Trump's mega tax and spending law will have small economic impact, forecasters say
President Donald Trump’s sweeping tax and spending law, which he dubbed "one big, beautiful bill," will likely have a small impact on the U.S. economy, forecasters say, defying Trump’s claims that it will turbocharge growth.
The legislation, which Trump signed into law July 4, should boost economic output in 2026, but the effects will wane over the next decade as new individual tax breaks expire and cuts to social safety net programs like Medicaid and food stamps ramp up, economists say.
“The GDP effects are on the margin,” said Mark Zandi, chief economist of Moody’s Analytics. “It adds a little to GDP growth in 2026 but over the longer run… it’s a wash.”
Before signing the bill on the South Lawn of the White House, Trump said, “After this kicks in, our country is going to be a rocket ship economically.”
What does the 'One Big Beautiful Bill Act' consist of?
The legislation chiefly extends Trump’s 2017 tax cuts, which had been set to expire this year, and provides new perks for working-class Americans while restoring full tax incentives for business capital investment. It also makes deep spending reductions to programs such as Medicaid, bolsters outlays on immigration enforcement and the military, and scraps dozens of green energy subsidies created by President Joe Biden’s Inflation Reduction Act.
Though the spending blueprint has been hotly debated because of its effects on household pocketbooks at various income levels, its impact on the overall economy is also a point of contention. Republicans have disputed a Congressional Budget Office analysis that concludes it will add $3.4 trillion to the national debt over a decade, largely by slashing tax revenue.
A higher national debt typically means higher interest rates for consumers.
Some GOP lawmakers argue the legislation will reduce the deficit or have no effect on it because it will juice economic growth so dramatically that it will yield a windfall of tax revenue. They say it also will save federal dollars by cutting waste, fraud and abuse from Medicaid.
And stronger economic growth means more job creation and more prosperous households and businesses.
How will the legislation affect the economy?
The Trump administration’s Council of Economic Advisors estimates the legislation will allow the economy to grow a relatively robust 3% a year through 2025 compared with 1.8% otherwise, according to the Tax Foundation. But the nonprofit think tank said the council is “ignoring many of the bill’s tax hikes on individuals, such as limitations on credits for health insurance and green energy.”
The council also “does not account for the bill’s reductions in spending, which further shrinks the size of the stimulus by about 20%,” the Tax Foundation said in a report.
Some independent economists are less sanguine.
Zandi estimates the legislation will lift economic growth by a moderate 0.4% in 2026, helping the economy grow a still-tepid 1.3%, up from a projected 0.9%. That should generate an additional 190,000 jobs, he said.
What's next for taxes on tips?
The bill largely spurs more economic growth next year by expanding the 2017 tax cuts that already have been lifting Americans’ after-tax income in recent years. For example, it eliminates taxes on tips (up to $25,000 a year) and overtime (up to $12,500). It also allows new deductions on Social Security benefits for people over 65, raises the child tax credit and increases the cap on the deduction for state and local taxes from $10,000 to $40,000.
The new provisions are expected to put more money in Americans’ pockets and increase consumer spending, which makes up 70% of economic activity. The tax breaks also should draw more people on the sidelines into the labor force, according to the Congressional Budget Office. A bigger labor supply helps U.S. businesses increase production.
But those tax benefits expire at the end of 2028.
By contrast, business tax cuts and capital spending incentives are permanent. Those also increase the economy’s productivity through investments in new factory machines, computers and artificial intelligence. Zandi said those tax benefits are small. But economist Bernard Yaros of Oxford Economics expects them to “play a larger role in boosting the economy” than the individual tax cuts.
What's next for Medicaid?
Meanwhile, reductions to Medicaid and SNAP benefits, formerly called food stamps – through new work requirements and paperwork – as well as to the Affordable Care Act are projected to reduce after-tax income for the poorest one-tenth of households by $1 trillion over the next decade, according to CBO and the left-leaning Center for Economic and Policy Research. The policies also will leave more than 12 million people without health insurance.
The reductions, along with the cancellation of Biden’s student loan subsidies, are slated to increase from $42 billion in 2026 to $285 billion in 2035, according to Moody’s Analytics.
A smaller social safety net also could take a big toll on local economies.
“Grocery stores who no longer get as much revenue from (food stamps) will cut back on staffing, hospitals without Medicaid may close or lay off health care workers,” said Robert Manduca, a sociology professor at the University of Michigan. “Those workers, in turn, will no longer spend as much at local restaurants, hardware stores, etc., prompting further job losses.”
Also poised to accelerate are cuts to the Inflation Reduction Act’s green energy subsidies, rising from $10 billion next year to $94 billion by 2032, Moody’s figures show.
What's the bottom line?
From 2027 to 2035, the social safety net and clean energy spending decreases will roughly offset the tax benefits for households and businesses, Zandi said.
The economy, he projects, will grow 1.3% to 2.3% over the next 10 years.
And the average annual bump from the budget bill is close to zero, according to Yaros of Oxford. By 2030, Yaros of Oxford predicts the nation’s gross domestic product will be just 0.1% larger as a result of the budget bill.
There’s another concern. By goosing consumer demand when unemployment is a historically low 4.1%, the bill is likely to spark more inflation, forcing the Federal Reserve to keep interest rates high and even raise them next year, Carl Weinberg, chief economist of High Frequency Economics, wrote in a note to clients.
That would mean “no incremental GDP growth, higher inflation and much bigger fiscal deficits,” Weinberg said.
Some analysts disagree.
Adam Michel, director of tax policy studies for the libertarian Cato Institute, said the Medicaid and food stamp cuts “are often framed incorrectly.”
“Reducing dependency on government programs and encouraging work can strengthen the labor market and improve long-term economic performance,” he said. “The spending cuts are part of a pro-growth strategy, not an economic drag. My biggest concern with the bill is that it didn’t cut spending further.”