One Big Beautiful Podcast
By: Brian Seay, CFA
It’s all about the One Big Beautiful Bill on this episode of the Capital Stewards Podcast. Some would say it’s the hugest, most beautiful bill ever. Well, we will talk about that.
Will it be good for the economy? What about the deficit? Is it 4 Trillion or something less?
In the second half, I’ll cover what the Big Beautiful Bill means for your taxes and what tax planning steps you should be thinking about before we head into 2026.
Transcript:
Let’s talk about the tax bill. Before we get into the current legislation, I always like to set the table on U.S. fiscals correctly. For some of you, this will be like beating a dead horse, but its important so I’m going to talk about it anyway.
Most people get their information on the U.S. fiscal situation from the news, which is usually tilted one way or the other. Two things are true about the U.S. fiscal situation. The first is that we have a spending problem, not a revenue or tax collection problem. U.S. revenue has been very steady around 17% of GDP since the 1940s, and that is where we sit today, you can see that in the green line of the chart. Spending, however, exploded higher during the financial crisis in 2008, then again during Covid and continues to break higher. Spending should be somewhere between 18-20% during good economic times. We don’t need a completely balanced budget, but we should be closer than not during good economic times so that we can spend to stimulate the economy when things go south. So, you can argue that we should raise tax revenue to a higher level than it’s ever been – that’s a political argument. You can argue that we should have even more spending – that’s also a political argument – but you can’t argue with the current levels of either relative to the size of the economy and history. Revenue, is currently close to historical levels relative to the size of the economy, Government spending is significantly higher.
Second, the annual discussion of who pays and does not pay their “fair share” is undoubtedly coming later this summer. So let’s look at the tax data. These charts show U.S. households by income quintile, you can see in the bottom row the dividing income lines between the 5 groups. On the left, the lowest 4 quintiles all have a higher share of income than they pay in taxes. The only group that shoulders a greater burden of the taxes than their share of income is the richest 20% of Americans. They pay 81% of the taxes and only earn 55% of the income. You might ask, how is possible to have a negative share of taxes or a negative tax rate, that’s because this takes into account refundable credits and deductions, so you can get back more from the government in income taxes than you pay. That happens in the lowest quintile.
Let’s also debunk Warran Buffets secretary myth. On the right, the average tax rate for the highest earners is higher than all the other groups. No, the wealth person’s secretary does not pay a higher tax rate on average than her boss. There are exceptions to every rule, Warren Buffet is one of the 10 richest people in the world, his situation is certainly unique. But it is a one off and not the case across the economy.
You can make a political argument that the richest quintile should pay an even higher rate – or an even higher share of the taxes. That’s a logical argument. You can argue that the tax burden should be more evenly shouldered across income groups. One thing you can’t say is that the top earners don’t “pay their fair share”, because objectively they are the only group that pays more than their fair share of the taxes in the U.S.
Alright – so now that we have a starting point – lets talk about the One Big Beautiful tax bill and its impact on the economy. The reason we start there is because you might get a few thousand dollars of a tax break through one of the provisions – which we will dive into detail on in the second part of this episode – but the most important impact for investors by far will be the bill’s impact on the economy and your portfolio returns. Does the tax bill drive economic growth or hurt the economy? Does it raise interest rates or not.
Now, there are lots of strange accounting methods the Federal Government uses that no one else in the world uses. Some of those are logical – some are not. So for this discussion I think its easier just to stay grounded in reality. What are tax receipts this year – for the 2025 fiscal year – and what will they be next year under the new law. The same thing for spending – what is it this year and what will it be next year – higher or lower.
This may surprise you – but the One Big Beautiful Bill increases government spending in 2026 and 2026 before cutting spending dramatically in the 2030s. The CBO estimates that spending will increase by 19 Billion in 2026 from this year, and by another 7 Billion in 2027. Now, in government terms that isn’t actually a really big increase, so perhaps we will say the bill comes close to holding spending flat over the next two years before cutting spending starting in 2028. Over the 10 year period, spending does go down by 1.2 to 1.4 trillion dollars. Now, will the budget change between now and 2030, yes, so I’m not really concerned about what happens in the 2030s, I’m more focused on the next 2 years. So for the next two years, government spending is flat to very slightly up.
