May 20, 2025 • 17 mins
We break down the House GOP’s One, Big, Beautiful Bill—a sweeping tax package designed to extend key parts of the 2017 Tax Cuts and Jobs Act before they expire in 2026.
Kyle Hulehan is joined by Garett Watson, Director of Policy Analysis at the Tax Foundation, to unpack what’s actually in the bill, who benefits the most, and how it could impact the economy, federal revenue, and your taxes.
Links:
https://taxfoundation.org/blog/house-one-big-beautiful-bill-temporary-tax-policy/
https://taxfoundation.org/research/all/federal/big-beautiful-bill-house-gop-tax-plan/
https://taxfoundation.org/blog/house-tax-plan-economic-growth-impact-business-tax-permanent/
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kyle Hulehan (00:00):
Hello and welcome to the Deduction, the Tax
Foundation podcast.
I'm your host, Kyle Houlahan,and today we are back with
another episode, and we arejoined by Garrett Watson
director of Policy Analysis atthe Tax Foundation.
Garrett, how are you doingtoday?
Garrett Watson (00:13):
Doing well,, how are you, Kyle?
Kyle Hulehan (00:14):
Are you ready to talk about our one big,
beautiful bill?
I mean, what a title?
Garrett Watson (00:19):
as ever.
We've been spending about, uh, aweek, uh, deep diving into this
bill and, uh, providing allsorts of, uh, analysis, so ready
to chat.
Kyle Hulehan (00:26):
So we're gonna get right into this.
Uh, so tell us what is the onebig beautiful bill and how does
it relate to the expiring 2017Tax Cuts and Jobs Act?
Garrett Watson (00:36):
So the one big beautiful bill is the major, uh,
congressional effort to dealwith, uh, in part the expiring
tax provisions that are comingat the end of the year.
So most of the individual taxchanges that came from.
2017 tax law known as Tax Cutsand Jobs Act expire all at once
in one big cliff.
And this has been talked about alot in tax policy circles.
(00:57):
We knew it would motivateCongress to come together and
try to introduce one big taxpackage.
'cause that's typically howthese things are done nowadays
on the Hill.
And, uh, this, uh, one bigbeautiful bill is the content.
Finally seeing the actuallegislative content of what this
may look like.
It was introduced and passed outthe House Ways and means
committee, uh, last week.
It's now being stitched togetherwith other spending changes as
(01:17):
part of one.
Big, beautiful bill that will beconsidered on the house floor as
soon as this week.
And the headline aspect of this,uh, package is making permanent
most of the changes in the, uh,2017 tax Cuts and jobs act for
individuals.
So we can go into that.
There's a lot of other taxchanges in here, both for
businesses and individuals, taxcuts on top of the, the package
(01:41):
that amount to about$4 trillion.
Tax cuts over 10 years.
So lots to talk about here interms of, uh, existing and new
provisions, uh, and outlookmoving forward as it gets to the
house floor and moves its way ofcourse into the senate.
Kyle Hulehan (01:53):
All right, so what are the key provisions as well
as some of the pay fors?
You know, this seems like itcould be expensive and you know,
how does this affect individualsand businesses?
Garrett Watson (02:03):
Right.
So the big, uh, continuity, Ithink, important thing to
emphasize is that permanency formost of the, uh, 2017 tax laws.
So that includes the lower taxrates on ordinary income, the,
uh, consolidated tax brackets,the doubling of the child tax
credit, and the standarddeduction, the elimination of
the personal exemption.
The, uh, in a variety of, uh,what we call base broadens,
(02:25):
basically tax increases incertain places to make up for
the other tax cuts.
So that includes, uh, therestricted limitation for
mortgage interest.
It includes, uh, a bit moregenerous salt deduction, which
is interesting.
That's a big flashpoint of$30,000, uh, for all individuals
with some, uh, income limits forupper, uh, uh, upper earning
households.
Uh, in addition to, uh, avariety of other new provisions
(02:49):
or tweak provisions, one, one,that, one big one that's come
out has been, uh, aturbocharged, uh, pass through
deduction that is a specialdeduction for, uh, pass through
businesses and small businessesgoing from 20% under current law
to 23%, making that permanentwe're looking at, and as we'll
get into some new tax cuts for,uh, deductions for tipped income
(03:10):
and overtime.
A few other items.
Uh, and that all amounts toabout a little over$4 trillion
tax cut over 10 years.
That was about the target theywere aiming for.
Uh, and what we find when we didour modeling on this is it does,
uh, have some positive economiceffects.
So we found a 0.6% increase inlong run GDP.
And that does result in somerevenue feedback.
(03:30):
So on a dynamic basis, when youinclude the effects of the
economy from this bill, it wouldcost about three point, uh,$3
trillion.
So about a 19%, uh, haircutthere on the headline cost.
Uh, and of course, all of thiswill come together with other
spending changes to see the, thenet figure, uh, which we expect
would increase the deficit, uh,over 10 years once it, uh, hits
(03:50):
the house floor.
