Thinking about the Looming Tax Cuts

At year-end, taxes are scheduled to revert to their pre-2018 levels. This would mean a range of

tax increases are on the horizon, with perhaps the most significant being the corporate tax rate

jumping to 35% from 21%. The White House and Republican-led Congress continue to work

toward addressing this problem with a new budget bill by July 4th , and Polymarket is putting the

odds that it’ll be completed by the end of July around 65% -- and 90% by the end of August.

The House passed the bill on May 22nd by a narrow 215-214-1 vote, and it now resides in the

Senate where, under budget reconciliation rules, Republicans need a simple majority to allow

passage, rather than a filibuster-proof 60 votes. In order to qualify under reconciliation rules,

the new budget must be revenue neutral after 10 years. This is known as the “Byrd Rule” and is

why, for example, many of the Trump tax cuts in 2017, known as the “Tax Cuts and Jobs Act”

(TCJA), sunset in 2026.

The good news is, today’s budget plan is expected to make permanent the various individual

income tax cuts in place today, the 21% corporate tax rate, the stepped-up estate tax

exemption to keep it around $13+ million per person, and full R&D expensing.

The bill will include provisions to eliminate taxes on tips and overtime pay, which President

Trump campaigned on; but only through 2028. As for eliminating federal income taxes on social

security, Senate rules do not allow for that to be done via reconciliation. Not to mention,

elimination would potentially cost $1.5 trillion, which is far too expensive to fit within the

reconciliation rules. To meet the President’s campaign promise, the bill currently proposes an

extra $4,000 standard deduction for taxpayers aged 65 and older, from 2025 through 2028.

Other significant tax cuts currently contemplated are 100% bonus depreciation and immediate

expensing for factories through 2029.

Areas of dispute between the House and Senate generally revolve around Medicaid and SNAP,

the SALT cap, border and defense spending, judicial limits, and civil service and union reforms.

For example, the Senate is pushing for deeper cuts in federal funding for SNAP and shifting

work requirements to older age groups. The House increased the SALT cap to $40,000, while

Senate Republicans want to lower that limit. Deficit hawks are pushing to reduce the $150B and

$70B currently allocated for military and border control. With Republicans controlling 53 seats

in the Senate, Majority Leader Thune will need to address misgivings and satisfy most of his

Caucus.

Many headlines in recent weeks have focused on how the “Big Beautiful Bill” will explode the

deficit. This largely stems from the Congressional Budget Office (CBO) projecting that the

legislation will add approximately $2.4 trillion to the primary deficit over ten years, or nearly $3

trillion including interest. Note, these estimates are cumulative deficits over the first decade of

the new legislation.

The Office of Management and Budget (OMB) projects, on the other hand, over a $1.3 trillion

reduction in the deficit. This disparity in forecasts is due to differences in scoring

methodologies. The CBO’s forecasts are based on the assumption that the 2017 TCJA tax cuts

will expire in 2026 and will therefore need to be “paid for”; whereas the OMB scoring is based

on the current tax rates simply continuing and in doing so, not adding to the deficit. The OMB

also makes the points that the $1.7 trillion in mandatory spending are permanent changes to

the law and the largest of any reconciliation bill in history.

Furthermore, the White House (OMB) argues that a reconciliation bill is not an appropriations

bill. Therefore, there is no mechanism for including spending reductions on 99% of government

operations. It plans to address prevalent government spending concerns and pursue reductions

in upcoming appropriations bills. Needless to say, after this reconciliation bill passes, many eyes

will be on Senator Susan Collins, Chair of the Senate Committee on Appropriations.

For a slim-majority GOP, whose caucus casts a wide net of economic policy ideas and must

work within deficit-neutral reconciliation rules, the Big Beautiful Bill is compromise legislation.

For deficit hawks, it doesn’t do enough to cut spending. For pro-growthers, it doesn’t

aggressively increase incentives for risk-taking by reducing taxes on capital gains and corporate

profits. Making permanent the many tax rates that were established for 2018 and scheduled to

sunset in 2026 is arguably the most significant and defining feature of the legislation and will be

marginally pro-growth and supportive to the US economy. With GDP contracting at an annual

rate of -0.2% in Q1 (versus +2.4% in Q4 2025), tariffs on the horizon (President Trump has

promised unilateral tariff increases within weeks) and turmoil in the Middle East, the economy

needs the help.

While it’s welcome news, we don’t expect the bill, itself, will ignite risk assets much higher

because it’s been widely expected to pass. If anything, the primary variables moving financial

markets today are geopolitics, tariffs and Fed policy. Deficit hawks will have until the 2026

midterms to chip away at government spending, whereas pro-growth Republicans will need a

strong showing in the 2026 midterms to get another chance at that.