The U.S. House of Representatives has recently narrowly passed the Trump administration's new tax cut bill, the One Big Beautiful Bill Act (OBBBA), with 215 votes in favor and 214 against. Republican Speaker Mike Johnson made last-minute adjustments to the bill to balance the interests of various factions within the party, which was crucial in securing its difficult passage in the House. The bill includes USD 4.5 trillion in tax cuts, such as tax exemptions for tips and overtime pay, and making the 2017 tax cuts permanent, USD 175 billion for immigration enforcement and border wall construction, as well as cuts to social spending. However, this is only one step in the legislative process. After passing the House, the new tax bill must still be reviewed and voted on by the Senate and signed by President Donald Trump before it can officially become law.

The new tax cut bill is a continuation of the economic policy legacy from Trump’s first term. In 2017, Trump signed the Tax Cuts and Jobs Act (TCJA), which became the largest tax reform in the U.S. in 30 years. The legislation significantly reduced the corporate tax rate from 35% to 21%, implemented a tiered reduction in individual income tax rates, increased the standard deduction, and eliminated several state and local tax deductions. The TCJA was seen as the most important legislative achievement of Trump’s first term. It aimed to stimulate business investment and personal consumption through tax cuts, thereby driving overall economic growth. At the time, it did have a positive economic impact, and the U.S. economic growth reached 2.5% to 3% between 2018 and 2019. However, some provisions of the TCJA, such as the individual income tax cuts, are set to expire after 2025. This has prompted the Trump administration to push for a new round of tax reform to solidify TCJA as a lasting economic policy legacy.

The new tax cut bill follows the general framework of the TCJA, extending the 2017 tax cuts while making targeted adjustments and optimizations for low- and middle-income groups as well as small businesses. For example, it raises the cap on state and local tax (SALT) deductions from USD 10,000 to USD 40,000 to reduce the tax burden on middle-class families in high-tax states. The bill also introduces temporary tax credits for specific groups like restaurant servers, car buyers using auto loans, and retirees. Additionally, it continues benefits for the self-employed and small business owners, such as the existing 20% deduction on income from pass-through entities to support entrepreneurship.

The new tax cut bill is of significant importance to Trump. Indeed, Trump’s close ally, former Speaker of the House Newt Gingrich, publicly stated, “By the summer of 2026, we should be in the early stages of what will come to be known as the Trump Boom”. Why is Trump and the Republican Party so focused on the new tax cut bill? On one hand, it is a core piece of Trump’s “Make America Great Again” strategy, carrying his campaign promises and policy legacy. On the other hand, the new tax cut bill is a "twin policy" that complements the tariff policy. Without the new tax cut bill, Trump’s tariff policies may struggle to continue, which would mean the failure of the economic direction for Trump’s second term.

First of all, the new tax cut bill is a consolidation of Trump’s economic policy legacy.

As early as his first term, the Trump administration believed that outdated and flawed tax laws threatened the economic development of the U.S., its competitiveness, and ultimately its global leadership. In 2017, the White House website published an article titled “With Tax Reform We Can Make It Morning in America Again”, stating, “We are now among the highest taxed nations in the developed world. Our tax code and laws have nearly tripled in length since the 1986 reforms. They now span 2,650 pages, with another 70,000 pages of forms, instructions, court decisions, and other guidance”. This reflected America’s long-standing struggles with its tax system. During the 2024 presidential campaign, Trump continued to make multiple tax cut promises, including exemptions on tips, overtime pay, and Social Security taxes, as well as tax reductions on auto loan interest. These promises became central to Trump’s economic agenda for his second term, aiming to attract support from low- and middle-income groups as well as businesses. They also served as a rebuttal to Democratic criticisms that Trump’s tax reforms primarily favored the wealthy and corporations.

Moreover, and perhaps more importantly, the new tax cut bill aims to help Trump strike a balance between trade protectionism and the economic pain it has caused.

Trump’s reciprocal tariff policy is expected to increase the cost of imported goods to the U.S., directly driving up consumer prices such as electronics and clothing, and indirectly raising input costs for domestic manufacturers like steel and semiconductors. According to models from the Peterson Institute for International Economics, a 10%-20% universal tariff could cause a short-term inflation rate increase of 0.5%-1.5%, with high tariffs on Chinese goods likely exacerbating inflation further. From a practical standpoint, the impact of Trump’s tariff policies on domestic price levels is becoming increasingly evident. For instance, recently, retail giant Walmart sent a clear signal to the market during its earnings report: a wave of price hikes triggered by tariffs is imminent. Therefore, while Trump’s tariff policy aims to protect domestic industries and create more jobs, although a positive vision, it also brings about short-term economic pain that will be difficult to bear. Both consumers and businesses will bear the brunt of this impact.

