Why in news?
On 4 July 2025 the US President signed the One Big Beautiful Bill Act (OBBBA) into law. The bill combines tax reforms, spending cuts, border‑security funding and an increase in the debt ceiling. Supporters called it the largest tax cut in American history, while critics warned of deep cuts to social programmes and a surge in federal debt.
Main provisions
- Extension of 2017 tax cuts: The bill makes permanent many provisions of the Tax Cuts and Jobs Act of 2017, including lower corporate tax rates and individual income‑tax brackets. The standard deduction is increased to US$31,500 for married couples.
- No tax on tips and overtime pay: Income from tips and overtime for the period 2025–2028 is exempt from federal income tax. Interest paid on car loans is also made tax‑deductible.
- Higher SALT deduction cap: The cap on state and local tax (SALT) deductions is raised from US$10,000 to US$40,000 for 2025, benefiting households in high‑tax states.
- Enhanced family credits: The child tax credit is increased to US$2,200 per child and made more refundable. The adoption tax credit and dependent‑care credits are expanded. 529 education savings accounts are broadened to cover K‑12 materials and vocational training.
- Support for small businesses: Bonus depreciation (100 percent expensing) and R&D tax credits are extended permanently, and incentives are provided for reshoring manufacturing jobs.
- Border‑security funding: The bill authorises what supporters call the largest single investment in border security, including funding for personnel, infrastructure and surveillance technology.
- Spending cuts and work requirements: Medicaid and Supplemental Nutrition Assistance Programme (SNAP) benefits are reduced by over US$1 trillion over a decade. Work requirements are tightened for able‑bodied adults up to age 64. Costs for some health programmes are shifted to state governments.
- Debt‑ceiling increase: The bill raises the federal borrowing limit by US$5 trillion, averting a debt‑default crisis.
Projected economic impact
- The Committee for a Responsible Federal Budget estimated that the bill would add about US$3 trillion to the national debt over ten years, after accounting for tax cuts and spending reductions. If temporary tax breaks are later extended, the impact could exceed US$5 trillion.
- Proponents argue that lower taxes and incentives for domestic manufacturing will boost growth, wages and job creation. House Republicans claim that a typical family could see up to US$10,900 in additional take‑home pay and that up to 7.2 million jobs would be created or protected.
- Critics point out that cuts to Medicaid and SNAP could leave about 10 million people without health coverage and reduce food aid for 3 million households. Local governments may have to raise taxes or cut other services to meet new obligations.
- The bill may strain global financial stability because higher US debt could push up interest rates and reduce investor confidence. For countries like India, this could impact capital flows, currency volatility and the cost of sovereign borrowing.
Relevance to India and civil services examination
- Understanding global fiscal policies is important for analysing India’s macro‑economic environment, trade and investment flows.
- Reduced US development assistance and changing immigration rules may influence Indian students and professionals.
- UPSC aspirants should be aware of how budget reconciliations can alter fiscal priorities and impact international financial institutions such as the IMF and World Bank.