Macroeconomic Effects of the One Big Beautiful Bill Act

Overview

The income tax system in the United States is ripe for reform. The Tax Cut and Jobs Act of 2017 was the latest attempt to reform the U.S. individual income and corporate tax system. The changes to the corporate tax system included (1) lowering the rate from 35 to 21 percent, (2) allowing immediate expensing of qualified capital investments (this provision phased out from 2023 to 2026), (3) requiring companies to amortize research expenditures over time instead of allowing an immediate deduction for the full cost of research and development, (4) limited the deductibility of interest expense, (5) shifted the corporate tax towards a quasi-territorial tax system, (6) aimed to reduce base erosion, tax foreign-derived income and discourage profit shifting. Most changes to the corporate tax system under TCJA were permanent, although several included phase-out periods that transformed the provisions over time.

By comparison, most of the individual provisions in TCJA were set to expire at the end of 2025. For example, at the end of 2025, individual income tax brackets will return to the pre-TCJA rates, the alternative minimum tax (AMT) exemption and phase-out range will return to pre-TCJA values (thus increasing the number of taxpayers subject to the AMT), the larger standard deduction will shrink, personal exemptions will return, and the child tax credit will return to its pre-TCJA value. The One Big Beautiful Bill would extend many of these provisions and add several new tax giveaways promised on the campaign trail in the last election. This bill is making its way through the legislative process and is scheduled to be sent to the President by July 4, 2025, if all goes according to the plan. This paper discusses the macroeconomic impacts of the One Big Beautiful Bill (OBBB) Act.

The simulations indicate that OBBB would lead to an increase in GDP of roughly 0.3 percent in the long run, assuming that the additional deficits are financed by higher government debt for 20 years, followed by reductions in transfer payments after 20 years. Most importantly, the debt-to-GDP ratio rises sharply, from 98 percent to more than 122 percent, highlighting the long-term fiscal burden of financing the tax changes through borrowing. If transfer payments, rather than issuing new debt, are used to offset the cost of the reform, then GDP rises gradually, increasing by 0.2 percent after 5 years, 0.6 percent after 20 years, and 0.8 percent in the long run.

The paper proceeds as follows. In the following section, the main provisions of the OBBB are outlined. Section III provides a brief description of the computable general equilibrium model, while the results of the simulation of the OBBB are reported in Section IV. The final section offers some conclusions and caveats.

The paper proceeds as follows. In the following section, the main provisions of the OBBB are outlined. Section III provides a brief description of the computable general equilibrium model, while the results of the simulation of the OBBB are reported in Section IV. The final section offers some conclusions and caveats.

View the full paper (PDF).

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