Tax collections, however, are down fairly dramatically. Using the standard congressional scoring methodology, taxes are reduced by more than 620 Billion in 2026. However, 420 Billion of that are really just the extension of the existing Tax Cut and Jobs act. So in the real world, we would say that tax collections will go down about $200 Billion dollars in 2026 as compared to 2025. That’s according to Analysis of the senate bill done by the tax foundation.
Now, we haven’t talked about tariffs because those aren’t part of the official DC “spending calculus.” In June, the U.S. government collected about $30 Billion in tariff revenue. If you annualize that number you get to about $360 Billion a year for 2026. Last year, the U.S. imported about 3.3 Trillion worth of goods, if you assume a 10% tariff, that leaves you with about $330 Billion in tariff revenue on an annual basis.
So spending is flat, taxes go down by $200 Billion in 2026 and tariffs bring in about $300 Billion. Some of the tariff burden will fall to foreign suppliers, some to U.S. businesses and some to U.S. consumers. All of that adds up to about a $100 Billion drop in the U.S. Government deficit for 2026 and 2027. That doesn’t really hurt or help the economy, all together, my view is that its sort of a neutral package from an economic standpoint. So the government isn’t stimulating growth in 2026 and they aren’t hurting the economy either
From a deficit perspective, the same is true. The deficit isn’t getting better, the U.S. will likely run a 1.7ish Trillion budget deficit again next year. But it’s not getting worse. For all of those that want to hemmm and hhh about what happens to trillions of dollars in the 2030s, I appreciate that argument, but we have 5 congresses between now and then that will change spending levels, so looking that far out is simply a waste of time. I do think spending needs to go down, so I would support the cuts to spending that exist in the current bill, but that will be another question for another congress to answer.
Now, let’s switch gears and talk about the tax cuts in the Bill and things you should think about in your personal situation between now and year end.
The biggest part of the tax cuts are simply extensions of the existing tax cuts and jobs act. That means a higher standard deduction (they even increased it slightly more for 2025) and fewer itemized deductions. Let’s talk about some of the more public provisions – tips, social security, overtime and auto loan interest.
The bill includes a provision that makes $25,000 of “tip” income deductible. Now, before you go restructure your earnings to be all in tips, they did a decent job limiting those that can take this deduction. The IRS will define “customarily tipped industries,” think service industries where you tip today. So if you are outside of one of those industries, newly found tips will not be deductible. Also, the deduction starts to phase out when singles earn $150,000 or couples earn $300,000. So again, I probably won’t be changing our fee structure at capital stewards to tips instead of traditional fees.
Many folks have been discussing the bill as “no taxes on social security.” You might then be surprised to find out that your social security income is just as taxable as it was before. To avoid a lot impacts around social security optimization, they simply granted seniors over 65 an additional deduction of $6,000 for individuals and $12,000 for couples. The extra deduction will certainly reduce your taxes if you are over 65, but it probably won’t fully offset the social security taxes for most of our listeners and clients. And of course, when your adjusted gross income exceeds $75,000, the deduction starts to phase out and by the time a couple earns $250,000, it is eliminated entirely.
Lets talk about overtime – which is what I’m doing as I record this. Similar to the TIPs provisions, $12,500 of overtime compensation is deductible. This only applied to the premium portion of your income – or that extra compensation you receive for overtime per hour or that you pay your employees per hour. So if a worker makes $20 an hour normally and $30 per hour in overtime, then the extra $10 would start to count towards the $12,500 in deductions, not your whole $30 per hour in compensation.
