U.S. President Donald Trump's proposed tax cut bill passed the first hurdle in the U.S. Senate on the 28th (local time), amid concerns that the bill may actually worsen the trade deficit that Trump seeks to address through tariffs.
The so-called 'One Big Beautiful Bill Act (OBBBA),' related to the procedure in the Senate, is a comprehensive bill aimed at implementing tax cuts, a key promise of Trump’s presidential campaign last year. It includes a reduction in personal income tax rates, a reduction in the top corporate tax rate, and an expansion of standard deductions and child tax credits, which were implemented during Trump’s first term in 2017, while also extending various tax cut policies due to expire at the end of this year.
The Washington Post (WP) reported on the 29th that 'this bill significantly reduces social welfare programs, including Medicaid (health insurance for low-income individuals), but is expected to increase national liabilities by trillions of dollars.' According to the Congressional Budget Office (CBO), this bill is projected to increase the federal budget deficit by $3.4 trillion (about 4,638 trillion won) over the next 10 years.
The government needs to increase borrowing to cover the budget deficit, which, according to The Washington Post (WP), leads to rising interest rates and a stronger dollar. A stronger dollar raises the price of U.S. products, reducing exports, while driving down the price of imports, thus leading to increased imports. In particular, consumption accounts for 68% of the Gross Domestic Product (GDP) in the U.S., which is expected to be hit even harder.
The side effects of the tax cut bill directly conflict with the effects Trump seeks to achieve through tariffs. The Trump administration announced the highest levels of tariffs in over 100 years last April, explaining that this measure is intended to rectify the chronic imbalance in the global economy centered around the U.S. and China. The U.S. has recorded trade deficits annually since 1975, aiming to reduce this.
Ben Steil, director of international economics at the Council on Foreign Relations (CFR), noted, 'If the continuous trade deficit is indeed an economic emergency as President Trump said, I cannot support this bill,' adding that, 'This bill will clearly prolong the trade deficit and increase its magnitude.'
The White House claims that the tax cut bill can reduce cumulative deficits by trillions of dollars through deregulation and expansion of energy production, thus putting the national finances 'on a healthier trajectory.' However, WP pointed out that the White House is ignoring the expenses associated with extending tax cuts. The non-profit think tank, the Committee for a Responsible Federal Budget (CRFB), criticized the White House's analysis as being 'based on unrealistic growth assumptions.'
The financial condition of the United States is also not good. Last year, the ratio of the budget deficit to GDP in the U.S. was 6.4%, which is unusually high considering that the economy is nearing full employment levels. Since the implementation of tax cut policies during Trump's first term, the budget deficit ratio has expanded from 3.1% in 2016 to 4.6% in 2019. Given this, if the current tax cut bill is enacted, the deficit in the U.S. is expected to widen even further.
Richard Samans, a non-resident senior fellow at the Brookings Institution, stated, 'There is a disconnect between the administration's declared intent to reduce and address global imbalances and the proposals being made in fiscal policy,' adding that, 'It’s as if macroeconomic policy and trade policy are rowing in opposite directions.' WP assessed that 'the larger fiscal deficit resulting from the tax cuts could become a Achilles' heel in President Trump's efforts to restructure global trade.'