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Short-Term Gains, Long-Term Pain? Inside Trump’s Tax Plan and Its Ripple Effects on the U.S. Economy

President Donald Trump’s highly publicized tax overhaul—hailed as a “big, beautiful” win by his administration—has taken a crucial step forward, having passed the House of Representatives and now awaiting Senate approval. The plan, which promises widespread tax cuts and increased federal spending, particularly on defense, is already stirring markets, investor sentiment, and economic forecasts.

Immediate Economic Boost Expected

According to Jed Ellerbroek, portfolio manager at Argent Capital Management, “The bill provides broad-based tax relief and boosts government expenditure, which translates to a short-term uptick in economic activity.” Defense spending, which makes up nearly 12% of the federal budget, is expected to increase under the plan, with estimates suggesting an additional $80–$100 billion in annual outlays over the next few years.

These changes are likely to temporarily lift GDP growth, spur consumer spending, and provide companies with more capital to invest or return to shareholders. For example, Goldman Sachs projects a 0.3–0.4 percentage point increase in GDP growth for the next fiscal year directly attributable to the tax cuts.

Ballooning Deficits: A Looming Concern

But the euphoria may be short-lived. Experts warn that the bill significantly reduces federal revenue while committing to higher expenditures, setting the stage for an expanding fiscal deficit. The Congressional Budget Office (CBO) projects that the plan could add over $1.5 trillion to the national debt over the next decade.

“This is basic economics,” Ellerbroek noted. “If you reduce your income and raise your expenses, the deficit grows. It’s not sustainable in the long run.”

Treasury yields reflect this concern. Although they eased slightly on Thursday following Wednesday’s spike, they remain well above early-year levels. The 10-year yield, for example, stands near 4.6%, up from around 3.9% just three months ago. Elevated yields suggest that investors are demanding higher compensation for the perceived risks of lending to a government with an increasingly uncertain fiscal path.

Market Takes a Cautious Pause

Wall Street’s reaction has been measured. The S&P 500 and Dow Jones Industrial Average closed mostly flat on Thursday, indicating that investors are adopting a wait-and-see stance. The muted response shows that while short-term corporate tax relief is welcomed, longer-term concerns—such as rising debt and inflation risks—are tempering enthusiasm.

Meanwhile, the Nasdaq inched up slightly, helped in part by tech optimism. One standout: Anthropic, an AI startup backed by Amazon, unveiled its latest suite of AI models—Claude 4—which analysts say could revolutionize enterprise automation.

Fed Independence: A Buffer Against Volatility

In a development with broader implications, the U.S. Supreme Court on Thursday signaled that Federal Reserve Board members may enjoy legal protection against being fired by the president. This news comes amid fears that Trump—or any future president—could attempt to politicize the central bank. Markets took this as a stabilizing factor, helping to avert fears of a Fed shake-up during politically turbulent times.

The Bigger Picture

The Trump tax bill may temporarily stimulate economic activity and provide political wins, but economists and analysts agree that the long-term fiscal implications cannot be ignored. With a growing federal debt—currently over $34 trillion—interest payments alone are projected to exceed $1 trillion annually by 2030 if current trends persist.

Moreover, the U.S. dollar’s role as the global reserve currency could come under pressure if investors lose confidence in the federal government's fiscal discipline.

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Trump’s tax reforms may provide a welcome jolt to the U.S. economy in the near term, but experts urge caution. Without structural adjustments or future revenue sources, America could find itself grappling with rising deficits, investor skepticism, and less room for maneuver in the next economic downturn.

As Ellerbroek puts it: “It’s a sugar rush now—but we’ll need a long-term plan before the crash sets in.”