The Long View

Last week in the middle of tariff headlines Republicans in both the House and Senate passed versions of their “tax” plans. 

There is a lot to unpack. 🧵

These changes will be just as big as Trump’s tariff plan. Tariffs were bad for stocks and good for bonds. This is the exact opposite. It’s another “all gas, no brakes” fiscal policy. 

Gold rallied to record highs and bonds tanked for good reason.

The current versions actually include most of the seemingly impossible  things Trump said on the campaign trail. To be clear, these tax cuts go significantly beyond simply rolling the old tax plan and represent a substantial expansion of tax reduction/elimination across multiple categories of taxpayers (in total it’s roughly 50% larger than the original deal)

The hard numbers: The Republican tax plan includes approximately $1.5 trillion in new tax cuts beyond the $3.8 trillion extension of the 2017 Trump tax cuts.

And while I appreciate the blue collar focus this level of spending is insane while we are running deficits twice as large as Argentina was before Milei took over. In 2024 the US deficit was -6.4% of GDP and is on a similar path this year - DOGE hasn’t done much. These plans would add another ~1.5% to the deficit. Clearly bond markets are having indigestion. With real yields on 30y bonds near 3%, clearly there is plenty of concern.

Presumably that is a big reason why they pushed so hard for tariffs - to serve as an offset to these tax cuts. Bessent and others have consistently cited $300-600bn as a tariff goal which would cover a big chunk of the costs. This would imply around 10-20% avg tariffs on $3tn in imports.

What are the specific tax proposals? 

-No tax on Social Security: Estimated cost: $1.2-1.4 trillion over 10 years

-No tax on tips:  Estimated cost: $118-139 billion over 10 years

-Overtime Pay Tax Elimination: Estimated cost: $748-882 billion over 10 years

-Auto Loan Interest Deduction: Estimated cost: $61-72 billion over 10 years

-Reduction of corporate tax rate to 15% for domestic production activities: Estimated cost: $361-428 billion over 10 years

-Enhanced R&D Incentives: More generous research and development tax credit, Immediate expensing of R&D costs (versus amortization. This could help a lot with AI).

- Individual Tax Relief
1Raising the SALT cap to at least  $25,000-$30,000 with income limitations. Estimated cost: $1.0 trillion over 10 years
2Family Caregiver Tax Credit. (TBD)
3Expatriate Tax Reform. Would end requirement for U.S. citizens living overseas to file U.S. tax returns
Estate Tax Changes
1Estate Tax Elimination or Reduction: TBD but likely to raise the $13m exemption,

The additional tax cuts would be implemented alongside the original
TCJA extension, with most provisions taking effect in 2026. Some provisions may be phased in gradually, particularly in the Senate version of the plan.

These are all likely to be very popular, broadly applicable, “vote yourself rich” policies that will make it a bit harder from members to vote against. It’s a good thing the bond market also has suffrage. This could very well be the start of a Liz Truss moment.

At a high level, alongside the tariffs, these proposals are less scary. However it’s unclear if those will stick and at what level. It would also represent a clear shift in how the country is financed. Less reliance on income taxes and more from consumption (Trump will say China is paying for it, others might frame it as a market access tax). Tariffs used to fund almost the entirety of the government but that was a very long time ago.  

Trump has also proposed some pretty serious cuts in spending. The bond market will want to see more of that transpire. Without follow through, rates markets will stay jittery.

But don’t hold your breath… https://x.com/repthomasmassie/status/1910688808921673768?s=46 

This article is a good summary of where the process stands and what’s to come…

https://apnews.com/article/congress-budget-tax-cuts-trump-medicaid-d3ef443d038a5532dea6d8f1f1846b10