House, the bill now moves to the Senate, where Republicans hold a 53-47 majority. Senate Majority Leader Mitch McConnell aims to pass the bill by 4 July, though further revisions are expected.
In summary, the “One Big Beautiful Bill Act” represents a significant shift in US tax and spending policy, with substantial tax relief for individuals and businesses, coupled with deep cuts to social programs and increased spending on border security and defence. Its passage marks a pivotal moment in the Trump administration’s legislative agenda.
Implications of the One Big Beautiful Bill Act
Increased government spending usually promotes growth and results in increased inflation. Both these usually result in high bond yields which is not good for the Fixed Interest asset class. AZ Sestante while not immediately concerned, notes we are monitoring the situation and may reduce our duration exposure in the US or internationally in general.
Both the RBA and the ECB intend to keep cutting rates which should be good for economic growth, but cutting rates usually occurs when the economy is slowing, so it is a two-edged sword. We remain comfortable holding both Australian equities and duration at the moment, but note that the valuation of the Australian bank equity is high.
The tax cuts and other payments to lower-income people are nearly always stimulatory as low-income people tend to spend all of the additional income they receive. This should flow on to boost the US economy and at this stage we are not seeing a recession in the US anytime soon, but we do note there was some damage done to the economy due to the tariffs, but we believe this will be relatively short term and the increased government spending should win out. Therefore, we maintain our equities exposures but are cognisant of maintaining a highly diversified portfolio given the ongoing uncertainty and volatility we are seeing in markets.