Part 4 The Big Beautiful Bill: Tax Cuts
Now that the Big Beautiful Bill is the law of the land and has been signed by President Trump, I would like to look to the future and share some insights on important topics and outcomes. Rather than posting a lengthy article, I will share a five-part series on this topic over the next week. You can expect a new article every day at 830am. If you want to read the 870-page bill, you can access it here.
The latest tax proposals making headlines promise relief for working Americans, introducing no taxes on tips, bigger deductions, and permanent rate cuts. These changes are designed to provide higher tax cuts to high-income earners. With that said, everyone should see lower taxes.
After covering the spending cuts in previous posts, we're now examining the tax aspects of the Big Beautiful Bill. I'll walk you through the key changes, explain why understanding tax brackets matters more than you think, and show you the math behind marginal vs average tax rates.
Making 2017 Permanent
The bill makes permanent the individual income tax rate reductions and bracket adjustments established in the 2017 Tax Cuts and Jobs Act.
New Tax Cuts
The BBB introduces some temporary tax breaks that were part of the president’s campaign promises, but with a slight twist.
No taxes on tips and overtime pay- Actually, more like a deduction. Workers will still pay taxes but can deduct $25,000 in reported tips and $12,500 in overtime pay from their taxable income on their federal tax returns. This provision will expire in 2028. This is an above-the-line deduction, which means you don't need to itemize to claim it.
Dedication for interest payments on certain auto loans - This applies to U.S.-made cars. The provision will allow taxpayers to deduct $10,000. This is an above-the-line deduction, which means you don't need to itemize to claim it.
Enhanced standard deduction for older adults- $6,000 deduction for older adults who earn no more than $75,000 a year.
Increased child tax credit- Increase the CTC from $2,000 to $2,200
Increased Standard Deduction- The bill permanently increases the standard deduction, providing relief to a large percentage of taxpayers
Single taxpayers: $15,750 (up from $15,000)
Joint filers: $31,500 (up from $30,000)
Head of household: $23,625 (up from $22,500)
What is a Tax Deduction
These tax deductions are being celebrated because they will increase net income. Tax deductions primarily benefit individuals with a tax liability because they reduce the amount of taxes they pay. For low-income earners, the deduction is helpful, but not as substantial.
For instance, a waitress earning $15,000 in wages and $10,000 in tips already falls into a bracket with little to no federal income tax liability after standard deductions. The new tax structure wouldn’t significantly change their refund.
Marginal vs Average Tax Rates
It is important to understand the difference between marginal and average tax rates. Below is the breakdown of the 2025 tax brackets provided by the Tax Foundation. Let’s take an example of a single filer making $60,000.
According to the table, their marginal tax rate is 22%. That means that if the taxpayer were to make an additional dollar, they would pay 22% in taxes for that new dollar of income. However, this is not their actual tax rate. That is because for the first $11,925, the taxpayer pays a 10% tax. For the money they make between $11,925 and $48,475, they pay a 12% tax. They will pay 22% tax on income between $48,475 and $60,000.
Their tax liability for each bracket will be calculated as follows.
Their total tax liability is
Their average tax rate is
This taxpayer only paid 13.5% of their income in taxes. This calculation did not apply any deductions. If deductions are accounted for, their adjusted gross income would be much lower, and therefore, the taxes they pay would decrease. This is just an example to show the difference between marginal tax rates and average tax rates in a progressive tax system.
The Takeaway
Some supply-side economists will celebrate these tax cuts as focused on long-run growth, tax reform, and incentives to work and invest. This might be a possible outcome. If the gains in growth are substantial enough, they can offset the cuts in spending. What they won’t do is manage how growth is distributed in the economy. A greater share of the gains will go to high-income earners. Whether that is optimal is a matter of personal judgment.
Without growth gains, the Congressional Budget Office estimates these proposals would increase deficits by $3.3 trillion over a decade. Since this money must eventually come from somewhere, we're essentially borrowing from future taxpayers to fund current tax cuts that disproportionately benefit higher earners.
The Generational Transfer. These policies represent a wealth transfer from younger to older Americans. Current workers, many of whom are just starting their careers, will eventually pay higher taxes or receive reduced services to fund today's tax cuts for more established, higher-earning taxpayers.
The Pattern Emerges When you combine these tax changes with the spending cuts discussed in previous newsletters, a clear pattern emerges: reduced investment in programs that help lower-income Americans, paired with tax benefits that primarily help higher earners. Implicit in this model is the assumption that an extra dollar saved in taxes has more value when it goes to someone who already has more dollars. In other words, Trickle Down Economics.
Tax policy that sounds universal often isn't. These proposals will provide minimal benefit to lower-income workers while delivering substantial savings to higher earners, all funded by increased debt that younger Americans will eventually pay.
Understanding how your taxes work, from progressive tax brackets to the function of deductions, is critical for evaluating political promises about tax relief. The next time you hear about tax cuts, ask how they will be implemented.
My biggest concern is what this means for the safety net and support for younger generations. The bottom rung of the ladder just broke.
-Dr. A
About the Author
Dr. Abdullah Al Bahrani is an economics professor and an award-winning educator. His research focuses on household finance and economic education. In addition to this newsletter, he has a YouTube channel and an Instagram account to share his economic insights. His goal is to improve economic literacy and well-being.
Read Previous Posts
Part 1 of The Big Beautiful Bill: Feature or Glitch
Now that the Big Beautiful Bill is the law of the land and has been signed by President Trump, I would like to look to the future and share some insights on important topics and outcomes. Rather than…
I just saw a video interview with Arthur Laffer, an old Reagan economist and current advisor to Mr. Trump, who loves the BBB. He says it will lead to 4-5% growth and debt reduction -- he says that the CBO models that show Reagan's tax cuts led to higher deficits were flawed. It's useful to see someone who is a trained economist who sincerely supports this side of the argument, just to see what they have to say. Unfortunately it was an interview, so there was no evidence for anything, so I emerged a little bit more convinced about Hannah Arendt's general point that "When truth is no longer valued, society loses its ability to think critically. Those who cannot distinguish fact from fiction soon cannot tell right from wrong—and such a society becomes vulnerable to control." But what we are experiencing now is more of a battle between conflicting versions of reality. Instead of truth not being valued, we see two different versions of truth, both strongly held, and with increasing amounts of evidence produced by partisan think-tanks to back each point of view.
Taxes are tricky. When the jobs act first passed in 2017 I went from breaking even to owing every year. The ironic part is I only made a extra 80 dollars a month and started owing half back out. Taxes are tricky and these cuts will barely make a difference for me. Great article. I know this bill is a lot to digest.