We are living in an age of hyperbole, or as writer Matthew Hennessey calls it, the “Age of Excusability,” in which our politicians succeed by making outlandish claims. So it goes with the One Big Beautiful Bill, which will usher in a new golden age or send us down the tubes for good, depending on your sources.
The Trump administration’s Council of Economic Advisers recently issued a report titled “The One Big Beautiful Bill: Legislation for Historic Prosperity and Deficit Reduction,” which pretty much says it all. The report claims the bill’s tax cuts will create an economic boom, raising economic growth to about 3% yearly, sufficient to offset nearly all of the bill’s cost. The remaining cost would be more than offset by the administration’s other policies, such as tariffs, which are assumed to raise $2.8 trillion without harming the economy, a sort of magic money machine.
Not to be outdone, the New York Times responded by casting doubt on the idea that tax cuts have ever boosted economic growth, relying on a casuistic retrospective of Republican tax cuts from President Ronald Reagan to President Donald Trump, published by a group called Co-Equal. In this worldview, those tax cuts didn’t work as they did not prevent economic downturns from occurring, such as the 1981 recession under Reagan and the financial crisis under President George W. Bush. Trump’s 2017 Tax Cuts and Jobs Act didn’t work either because real economic growth “averaged just under 3% for 2018 and 2019.” (Fortunately, they are not linked to the pandemic.)
As a final bit of evidence, the New York Times cites that the economy grew rapidly during the Clinton administration, by 3.9% annually, even though it raised taxes.
This historical pattern could just as well be attributed to numerology or astrology. Did you know that of these presidents, only former President Bill Clinton was born under the sign of Leo?
The New York Times chose not to cite any of the dozens of more careful academic studies done over the years that measure the effects of tax changes while controlling for other factors that also affect economic growth. Most of these studies find that taxes matter in the way that economic theory would predict: Lowering marginal tax rates on business profits and individual income boosts economic growth by increasing incentives to work, save, and invest.
A critical study by economists at Harvard, Princeton, the University of Chicago, and the Treasury Department found that for businesses experiencing the mean tax change from the 2017 tax law, domestic investment rose by 20% compared to a baseline where no tax changes occurred, mainly due to the lowering of the corporate tax rate.
While OBBB does not further lower the corporate tax rate (that change was made permanent), it does prevent individual income tax rates from rising at the end of this year and improves the business tax base by allowing companies to immediately deduct (expense) investment in equipment and domestic research and development. These are significant tax cuts, totaling more than $4 trillion over the next decade, and as such, we should expect some measurable economic growth to result.
Indeed, we estimate the Senate’s latest version of OBBB would boost economic output by about 1.2% over the long run and add 938,000 full-time equivalent jobs. If OBBB is passed, this would increase average annual economic growth to about 2%, versus about 1.8% under the baseline without OBBB. Economic growth results in additional dynamic tax revenue that reduces the cost of the tax cuts by about $970 billion.
FOR FERTILITY, FINANCIAL INCENTIVE DOES MORE THAN YOU THINK
While not as eye-popping as what CEA found, these results are nothing to sneeze at. And they are largely consistent with other estimates, including those by congressional scorekeepers.
So, while the White House may exaggerate the economic benefits of this legislation, we should not so quickly go to the other extreme, pretending the bill’s considerable fiscal cost has no upside. The truth is that OBBB is a trade-off that brings higher economic growth and deficits. The sooner our politicians and the press can grapple with these facts, the sooner we can have a more informed debate about the economic and fiscal challenges that lie ahead.
William McBride is the chief economist and Stephen J. Entin fellow in economics at the Tax Foundation.