By Jen Saarbach & Kristen Kelly, Co-Founders of The Wall Street Skinny
Last week on The Wall Street Skinny, we sat down with Congressman Seth Magaziner to dissect the tax proposal that just passed the house by one vote, and the structural debt risks that aren’t getting enough airtime.
Here’s a breakdown of what you need to know.
What’s Actually in the Tax Bill?
The bill currently being advanced by House Republicans includes:
- $5 trillion in new tax cuts over the next 10 years
- $2 trillion in proposed spending cuts
- Net increase in U.S. debt by $3-5 trillion, depending on economic assumptions
Key provisions:
-
- Extension of the 2017 Trump tax cuts, including:
- Lowered top individual tax rates (e.g. 37% vs 39.6%)
- The 21% flat corporate tax rate remains in place (which was dropped from a progressive 35% in 2017)
- A higher standard deduction
- Extension of the 2017 Trump tax cuts, including:
- Plus…
- Estate tax exemption increase from ~$14mm (which was scheduled to drop down to $7mm with the expiry of prior tax cuts) to $15mm per person/ $30mm per couple
- Raising the $10,000 SALT deduction cap to $40,000 for individuals and joint filers starting this year, with a phase-out for those making >$500,000 per year. The cap would increase by 1% per year for ten years.
- Private Universities with large endowments will be subject to a 21% tax on investment income, up from 1.4%.
- Temporary exemption of taxes on tips and overtime work.
Spending cuts target:
- Medicaid: reduced federal match to states → likely state tax hikes or coverage losses
- SNAP (food stamps): states now required to cover 25% of the program cost
How Can This Pass? (Reconciliation 101)
Normally, any bill that increases the federal deficit needs 60 votes in the Senate to pass. But under a budget maneuver called reconciliation, a bill can pass with just 51 votes, if it doesn’t increase the deficit over a 10-year window.
The loophole: Congressional Republicans argued that the 2017 tax cuts were already the baseline, even though those tax cuts were set to expire and REQUIRE a new bill to make them permanent. The argument is that making them “permanent” doesn’t technically increase the deficit.
Whether this math holds depends on the Senate parliamentarian, a nonpartisan official who rules on procedural questions. If she disagrees, the bill would be ineligible for reconciliation, and likely fail in the Senate, unless she were to be deposed or replaced by someone who would bless the bill.
Check it out HERE
What About the Debt Ceiling?
The U.S. is projected to hit its debt ceiling in July. The debt ceiling doesn’t authorize new spending, it authorizes the Treasury to pay for spending already approved by Congress.
If it isn’t raised:
- The U.S. could default on its obligations for the first time ever
- That could rattle credit markets and undermine the global perception of Treasury securities as “risk-free”
Over the past week, we’ve seen Moody’s downgrade the U.S.’ credit rating, and long-dated Treasuries have sold off back to April levels on investors’ lack of confidence in the U.S.’ fiscal discipline.
The Debt Projections Are Built on Shaky Assumptions
Even if you accept the $3–5 trillion increase in debt at face value…that number may be overly optimistic. Here’s why:
- The Congressional Budget Office’s projections assume 2.6% GDP growth annually
- But the Fed’s forecast is just 1.7–1.8% for the next few years, suggesting these tax revenue expectations may be overly optimistic
- Many of the spending cuts are back-loaded, meaning they don’t kick in for years and could be reversed
- For example, Medicaid cuts are delayed, leaving open the possibility of political pushback before implementation
- The tax cuts, however, kick in immediately, creating a mismatch between the “spend” and the “pay for”.
The proposal doesn’t fully account for the potential impact of new tariffs, which could:
- Hurt consumer demand
- Slow GDP growth
- Trigger inflation and raise borrowing costs further
This leads to a broader concern: what happens if GDP doesn’t meet expectations?
Slower growth = lower tax revenue = larger deficits. That in turn raises the risk of entering a debt trap, where we must borrow simply to cover interest payments
According to projections, the U.S. could soon spend $2 trillion/year on interest expense alone
Bottom Line for Investors
US debt is now at ~120% of GDP, and this bill could take us to ~130%, an all-time high.
- Higher debt + higher rates = higher risk premiums
The market hasn’t fully priced in these risks yet, but watch:
- Reconciliation decisions
- Debt ceiling negotiations
- Bond yields and Fed response
This episode was packed with insights, and we barely scratched the surface. For the full discussion on taxes, policy, and the economics behind the headlines, watch here!