Kyle Hulehan (03:51):
And yeah, so I, I'm wondering, you know, what
are the main benefits of thisbuild?
Like, you know, who are the, thenotable winners and losers among
these income groups?
Garrett Watson (03:59):
So on the TCJA stuff, of course we've been, uh,
emphasizing that if, if noaction is taken, about 62%.
Of, uh, taxpayers would see atax hike at the end of the year.
So they're one big winner inthat they're avoiding a tax
increase.
Uh, there would be this big taxcliff that they're avoiding, but
that is just a continuation ofthe status quo.
So a lot of folks would see thatas just continuing, uh, this
(04:20):
year's tax design, which isgenerally true, and they're
avoiding a tax increase forother folks.
They are gonna see.
Uh, net tax cuts on top of that,most notably from some of these
new ideas.
So, for example, there is, uh,an exemption for tipped income
For most, uh, employees who arenot higher earners.
Uh, there's gonna be a deductionfor overtime.
Uh, pay for the premium portion,the, the 0.5 and a time and a
(04:42):
half.
If you're a hourly worker,you'll be able to get that
deducted from your tax return,whether or not you're an
itemize.
There's a special, uh,additional deduction for
seniors, uh, worth up to$4,000that will provide some benefit
in lieu of the president's, uh,promise to exempt social
security from tax.
Social security will still besubject to tax, but you'll get
that additional deduction, whichmight help offset some of those
(05:04):
taxes paid on social securitybenefits.
And there's also, uh, you know,deduction for auto loan
interest.
A few other.
in there that, uh, will add upto an increase in, uh, after-tax
incomes.
Overall, we find in ourdistributional analysis that uh,
most, uh, major income groupsacross the, the income spectrum
would see an increase inafter-tax incomes.
(05:24):
one caveat, I think further downthe line in a few years there
will be tighter rules on certaincredits like the child credit,
the earned income credit, theAffordable Care Acts, premium
tax credits that will offsetsome of these tax cuts.
At the bottom, we find thebottom 20% by 2034 would see a
0.1% increase in after taxincome.
So just, just over the line.
(05:44):
that is one element that's beenemphasized is there are some.
Credit restrictions that maymute some of the positive
benefit for those at the bottom.
Uh, but overall we're, we'reseeing somewhere between, you
know, a a 2%, upwards of a 4%increase in after tax incomes
overall.
Uh, though we do have to factorin the fact that this would
increase the deficit and havesome effects of its own, um,
because of the debt path thatwe're on.
Kyle Hulehan (06:05):
So Garrett, um, I'm wondering, you know, how is
this bill projected to impacteconomic growth and, and federal
revenue over the next decade?
Like, what are we seeing as likethe headlines for this?
Garrett Watson (06:15):
So a couple of headline takeaways from the
Bills expected economic impact.
One is we do expect the long runsize of the economy to be larger
at about.
0.6%.
And that represents, uh, youknow, tens of billions of
dollars of additional economicoutput every year, mostly from
encouraging, uh, more, uh, work.
So lower marginal tax rates forindividuals will encourage them
to work more, and that's gonnalead to a higher capital stock,
(06:36):
a higher amount of output in theus.
But there's one big caveat onthat, and then that's because,
primarily because of the deficitimpact, we're looking at a, you
know,$4 trillion tax cut here.
Uh, that'll only be partiallyoffset.
That means that, uh, thegovernment is gonna be issuing
more treasury bonds to financeits operations, and a lot of
that will be financed fromabroad.
So a lot of those payments ofthose treasury bonds will be
(06:57):
remitted.
To foreigners who are, who arefinancing this, uh, this
deficit.
And what that means is a lot ofour income we'd otherwise accrue
from this bill will end up, uh,being paid in the form of those
bond payments to foreigners.
And that's why we find thatwhile American production is up
by 0.6%, American incomes asmeasured by GNP up only very
slightly by a couple hundreds ofa percentage point.
(07:19):
So it is net positive, but thereis that big caveat that, uh,
the, uh, the deficit impact ismuting the overall benefit to
American incomes in ourmodeling.
Uh, and of course there areopportunities as this is still
going through the process,right, to turbocharge the
economic growth even more.
There's several opportunities wecan talk about, and that would
of course raise American incomesfurther from what we've found so
far.
Kyle Hulehan (07:40):
Yeah.
And you know, maybe for a, anon-economist like myself, you
could just very quickly diveinto this, why does the deficit
really matter?
You know, we're talking aboutthe deficit and how much it
raises.
I, I, I think that would behelpful for some people of like,
why is this important?
I.
Garrett Watson (07:53):
So the, the, the overall sort of deficit of the
US government is reallyimportant because.
Uh, someone's gotta finance it,right?
And so eventually that deficitneeds to be paid for either
through tax changes, spending,you know, spending changes to
make sure it's on a sustainablepath forward.
