US Fiscal System Remains Highly Progressive After the “Big Beautiful Bill” Spending Cuts
The real problem is that the bill didn't cut spending far enough.
The following is a guest essay originally written for the Concord Coalition blog. The companion piece from a different perspective is here.
Two criticisms of the One Big Beautiful Bill Act (OBBBA) signed into law by President Trump on July 4 are that it dramatically expands the deficit and that it unfairly cuts benefits for lower-income Americans to fund tax cuts for the rich. Combining these critiques reveals a problem for deficit hawks: spending cuts will be necessary to fix the budget, and demagoguing even the modest and prudent reforms in the budget bill is a recipe for continued fiscal recklessness.
The real problem with the Republican budget bill isn’t that it cut spending; it’s that it didn’t cut spending far enough. The bill also cut taxes more than it should have (absent even larger spending cuts), but about 80 percent of the revenue reduction is from keeping taxes from increasing on middle-class families, employers, and the types of domestic investment that are critical for long-run economic growth. Even if Congress increases taxes, much deeper spending cuts will be necessary to achieve fiscal responsibility.
The Federal Fiscal System Is Already Highly Progressive
The US system of taxes and transfers is highly progressive, redistributing income from rich to poor. Higher-income households pay the vast majority of federal income taxes, while lower-income households receive the lion’s share of federal transfer payments. So, when critics call the budget bill “regressive,” what they really mean is that it makes the system slightly less progressive.
Figure 1 illustrates the basic structure of this system: means-tested transfers increase the incomes of low-income households by tens of thousands of dollars, while taxes reduce the net incomes of those at the top. According to the Congressional Budget Office, the budget bill reduces transfers to the bottom quintile so that average annual resources decline by 2.6 percent, while the top quintile benefits from a tax cut, increasing incomes by 1.9 percent, reflecting modest changes relative to the scale of the underlying redistribution.
While it’s intuitive that means-tested transfer programs are progressive, the tax code is even more so. In 2022 (the most recent government data), the top 10 percent earned 49 percent of the income and paid 72 percent of the income tax. According to the Tax Policy Center, the top 20 percent of earners will pay 67 percent of all federal taxes in 2026, while the bottom 20 percent pay less than 1 percent.
This lopsided distribution means that any broad-based tax cut will, by definition, reduce taxes more in dollar terms for those who pay more, and will also result in a large share of the total tax cut accruing to higher earners. But by percentage change in taxes paid (a more informative way to show how tax changes affect the progressivity of a tax system), the lowest-income taxpayers benefit from the largest tax cuts in the budget bill.
Spending Reform Is Necessary and Overdue
The budget bill’s spending cuts are modest and justified in the context of the federal government’s large deficits and massive, highly redistributive transfer system.
Changes like stronger work requirements for food stamps and Medicaid recipients are not new or untested. Decades of research show that these policies improve long-term outcomes by encouraging work and reducing dependency on government programs. The benefits are especially clear for children whose parents entered the workforce following the 1990s welfare reforms. Other provisions in the bill are simply common-sense good governance policies, such as requiring states to shoulder a greater share of program costs and giving them stronger incentives to reduce fraud and abuse.
More importantly, these spending reforms are only a first step. Anyone serious about balancing the budget (or, more realistically, stabilizing the debt-to-GDP ratio) must acknowledge that the main driver of federal spending growth is the automatic expansion of benefit programs. Even with higher taxes, spending will continue to grow faster than the economy, the population, and inflation unless structural reforms are made. And tax hikes are no panacea: a broad historical review by Alberto Alesina and co-authors finds that relying on tax increases to stabilize debt-to-GDP ratios is often “self-defeating.” Tax increases slow the economy, which undermines revenue growth and puts additional pressures on anti-poverty spending programs.
Opposing today’s modest, well-justified spending reforms only makes it harder to build support for the far larger, more politically sensitive structural changes that will be needed tomorrow.
Fiscal hawks should be outraged about the size of the deficit and critical of both the unnecessary spending and the unnecessary targeted tax subsidies in the budget bill. There’s a lot to dislike, but fiscal hawks should also applaud the bill’s modest spending reforms. We won’t reach fiscal sustainability without them, and more. If these small wins can be preserved and expanded in the future, they may prove to be the most important parts of an otherwise deeply flawed bill.