The last heavy hitter is auto loan interest. Up to $10,000 in interest is tax deductible for new – not used – only new cars and only when the final assembly of those cars occurs in the U.S. That may get tricky because some Mercedes Benz SUVs are assembled in Alabama and some Fords are assembled in Canada. So you will need to look at the specific model you are buying and discuss that with the dealer before you make a purchase to be sure that your new ride was assembled in the states. The limit is $10,000 in interest and of course, it starts to phase out at $100,000 in income for singles and $200,000 for couples.
Let’s talk about SALT. Whether you think SALT is good or bad policy, its in the current law. If you itemize your deductions, which is now as I discussed a minority of people, but if you do, then you can deduct your state and local income taxes. The law caps the deduction at $40,000 and phases out when your income is over $500,000. Its less relevant for folks living in the southeast, but if you happen to have income from a high tax state like California or New York, then you may be able to deduct some of the higher taxes you pay in those states.
So that’s the heavy hitters you probably heard about on the news. Let’s talk about planning ideas to think about for next year.
The most important thing to remember that the Tax Cuts and Jobs act, and now the One Big Beautiful Bill make the tax code simpler, with higher standard deductions and fewer itemized deductions. That means it’s harder to find deductions to reduce your taxes down the road. If you can’t find deductions, then the best way to manage your tax situation is to manage your taxable income. That means paying close attention to things like ROTH IRA conversions and other strategies that move income recognition from one year to another that help minimize your long-term taxable income.
If you are a business owner, then there are three planning things to consider. Capital spending and associated depreciation, Qualified Business Income (QBI) and Qualified Small Business Stock.
For business owners, domestic R&D can be expensed to reduce your taxes – and you may be able to expense prior R&D back to 2021. So think about that if you run a business – like say a defense engineering firm – that has a lot of R&D happening every year. Bonus depreciation is also back, meaning you can fully expense some types of capital expenditures in the first year. That may cause you to reevaluate your business’s capital spending plans for the next few years. It could make more sense to accelerate them to get immediate tax deductions instead of spreading them out over several years.
If you own a small business and then you may be eligible to deduct the first 20% of your income as QBI. This was a feature of the Tax Cuts and Jobs Act and is now permenant. The new bill made a few changes to allow more service oriented businesses to take the deduction, so if you own a business its worth reevaluating if you can take a QBI deduction. The same is true for Qualified Small Business Stock. That provision was made permenant, meaning up to $10,000,000 in capital gains on the sale of a small business can be excluded from taxes IF your stock is structured correctly. Its vitally important that your business is setup correctly from the beginning, so its worth revisiting this with your tax team if you own a business.
Lastly from a planning perspective, lets talk about the “Trump Accounts.” The bill will allow you to open an IRA for a child – and the government will contribute the first $1,000 for kids born between 2025 and 2028. Getting free money from the government is good, but thoughtful planning is required before you contribute additional funds. You don’t receive a tax deduction for money you contribute to a child’s IRA. So that means the money you contribute is fully taxable and the distributions when they reach retirement age are also fully taxable. Depending on your situation, you my be better off just contributing to a standard brokerage account or ROTH for your children instead of these new IRAs.
Alright – so to summarize it all together.
The fiscal policy of the administration is neutral to very slightly positive for the economy when you consider both the One Big Beautiful Bill tax provisions, the Federal Budget and the Tariff policies. Not great, but not bad either. Overall, from a planning perspective, continuing to control your income remains critically important as itemized deductions are all but eliminated for most tax-payers. Many of you will get a little bit of tax help from the senior citizen deduction and perhaps the ability to deduct auto loan interest in 2026. Lastly, if you own a business, work with your tax advisors and make sure you qualify for the QBI and Qualified Small Business Stock provisions. And lastly, think before you rush into opening an IRA for your Child and get hit with taxes on the same money twice.
I hope this helps put some of the provisions from the bill in context. We will be back later in the year with tips for year end tax planning as usual, so watch out for that and we will see you on the next episode of the Capital Stewards Podcast.