And of course, the folks who arefinancing it in the interim, uh,
are folks who are basicallyloaning the US government money,
right?
So they expect their principleback and interest.
(08:14):
It's that and interest part thatwe're finding in our modeling
that has a negative effect onAmerican incomes.
And so we're paying, you know,the, uh, sometimes it's
Americans, right, who aregetting that, uh, the benefit of
that.
Sometimes it's folks fromabroad.
That of course represents thenet outflow of, uh, American
incomes, uh, relative to if wejust paid for this right
outright and didn't increase thedeficit, we wouldn't have to
(08:35):
make those interest payments.
It's much like financingsomething on a credit card,
right?
You've gotta pay back the creditcard amount plus whatever
interest is owed, and that, uh,is a loss sometimes that, that
there are cases where that'sworth it, but, uh, it's not
always worth it.
As anyone with a credit cardknows, you can get into an
unsustainable situation andthat's sort of where we're
bordering on in our, with ourdebt and deficit.
Situation.
(08:55):
I think that's one big headlineis this, this bill, as it's
going through the process risks,uh, being a missed opportunity
to further address the debt,either through tax changes or
through responsible spendingchanges moving forward.
And that's what's actuallyunderlying a lot of the current
debates on the hill about wherethis bill goes, uh, both on the
house floor and in the Senate.
Kyle Hulehan (09:13):
Okay.
Thank you.
That, that makes a lot of sense.
So we're talking about thosedebates.
What, what are the majorpolitical debates surrounding,
uh, this, this bill andincluding, you know, maybe some
GOP divisions on stuff like thesalt cap.
Garrett Watson (09:26):
Yeah, so there's a couple of flash points here.
One major.
Outstanding question is on thelong-term design of the salt
cap.
There is the proposal in thebill, as we mentioned, right?
Raising that cap from$10,000this year up to$30,000, putting
in some new income limits forvery high earners.
Uh, but there are a group offolks in Congress who want to
see that deduction made more,even more generous to help
constituents, uh, in theirdistricts who are, uh, being hit
(09:48):
by the cap.
Uh, the, but the big, uh,roadblock has been, there's been
no consensus on what that designmay.
Much more generous leadershipand folks who are more skeptical
of that deduction don't wantsomething as generous.
So they gotta come up with adesign that everyone can live
with that can be put andmodified into the bill.
That, of course, will costrevenue already.
This$30,000 cap costs close to200 billion over 10 years.
(10:10):
We're talking about tens orhundreds of billions of dollars
more, and that goes back to thedeficit math.
How do you square these?
a couple of other things, ofcourse.
One is there's this bill islittered with a lot of temporary
policy that a lot of folks wouldlike to see improved.
For us, the tax foundation, abig one is of course the major,
uh, business provisions wherewe're providing full and
immediate, uh, deductions forbusiness investment, uh, are,
(10:32):
um, included in here, but onlytemporarily for the next five
years.
And that undercuts a lot of theeconomic growth.
Uh, so we'd like to see that,that permanency.
That's one area we can talk alittle more about.
Uh, and of course the other.
Uh, area is, um, as it relatesto spending, what's gonna happen
to, uh, the spending side.
That's big debate right now onthe Hill, on the future of
Medicaid and other, otherprograms, uh, to make the math,
(10:54):
uh, line up, um, between folkswho are more worried about the
deficit and those who are moreworried about the impact of
those spending changes.
Kyle Hulehan (11:00):
Okay, I, I got it Now.
What do you think is the, likelegislative outlook of this?
You know, how likely is it topass in its current form?
Garrett Watson (11:09):
So it's, uh, almost certain that this bill
will change, uh, it from ranginganywhere from, uh, minor changes
to o overwhelming sort ofchanges, right?
Uh, the next step, uh, so now itwas passed outta the budget
committee late on Sunday.
I.
Um, so that's the committee thatstitches together all the
different committee, uh, uh,bills that have been, uh, put
together the different text intoone big bill, and now it will
(11:32):
move on to what is known as therules committee, which can amend
this text before it hits thehouse floor for a formal sort of
house.
Vote.
So that's where we expectthere's already been some minor
changes in some other non-taxitems already today.
We expect that's where maybesome other changes might happen
as it relates to salts or eventhe green energy credits, most
of which are being repealed inthis bill.
Uh, and so we're watching forthat.
(11:53):
And then of course, even if itpasses the house, the Senate
gets its own crack at the apple.
So they will be, uh, you know,there's already folks, senators
who have big ideas that maydiffer quite a bit from what the
house is looking at.
Um, and so that's what we'll bewatching next.
And of course, the White Housemay have its own views as well
on how to design this movingforward.
Once the Senate acts, then thehouse has to come back and if
(12:14):
anything is different, they haveto repass that legislation
because of course, both chambershave to pass identical bills.
So there's still a lot of runwayleft, a lot of work left to do
to get this through Congress andget it to the President's desk.
