Sometimes, the small details tell a larger story. On February 6th, a couple of weeks after Donald Trump returned to the White House, he met with Republican lawmakers to discuss his tax and spending plans. He was looking to extend the huge pro-business tax cuts that Republicans had pushed through during his first term and to enact a pair of more populist proposals he had campaigned on in 2024: exempting tips and seniors’ Social Security payments from federal taxes. But, as the budget deficit stood at about 6.4 per cent of G.D.P., a very high figure historically, the President and other G.O.P. leaders were under pressure to find revenue raisers and spending cuts that would offset the cost of the policies.
Shortly after the meeting, the White House press secretary, Karoline Leavitt, told reporters that the Administration wanted to eliminate a notorious tax loophole from which some of the richest financiers in the country had benefitted for decades. The loophole, known as the carried-interest deduction, allowed managers of hedge funds and private-equity funds to classify some of their earnings as investment gains that are taxed at a much lower rate than regular income, thus reducing their over-all tax liabilities. Getting rid of it offered not only the prospective benefit of raising money but also an opportunity to boost Trump’s populist credentials.
The announcement presumably came as a surprise to hedge-fund and private-equity titans, some of whom had contributed heavily to the President’s campaign. At first glance, they had genuine grounds for concern. Although Trump isn’t known for stiffing his mega-rich backers, the carried-interest deduction is such a stain on the tax code that even Bill Ackman, a prominent Trump-supporting hedge-fund billionaire, had previously described it in precisely these terms. Briefly—very briefly—it seemed conceivable that Trump would do something that previous Administrations from both parties had backed away from: face down the hedge-fund and private-equity lobby.
It didn’t happen, of course. In May, when House Republicans passed their thousand-page One Big Beautiful Bill Act, it contained virtually everything else that Trump had asked for—tax cuts, large increases in the defense budget, new pots of funding for ICE and Border Patrol—but no mention of eliminating carried interest. Nor was there any reference to it in an amended version of the bill that the Senate narrowly passed on July 1st, with Vice-President J. D. Vance breaking a tie, and a reconciliation bill that the House voted through two days later. After Trump signed the final legislation on Friday afternoon, the hedge-fund and private-equity managers could return to their July 4th pool parties and fireworks displays secure in the knowledge that yet another Administration had failed to consign this lamentable loophole to history.
In macroeconomic terms, it’s true that this failure to act was of no great consequence. According to the Congressional Budget Office, treating carried interest as regular income would generate about thirteen billion dollars in additional revenues over ten years. Compared with the $3.4 trillion in new debt that the C.B.O. estimates the G.O.P. bill will create over the same period, that is a drop in the ocean. But, in political and symbolic terms, the survival of the carried-interest deduction speaks volumes.
Ever since Trump came down the escalator at Trump Tower ten years ago, he has portrayed himself as a gilded avenger of the toiling masses. At the Republican National Convention in Milwaukee last July, Vance famously remarked, “We’re done, ladies and gentlemen, catering to Wall Street—we’ll commit to the working man.” The results of November’s election showed that the G.O.P. was, indeed, making progress in working-class areas. But, after Friday’s signing ceremony, what is left of Trump’s and Vance’s pledges?
A study from the Yale’s Budget Lab provides an answer to this question. It found that the Senate bill—which was not far off from the final version of the legislation that passed—would decrease the financial resources of households in the bottom twenty per cent of the income distribution by about seven hundred dollars a year and increase the resources of households in the top 0.1 per cent by more than a hundred thousand dollars annually. As I pointed out a few weeks ago, the bill is a reverse-Robin Hood mechanism.
An analysis from the Committee for a Responsible Federal Budget, an independent watchdog, provides another way to parse the gap between the Trump-Vance rhetoric and reality. It shows that the costliest element of the legislation by far—totalling $4.6 trillion over ten years—is the extension of the President’s first-term tax cuts that were enacted while Paul Ryan was Speaker of the House. Those measures slashed the corporate-tax rate, lopped nearly three points off the top income-tax rate, and bestowed big favors on businesses that “pass through” their incomes to their owners for tax-filing purposes, such as the Trump Organization. Paying for Trump’s latest tax cuts and his pet spending allotments—which include an additional hundred and fifty billion dollars for military projects and about seventy-five billion to beef up ICE operations, including building more immigrant-detention centers and hiring more ICE agents—adds another trillion dollars or so to the tab, taking it to roughly $5.5 trillion.
Let it not be said that Republicans on Capitol Hill and in the White House made no effort to reduce this enormous sum. Having given the hedge-fund and private-equity partners a pass, they focussed relentlessly on the benefits afforded to folks at the other end of the income spectrum. By stripping almost a trillion dollars in funding for Medicaid, the public health-care system that covers more than seventy million low-income American adults and their children, and also slashing subsidies to health-care insurance policies purchased on the Obamacare exchanges, they found more than $1.2 trillion in savings. They also hacked about a hundred and forty billion dollars from nutritional-assistance programs, once known as food stamps, and three hundred and thirty billion from student-loan programs and other commitments to education. To save another five hundred and forty billion dollars or so, they repealed Joe Biden’s tax credits for purchases of electric vehicles and business investments in clean-energy systems and green manufacturing, climate action be damned.
The makeup of the Big Odious Bill reveals it to be an ugly hybrid of timeworn trickle-down economics and authoritarian populism. When Trump talks about the bill, he emphasizes components such as cutting taxes for waiters and other workers who rely on tips, jump-starting the creation of a Golden Dome missile shield, and significantly expanding his already burgeoning anti-immigration police state. The latter prospect is particularly alarming: according to the Brennan Center for Justice, ICE is set to become the biggest federal law-enforcement agency. But, in terms of actual money spent, the feed-the-rich part of the bill looms larger.
Oren Cass, the founder of the conservative think tank American Compass, who has defended Trump’s protectionist trade policies but has argued that Republicans need to embrace higher taxes on the rich, was on the right track when, according to The Economist, he joked that the bill is “zombie Reaganism” or “zombie Ryanism.” If it proves to be the last significant piece of tax-and-spending legislation passed while Trump is President, a possibility that is far from remote, he could go down in history—or at least in fiscal history—not as the disrupter and agent of change that he likes to see himself as but rather as someone who simply extended the agenda of Ronald Reagan, Grover Norquist, and Paul Ryan to its logical conclusion: utter incoherence and irresponsibility.
Even some beneficiaries of the bill’s provisions, including the sparing of the carried-interest deduction, have criticized the bill on these grounds. Ray Dalio, who founded the big hedge fund Bridgewater Associates, posted on LinkedIn, “The debt, which is now about 6x of the money taken in, 100 percent of GDP, and about $230,000 per American family, will rise over ten years to about 7.5x the money taken in, 130 percent of GDP, and $425,000 per family.” If steps weren’t taken to change this trajectory, Dalio added, “big, painful disruptions will likely occur.”
