The "big beautiful bill" and its big bill

The House of Representatives passed the 'One Big Beautiful Bill', the administration's flagship legislation, by a razor-thin party-line majority on 22 May. Supporters celebrated the permanent extension of the 2017 individual tax brackets and of the corporate expensing rules. Budget watchdogs on Capitol Hill and traders on bond desks were looking at a very large bill over the next ten years.

The margin was a single vote, 215 to 214, after days of bargaining with holdouts over state and local tax deductions and cuts to Medicaid. The bill now goes to the Senate, where Republican leaders want changes of their own and hope to have a law signed by the Fourth of July.

What is in it

The core of the bill is the extension of the individual tax cuts passed in 2017, which would otherwise expire at the end of this year. Around that core sit newer promises: tax breaks on tips and overtime pay, a larger deduction for state and local taxes, and a return to immediate expensing of equipment and domestic research spending for companies. The savings come mainly from tighter rules for Medicaid and food aid, which fall far short of the tax cuts. The bill also raises the debt ceiling, which the Treasury has been working around with emergency accounting measures since January.

Several of the newer breaks are written to expire after a few years, which lowers their official cost. Few in Washington expect them to be allowed to lapse, since letting a tax cut expire is politically indistinguishable from raising taxes. The same logic is what makes the 2017 extension so expensive now. Temporary provisions tend to become permanent, and the cost that looked modest in the first score arrives in full a decade later.

Trillions added to the debt

Non-partisan budget analysts estimate the law will add between $3.5 trillion and $4.5 trillion to the national debt over the coming decade. The bill claims to pay for itself by relying on optimistic assumptions about faster growth and on expected tariff revenue. Experienced fiscal economists know that border duties cannot make up for the revenue lost to permanent cuts in personal and corporate taxes. The arithmetic does not work.

The record of 2017 is instructive. The original tax cuts were also promised to pay for themselves, yet the federal deficit widened in each of the following two years, while the economy was growing and before the pandemic struck. Tariff revenue is a weak substitute, because it depends on imports that the tariffs are meant to shrink and on duties that the administration keeps changing in trade talks.

Scoring the cost

The Senate may make the numbers look smaller without changing them. Some Republican senators want the extension of the 2017 cuts measured against a baseline that assumes those cuts continue, a convention known as current policy. On that basis, keeping existing tax rates costs nothing, because the comparison is with a world in which they never expire. The deficits would be exactly as large as before, but the official score would shrink by trillions of dollars. Bond investors, who lend against actual cash flows rather than scoring conventions, are unlikely to be persuaded.

Distribution matters for the politics as much as the total. The budget office's analysis of the House bill found that the poorest households would end up worse off, largely because of the cuts to Medicaid and food aid, while the richest would gain most from the tax changes. That pattern will shape the Senate fight, where a handful of Republicans have their own objections, some to the Medicaid cuts and some, from the other direction, to the size of the deficits.

Reagan's reversal

There is precedent for a correction. In 1981 Congress passed large tax cuts under Ronald Reagan, and as deficits widened and interest rates stayed painfully high, Congress raised taxes again in 1982 and in several later bills. The reversal came because the numbers forced it, not because the original plan had anticipated it. A similar correction is possible here, but it would come after the damage to the debt path had been done, and today's Congress shows less appetite for raising taxes than its predecessors did.

Dealers face more supply

For the Treasury's Office of Debt Management, the bill means permanently larger auctions at every maturity. Primary dealers are already struggling to handle record volumes of government debt under tight capital rules, and they now face a steady stream of new issuance with no end in sight.

At its refunding announcement in early May the Treasury again said it expected to keep the size of its note and bond auctions unchanged for at least the next several quarters, covering the gap with short-term bills. The bill makes that promise harder to keep. Leaning on bills exposes the budget to every move in the Federal Reserve's policy rate, while larger auctions of long bonds would push up term premiums at a time when Moody's has just removed America's last AAA rating.

The debt-ceiling increase adds a short-term twist. Once the limit is raised, the Treasury will rebuild its cash balance at the Fed by issuing a wave of bills, draining money from the banking system and money-market funds within weeks. That happened after the ceiling was suspended in June 2023, when bill issuance surged. It is a technical effect, but it tightens funding conditions at the same time as the longer-term supply problem grows.

Who gains and who pays

Capital-intensive companies are the clearest winners, since full expensing lowers the after-tax cost of new plant and equipment. Higher earners gain most in dollar terms from the extension of the brackets, and residents of high-tax states gain from the larger deduction. The losers are future taxpayers and anyone who borrows at rates set off long-term Treasuries, including home buyers and companies issuing bonds.

The strongest argument for the bill is that expensing and certainty will lift investment and productivity enough to narrow the gap. Some of that effect is real, but no mainstream estimate finds growth large enough to cover the cost. Regulators are considering an easing of the leverage rules that limit how many Treasuries banks can hold, which would help dealers absorb supply without changing the total. The signals to watch are the Senate's changes, the budget office's final score and the tails at long-bond auctions. Companies get certainty on their taxes, and the government's finances pay for it. The extra Treasury supply will probably keep long-term borrowing costs near multi-year highs for years, and the Senate's likely switch to a friendlier scoring baseline will change the headline cost without changing a dollar of what the Treasury has to borrow.