Uh, for signature, uh, the houseis hoping to have something
passed by Memorial Day, so we'llsee if they end up in that.
Uh.
that, where they are in thatprocess.
(12:35):
But, uh, that's where we'recurrently standing.
Kyle Hulehan (12:37):
Yeah, we're really in the middle.
I don't know if you rememberfrom school, it was obviously a
while ago, of how a bill becomeslaw.
We're really, we're right in themiddle of this process of like,
everyone's tossing it back andforth to each other.
So it's, uh, we're in the, themess of it right now.
Um, yeah.
But so, uh.
I'm curious, what do you think,like what would you like to see
changed in this bill as thelegislative process moves
(12:59):
forward?
What would make this, you know,a, a better bill for the
American people and for ourcountry in general?
I.
Garrett Watson (13:05):
So I think there's a couple of common sense
things that make a lot of sense,sort of even just stepping back
from some of the bigcontroversies.
One is, uh, seeing morepermanence in the bill will be
really helpful.
It's better to do even fewerthings and make them permanent.
Than to do more and more thingsand have them all be temporary.
And that's helpful for certaintyfor taxpayers.
It's helpful from an economicperspective.
Uh, my colleague Erica Yo and Iran some numbers last week and
(13:26):
we found that, uh, if they were,for example, make permanent, uh,
the full expensing provisionsfor our research and development
for short-lived assets, uh, inthis bill, along with more
generous interest deduction.
Uh, if all that is permanent,you would actually double the
long run economic growth effectsfrom point, uh, from 0.6% to
1.6%.
So more than doubling thateffect.
(13:47):
Um, and it would raise Americanincome just by 0.9%.
So a clear increase compared tothe more muted effects of the
current bill.
So I think that's one, uh,lesson that can be learned.
Something we've emphasized alot, it's, it's hard because
there's always a temptation forgimmicks and temporary changes.
Another thing is just makingsure that simplicity is really
prioritized across the bill.
There's a lot of complicatednovel ideas ranging from, you
(14:10):
know, reworking some of theincome limitations for the pass
deduction, brand new deductionsthat have never been tested
before.
Uh, just a raft of, um, ofcomplicated things that are
going to put more work on theIRS and treasury.
And stuff that taxpayers aregonna have to catch up on.
So I think, uh, you know,greater simplicity just across
as a, as a principle across thebill would also be helpful.
(14:31):
Um, part of this has to do withthey're trying to do a lot all
in one package very quickly, andthat's not necessarily a recipe
for a rational or simple or, orpro growth.
Uh, a tax code at the end of theday.
And so, you know, I think our,we do have an opportunity now
with, you know, the, the housetrying to finish up their work
and the Senate taking a freshlook to prioritize those things.
There's still, um, sort of roomto, to improve the bill from
(14:52):
where it is in ways that areincremental and not, uh, not
too, um, not requiring acomplete, uh, going back to the
drawing board.
Kyle Hulehan (14:59):
Yeah.
Now I'm curious, you, youmentioned a couple things.
What, what do you see?
Is it the simplicity as like thebiggest con of this bill, or is
it what it adds to the deficit?
What do you, what do you thinkis like the biggest issue of the
bill?
Garrett Watson (15:11):
Yeah, so, so I think, I think the, the lack of
permanency, which mutes thegrowth effects is one big
downside.
That's obviously been one of thebiggest legacies of the task.
Custom Jobs Act was sort of thegrowth effects.
That's something that theframers of this bill want.
And, uh, there's clear stepsthey can take to do that.
And it, it folds into thepermanency and the certainty
that we're providing on theindividual side.
So I think that that's a clearpath forward, very low hanging
(15:31):
fruit.
Um, trying to, yeah, keep thingsas simple as possible is
another.
I think big one and yeah.
And the third item is thisdeficit impact that that is.
Um, we're already seeing marketsmove a little bit.
It's early to say if, if thiswill move markets in a longer
term way, that that worsens ourfiscal situation.
But, uh, this is a bigopportunity to, you know, right.
The ship as it were.
And, uh, that's, um, this, thisbill is not going in that, in
(15:54):
that direction.
It's just a question of how bigit increases the deficit rather
than, uh, does it, um, does itincrease the deficit?
So I think those are the threethings that, that are probably
the biggest priorities to, to,to improve the, the bill moving
forward.
Kyle Hulehan (16:06):
All right, Garrett.
Well, thank you for breaking allof this down for us.
This is really a quick,informative, educational kind of
episode.
I, I wonder, real quick, isthere anything, any of the work
you're doing, you wanna plugreal quick, let the people know
what you're working on?
Garrett Watson (16:17):
Yeah, so our team is currently working on,
uh, a raft of follow up, uh,blog posts and pieces covering
various components of this.
Package one that's coming outvery shortly, uh, by our team is
looking at the good, the bad,and the ugly of this bill, uh,
from our, our principles andperspective.
And that'll be out in the nextcouple of days.
And, uh, should be a goodoverview of, of, uh, of what's
going on and what.