At this point, the tax cut bill could become a "lifesaver". The tax policy and tariff policy complement each other, i.e., imposing tariffs on imported goods while simultaneously reducing taxes on consumption and businesses domestically. After offsetting each other, this creates a balance in domestic price levels, alleviating the burden that tariffs impose on consumers and businesses. Specifically, the tax cuts aimed at low- and middle-income groups in the new bill are expected to increase household disposable income. Additionally, the tax relief on car loan interest is expected to help consumers cope with price increases caused by tariffs, helping to maintain consumer demand. The corporate tax cuts in the new bill will help businesses absorb the rising costs of imported raw materials due to tariffs, reducing the likelihood of layoffs or even business closures caused by cost increases. In other words, the new tax cut bill is a necessary tool for Trump to balance protectionism and short-term economic pain within the framework of "economic nationalism".

The new tax cut bill's eventual enactment is of significant importance to the Trump administration. For this reason, it is expected that the new tax cut bill will face strong opposition from the Democrats in the Senate. Given the current partisan composition of the Senate, the Democrats and their allied factions remain highly unified on several key issues. They are willing to disregard the interests of ordinary people, and as long as they can block the tax cuts, even if they only manage to reduce its effectiveness, they can turn Trump’s tariff measures into a policy that raises inflation unilaterally. This would be fatal for Trump, forcing him to abandon his economic plan, which means giving up on the trade war as well. Furthermore, the uncertainty surrounding this tax cut bill is still quite high. Even within the Republican Party, some fiscal conservatives remain cautious about large-scale tax cuts. The House of Representatives passed it with just a one-vote margin, which clearly shows that there are differing opinions on the tax cut plan within the Republican Party itself.

The main points of contention regarding the new tax cut bill now focus on deficit pressure and long-term fiscal sustainability. Currently, the U.S. federal government debt has exceeded USD 36.2 trillion and continues to rise. Recently, Moody's downgraded the U.S. sovereign credit rating by one notch, warning that over the next decade, the debt-to-GDP ratio could soar from around 100% to 134%, which has sparked concerns in the market about the long-term fiscal stability of the country. Against this backdrop, the introduction of another large-scale tax cut would undoubtedly further expand the fiscal deficit. The Congressional Budget Office estimates that the tax cut bill will increase the federal deficit by over USD 2.3 trillion over the next decade. Under the shadow of the "deficit narrative", both U.S. government bonds and S&P 500 prices fell after the bill passed in the House of Representatives. Some commentators have even warned that Trump’s move could repeat the tragedy seen with the UK’s Truss government, where tax cuts sparked market panic. In summary, concerns within and outside the Republican Party about the increasing deficit, partisan struggles, and the reality of the U.S. debt being at a high level all cast a shadow over the tax cut bill.

The fate of the new tax cut bill will be a critical turning point in Trump’s economic strategy for his second term. If passed, it would help stabilize market expectations to some extent and create conditions for a strong push for his tariff policies. On the other hand, if it faces obstacles, not only will his economic nationalism struggle to continue, but it could even force him to completely reassess his economic agenda. Therefore, the political implications of this bill are just as far-reaching as its economic implications, and its trajectory is something that all parties should pay close attention to. Now, due to the "deficit narrative"， the new tax cut bill still faces considerable uncertainty both within and outside the party.

Final analysis conclusion:

The new tax cut policy in the U.S. is a complementary measure to the tariff policy, aimed at offsetting the inflationary pressure caused by the tariffs and stabilizing the support from middle- and low-income voters and businesses. If the bill fails to pass, Trump’s overall economic plan may lose its balance, and the tariff policy could be forced to make concessions. Therefore, the political implications of this bill are as far-reaching as its economic implications, and its direction is something that is worth close monitoring. Due to the "deficit narrative", the bill still faces significant uncertainty both within and outside the party.

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Chen Li is an Economic Research Fellow at ANBOUND, an independent think tank.