Kyle Hulehan (16:38):
All right, Garrett, thank you for being on
the show today.
And before we sign off, I justwanna let you guys know if you
have any burning questions.
Look, you can obviously drop acomment on YouTube, you know how
to do that.
You can email us atpodcast@taxfoundation.org.
There's always our dms onTwitter.
You can find us there.
And thank you for listening.
Hello and welcome to the Deduction, the Tax
Foundation podcast.
I'm your host, Kyle Houlahan,and today we are back with
another episode, and we arejoined by Garrett Watson
director of Policy Analysis atthe Tax Foundation.
Garrett, how are you doingtoday?
Garrett Watson (00:13):
Doing well,, how are you, Kyle?
Kyle Hulehan (00:14):
Are you ready to talk about our one big,
beautiful bill?
I mean, what a title?
Garrett Watson (00:19):
as ever.
We've been spending about, uh, aweek, uh, deep diving into this
bill and, uh, providing allsorts of, uh, analysis, so ready
to chat.
Kyle Hulehan (00:26):
So we're gonna get right into this.
Uh, so tell us what is the onebig beautiful bill and how does
it relate to the expiring 2017Tax Cuts and Jobs Act?
Garrett Watson (00:36):
So the one big beautiful bill is the major, uh,
congressional effort to dealwith, uh, in part the expiring
tax provisions that are comingat the end of the year.
So most of the individual taxchanges that came from.
2017 tax law known as Tax Cutsand Jobs Act expire all at once
in one big cliff.
And this has been talked about alot in tax policy circles.
(00:57):
We knew it would motivateCongress to come together and
try to introduce one big taxpackage.
'cause that's typically howthese things are done nowadays
on the Hill.
And, uh, this, uh, one bigbeautiful bill is the content.
Finally seeing the actuallegislative content of what this
may look like.
It was introduced and passed outthe House Ways and means
committee, uh, last week.
It's now being stitched togetherwith other spending changes as
(01:17):
part of one.
Big, beautiful bill that will beconsidered on the house floor as
soon as this week.
And the headline aspect of this,uh, package is making permanent
most of the changes in the, uh,2017 tax Cuts and jobs act for
individuals.
So we can go into that.
There's a lot of other taxchanges in here, both for
businesses and individuals, taxcuts on top of the, the package
(01:41):
that amount to about$4 trillion.
Tax cuts over 10 years.
So lots to talk about here interms of, uh, existing and new
provisions, uh, and outlookmoving forward as it gets to the
house floor and moves its way ofcourse into the senate.
Kyle Hulehan (01:53):
All right, so what are the key provisions as well
as some of the pay fors?
You know, this seems like itcould be expensive and you know,
how does this affect individualsand businesses?
Garrett Watson (02:03):
Right.
So the big, uh, continuity, Ithink, important thing to
emphasize is that permanency formost of the, uh, 2017 tax laws.
So that includes the lower taxrates on ordinary income, the,
uh, consolidated tax brackets,the doubling of the child tax
credit, and the standarddeduction, the elimination of
the personal exemption.
The, uh, in a variety of, uh,what we call base broadens,
(02:25):
basically tax increases incertain places to make up for
the other tax cuts.
So that includes, uh, therestricted limitation for
mortgage interest.
It includes, uh, a bit moregenerous salt deduction, which
is interesting.
That's a big flashpoint of$30,000, uh, for all individuals
with some, uh, income limits forupper, uh, uh, upper earning
households.
Uh, in addition to, uh, avariety of other new provisions
(02:49):
or tweak provisions, one, one,that, one big one that's come
out has been, uh, aturbocharged, uh, pass through
deduction that is a specialdeduction for, uh, pass through
businesses and small businessesgoing from 20% under current law
to 23%, making that permanentwe're looking at, and as we'll
get into some new tax cuts for,uh, deductions for tipped income
(03:10):
and overtime.
A few other items.
Uh, and that all amounts toabout a little over$4 trillion
tax cut over 10 years.
That was about the target theywere aiming for.
Uh, and what we find when we didour modeling on this is it does,
uh, have some positive economiceffects.
So we found a 0.6% increase inlong run GDP.
And that does result in somerevenue feedback.
(03:30):
So on a dynamic basis, when youinclude the effects of the
economy from this bill, it wouldcost about three point, uh,$3
trillion.
So about a 19%, uh, haircutthere on the headline cost.
Uh, and of course, all of thiswill come together with other
spending changes to see the, thenet figure, uh, which we expect
would increase the deficit, uh,over 10 years once it, uh, hits
(03:50):
the house floor.
Kyle Hulehan (03:51):
And yeah, so I, I'm wondering, you know, what
are the main benefits of thisbuild?
Like, you know, who are the, thenotable winners and losers among
these income groups?
Garrett Watson (03:59):
So on the TCJA stuff, of course we've been, uh,
emphasizing that if, if noaction is taken, about 62%.
Of, uh, taxpayers would see atax hike at the end of the year.
So they're one big winner inthat they're avoiding a tax
increase.
Uh, there would be this big taxcliff that they're avoiding, but
that is just a continuation ofthe status quo.
So a lot of folks would see thatas just continuing, uh, this
(04:20):
year's tax design, which isgenerally true, and they're
avoiding a tax increase forother folks.
They are gonna see.
Uh, net tax cuts on top of that,most notably from some of these
new ideas.
So, for example, there is, uh,an exemption for tipped income
For most, uh, employees who arenot higher earners.
Uh, there's gonna be a deductionfor overtime.
Uh, pay for the premium portion,the, the 0.5 and a time and a
(04:42):
half.
If you're a hourly worker,you'll be able to get that
deducted from your tax return,whether or not you're an
itemize.
There's a special, uh,additional deduction for
seniors, uh, worth up to$4,000that will provide some benefit
in lieu of the president's, uh,promise to exempt social
security from tax.
Social security will still besubject to tax, but you'll get
that additional deduction, whichmight help offset some of those
(05:04):
taxes paid on social securitybenefits.
And there's also, uh, you know,deduction for auto loan
interest.
A few other.
in there that, uh, will add upto an increase in, uh, after-tax
incomes.
Overall, we find in ourdistributional analysis that uh,
most, uh, major income groupsacross the, the income spectrum
would see an increase inafter-tax incomes.
(05:24):
one caveat, I think further downthe line in a few years there
will be tighter rules on certaincredits like the child credit,
the earned income credit, theAffordable Care Acts, premium
tax credits that will offsetsome of these tax cuts.
At the bottom, we find thebottom 20% by 2034 would see a
0.1% increase in after taxincome.
So just, just over the line.
(05:44):
that is one element that's beenemphasized is there are some.
Credit restrictions that maymute some of the positive
benefit for those at the bottom.
Uh, but overall we're, we'reseeing somewhere between, you
know, a a 2%, upwards of a 4%increase in after tax incomes
overall.
Uh, though we do have to factorin the fact that this would
increase the deficit and havesome effects of its own, um,
because of the debt path thatwe're on.
Kyle Hulehan (06:05):
So Garrett, um, I'm wondering, you know, how is
this bill projected to impacteconomic growth and, and federal
revenue over the next decade?
Like, what are we seeing as likethe headlines for this?
Garrett Watson (06:15):
So a couple of headline takeaways from the
Bills expected economic impact.
One is we do expect the long runsize of the economy to be larger
at about.
0.6%.
And that represents, uh, youknow, tens of billions of
dollars of additional economicoutput every year, mostly from
encouraging, uh, more, uh, work.
So lower marginal tax rates forindividuals will encourage them
to work more, and that's gonnalead to a higher capital stock,
(06:36):
a higher amount of output in theus.
But there's one big caveat onthat, and then that's because,
primarily because of the deficitimpact, we're looking at a, you
know,$4 trillion tax cut here.
Uh, that'll only be partiallyoffset.
That means that, uh, thegovernment is gonna be issuing
more treasury bonds to financeits operations, and a lot of
that will be financed fromabroad.
So a lot of those payments ofthose treasury bonds will be
(06:57):
remitted.
To foreigners who are, who arefinancing this, uh, this
deficit.
And what that means is a lot ofour income we'd otherwise accrue
from this bill will end up, uh,being paid in the form of those
bond payments to foreigners.
And that's why we find thatwhile American production is up
by 0.6%, American incomes asmeasured by GNP up only very
slightly by a couple hundreds ofa percentage point.
(07:19):
So it is net positive, but thereis that big caveat that, uh,
the, uh, the deficit impact ismuting the overall benefit to
American incomes in ourmodeling.
Uh, and of course there areopportunities as this is still
going through the process,right, to turbocharge the
economic growth even more.
There's several opportunities wecan talk about, and that would
of course raise American incomesfurther from what we've found so
far.
Kyle Hulehan (07:40):
Yeah.
And you know, maybe for a, anon-economist like myself, you
could just very quickly diveinto this, why does the deficit
really matter?
You know, we're talking aboutthe deficit and how much it
raises.
I, I, I think that would behelpful for some people of like,
why is this important?
I.
Garrett Watson (07:53):
So the, the, the overall sort of deficit of the
US government is reallyimportant because.
Uh, someone's gotta finance it,right?
And so eventually that deficitneeds to be paid for either
through tax changes, spending,you know, spending changes to
make sure it's on a sustainablepath forward.
And of course, the folks who arefinancing it in the interim, uh,
are folks who are basicallyloaning the US government money,
right?
So they expect their principleback and interest.
(08:14):
It's that and interest part thatwe're finding in our modeling
that has a negative effect onAmerican incomes.
And so we're paying, you know,the, uh, sometimes it's
Americans, right, who aregetting that, uh, the benefit of
that.
Sometimes it's folks fromabroad.
That of course represents thenet outflow of, uh, American
incomes, uh, relative to if wejust paid for this right
outright and didn't increase thedeficit, we wouldn't have to
(08:35):
make those interest payments.
It's much like financingsomething on a credit card,
right?
You've gotta pay back the creditcard amount plus whatever
interest is owed, and that, uh,is a loss sometimes that, that
there are cases where that'sworth it, but, uh, it's not
always worth it.
As anyone with a credit cardknows, you can get into an
unsustainable situation andthat's sort of where we're
bordering on in our, with ourdebt and deficit.
Situation.
(08:55):
I think that's one big headlineis this, this bill, as it's
going through the process risks,uh, being a missed opportunity
to further address the debt,either through tax changes or
through responsible spendingchanges moving forward.
And that's what's actuallyunderlying a lot of the current
debates on the hill about wherethis bill goes, uh, both on the
house floor and in the Senate.
Kyle Hulehan (09:13):
Okay.
Thank you.
That, that makes a lot of sense.
So we're talking about thosedebates.
What, what are the majorpolitical debates surrounding,
uh, this, this bill andincluding, you know, maybe some
GOP divisions on stuff like thesalt cap.
Garrett Watson (09:26):
Yeah, so there's a couple of flash points here.
One major.
Outstanding question is on thelong-term design of the salt
cap.
There is the proposal in thebill, as we mentioned, right?
Raising that cap from$10,000this year up to$30,000, putting
in some new income limits forvery high earners.
Uh, but there are a group offolks in Congress who want to
see that deduction made more,even more generous to help
constituents, uh, in theirdistricts who are, uh, being hit
(09:48):
by the cap.
Uh, the, but the big, uh,roadblock has been, there's been
no consensus on what that designmay.
Much more generous leadershipand folks who are more skeptical
of that deduction don't wantsomething as generous.
So they gotta come up with adesign that everyone can live
with that can be put andmodified into the bill.
That, of course, will costrevenue already.
This$30,000 cap costs close to200 billion over 10 years.
(10:10):
We're talking about tens orhundreds of billions of dollars
more, and that goes back to thedeficit math.
How do you square these?
a couple of other things, ofcourse.
One is there's this bill islittered with a lot of temporary
policy that a lot of folks wouldlike to see improved.
For us, the tax foundation, abig one is of course the major,
uh, business provisions wherewe're providing full and
immediate, uh, deductions forbusiness investment, uh, are,
(10:32):
um, included in here, but onlytemporarily for the next five
years.
And that undercuts a lot of theeconomic growth.
Uh, so we'd like to see that,that permanency.
That's one area we can talk alittle more about.
Uh, and of course the other.
Uh, area is, um, as it relatesto spending, what's gonna happen
to, uh, the spending side.
That's big debate right now onthe Hill, on the future of
Medicaid and other, otherprograms, uh, to make the math,
(10:54):
uh, line up, um, between folkswho are more worried about the
deficit and those who are moreworried about the impact of
those spending changes.
Kyle Hulehan (11:00):
Okay, I, I got it Now.
What do you think is the, likelegislative outlook of this?
You know, how likely is it topass in its current form?
Garrett Watson (11:09):
So it's, uh, almost certain that this bill
will change, uh, it from ranginganywhere from, uh, minor changes
to o overwhelming sort ofchanges, right?
Uh, the next step, uh, so now itwas passed outta the budget
committee late on Sunday.
I.
Um, so that's the committee thatstitches together all the
different committee, uh, uh,bills that have been, uh, put
together the different text intoone big bill, and now it will
(11:32):
move on to what is known as therules committee, which can amend
this text before it hits thehouse floor for a formal sort of
house.
Vote.
So that's where we expectthere's already been some minor
changes in some other non-taxitems already today.
We expect that's where maybesome other changes might happen
as it relates to salts or eventhe green energy credits, most
of which are being repealed inthis bill.
Uh, and so we're watching forthat.
(11:53):
And then of course, even if itpasses the house, the Senate
gets its own crack at the apple.
So they will be, uh, you know,there's already folks, senators
who have big ideas that maydiffer quite a bit from what the
house is looking at.
Um, and so that's what we'll bewatching next.
And of course, the White Housemay have its own views as well
on how to design this movingforward.
Once the Senate acts, then thehouse has to come back and if
(12:14):
anything is different, they haveto repass that legislation
because of course, both chambershave to pass identical bills.
So there's still a lot of runwayleft, a lot of work left to do
to get this through Congress andget it to the President's desk.
Uh, for signature, uh, the houseis hoping to have something
passed by Memorial Day, so we'llsee if they end up in that.
Uh.
that, where they are in thatprocess.
(12:35):
But, uh, that's where we'recurrently standing.
Kyle Hulehan (12:37):
Yeah, we're really in the middle.
I don't know if you rememberfrom school, it was obviously a
while ago, of how a bill becomeslaw.
We're really, we're right in themiddle of this process of like,
everyone's tossing it back andforth to each other.
So it's, uh, we're in the, themess of it right now.
Um, yeah.
But so, uh.
I'm curious, what do you think,like what would you like to see
changed in this bill as thelegislative process moves
(12:59):
forward?
What would make this, you know,a, a better bill for the
American people and for ourcountry in general?
I.
Garrett Watson (13:05):
So I think there's a couple of common sense
things that make a lot of sense,sort of even just stepping back
from some of the bigcontroversies.
One is, uh, seeing morepermanence in the bill will be
really helpful.
It's better to do even fewerthings and make them permanent.
Than to do more and more thingsand have them all be temporary.
And that's helpful for certaintyfor taxpayers.
It's helpful from an economicperspective.
Uh, my colleague Erica Yo and Iran some numbers last week and
(13:26):
we found that, uh, if they were,for example, make permanent, uh,
the full expensing provisionsfor our research and development
for short-lived assets, uh, inthis bill, along with more
generous interest deduction.
Uh, if all that is permanent,you would actually double the
long run economic growth effectsfrom point, uh, from 0.6% to
1.6%.
So more than doubling thateffect.
(13:47):
Um, and it would raise Americanincome just by 0.9%.
So a clear increase compared tothe more muted effects of the
current bill.
So I think that's one, uh,lesson that can be learned.
Something we've emphasized alot, it's, it's hard because
there's always a temptation forgimmicks and temporary changes.
Another thing is just makingsure that simplicity is really
prioritized across the bill.
There's a lot of complicatednovel ideas ranging from, you
(14:10):
know, reworking some of theincome limitations for the pass
deduction, brand new deductionsthat have never been tested
before.
Uh, just a raft of, um, ofcomplicated things that are
going to put more work on theIRS and treasury.
And stuff that taxpayers aregonna have to catch up on.
So I think, uh, you know,greater simplicity just across
as a, as a principle across thebill would also be helpful.
(14:31):
Um, part of this has to do withthey're trying to do a lot all
in one package very quickly, andthat's not necessarily a recipe
for a rational or simple or, orpro growth.
Uh, a tax code at the end of theday.
And so, you know, I think our,we do have an opportunity now
with, you know, the, the housetrying to finish up their work
and the Senate taking a freshlook to prioritize those things.
There's still, um, sort of roomto, to improve the bill from
(14:52):
where it is in ways that areincremental and not, uh, not
too, um, not requiring acomplete, uh, going back to the
drawing board.
Kyle Hulehan (14:59):
Yeah.
Now I'm curious, you, youmentioned a couple things.
What, what do you see?
Is it the simplicity as like thebiggest con of this bill, or is
it what it adds to the deficit?
What do you, what do you thinkis like the biggest issue of the
bill?
Garrett Watson (15:11):
Yeah, so, so I think, I think the, the lack of
permanency, which mutes thegrowth effects is one big
downside.
That's obviously been one of thebiggest legacies of the task.
Custom Jobs Act was sort of thegrowth effects.
That's something that theframers of this bill want.
And, uh, there's clear stepsthey can take to do that.
And it, it folds into thepermanency and the certainty
that we're providing on theindividual side.
So I think that that's a clearpath forward, very low hanging
(15:31):
fruit.
Um, trying to, yeah, keep thingsas simple as possible is
another.
I think big one and yeah.
And the third item is thisdeficit impact that that is.
Um, we're already seeing marketsmove a little bit.
It's early to say if, if thiswill move markets in a longer
term way, that that worsens ourfiscal situation.
But, uh, this is a bigopportunity to, you know, right.
The ship as it were.
And, uh, that's, um, this, thisbill is not going in that, in
(15:54):
that direction.
It's just a question of how bigit increases the deficit rather
than, uh, does it, um, does itincrease the deficit?
So I think those are the threethings that, that are probably
the biggest priorities to, to,to improve the, the bill moving
forward.
Kyle Hulehan (16:06):
All right, Garrett.
Well, thank you for breaking allof this down for us.
This is really a quick,informative, educational kind of
episode.
I, I wonder, real quick, isthere anything, any of the work
you're doing, you wanna plugreal quick, let the people know
what you're working on?
Garrett Watson (16:17):
Yeah, so our team is currently working on,
uh, a raft of follow up, uh,blog posts and pieces covering
various components of this.
Package one that's coming outvery shortly, uh, by our team is
looking at the good, the bad,and the ugly of this bill, uh,
from our, our principles andperspective.
And that'll be out in the nextcouple of days.
And, uh, should be a goodoverview of, of, uh, of what's
going on and what.
Kyle Hulehan (16:38):
All right, Garrett, thank you for being on
the show today.
And before we sign off, I justwanna let you guys know if you
have any burning questions.
Look, you can obviously drop acomment on YouTube, you know how
to do that.
You can email us atpodcast@taxfoundation.org.
There's always our dms onTwitter.
You can find us there.
And thank you for listening.
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