Why even Elon Musk can’t kill the deficit-busting tax bill

The bill will add $2.4 trillion to the deficit over 10 years, the nonpartisan Congressional Budget Office reported Wednesday. That will give ammunition to critics such as Elon Musk, who on Tuesday denounced the bill as a “disgusting abomination" and Sen. Rand Paul (R., Ky.), who who warned in an op-ed Wednesday of “an avalanche of calamities" should the bill move ahead.

Worries about the bill’s political fate miss the forest for the trees, however. It is likely to pass in some form or other, largely for two reasons: Failing to pass the bill would be an existential threat to congressional Republicans, and because the administration is effectively sneaking a tax hike through alongside the bill in the form of tariffs. The provisions of the bill and its timing may well change, but the powerful combination of career incentives and political cover should keep it alive.

“The question for our members is going to be, would you prefer the alternative?" Majority Leader Sen. John Thune (R., S.D.) told reporters Wednesday. “The alternative isn’t a good one."

As Republicans have frequently pointed out, the alternative is to allow the 2017 tax cuts to expire. The resulting rise in personal income tax rates, among other provisions, would shave about a third of a percentage point off growth next year, the Congressional Budget Office estimates.

The most powerful force pushing back against the bill is likely to be the bond market. The deficit ran at 6.4% of gross domestic product in 2024, or about $2 trillion, pushing the stock of debt held by the public up to 100% of GDP. Those alarmingly high figures have prompted concerns from the likes of JPMorgan Chase CEO Jamie Dimon, who last week warned that the bond market will soon crack, and Moody’s, which last month downgraded U.S. credit.

But on Wednesday morning, the cracks were hard to find. The yield on the 10-year Treasury note declined by nearly a 10th of a percentage point, a large move for a single day. That came as traders digested news of the bill’s cost as well as worrying signs of job losses and a contraction in the services sector that point to a weakening economy.

Given the CBO’s projection of trillions in new debt, which might otherwise push up yields, the administration is likely to see the declining long-term yield as good news. Trump has agitated for lower interest rates, posting on social media Wednesday morning that Federal Reserve Chair Jerome “Powell must now LOWER THE RATE." The Fed influences short-term interest rates, but rates on consumer debt such as mortgages and car loans are set by the market for long-term debt and closely follow the 10-year yield.

Another bit of data released by the CBO Wednesday is likely to bolster the administration’s view of the economy. The tariff regime in place as of mid-May will generate enough revenue to reduce the deficit by $2.8 trillion over 10 years. (That estimate encompasses the vast majority of the administration’s tariffs, including the 10% universal tariffs that a court has recently questioned, though not a recent U.K. deal.) The revenue increase from tariffs is more than the $2.4 trillion the tax cuts will add.

Strictly speaking these are two separate policies, but from the Trump administration’s point of they are part of one unified economic agenda. “The tariffs are not separate from the budget," Treasury Secretary Scott Bessent told an interviewer recently.

But putting those together illustrates the messiness of the administration’s economic policy. The tax bill itself is full of contradictions. The bill passed by the House includes some pro-growth policies, including measures that that make business investments more tax deductible. But those measures add to the cost of the bill, and are temporary rather than permanent. Congress needed to find hundreds of billions of dollars to pay for Trump’s costly campaign promises to reduce tax on tips and overtime.

Meanwhile the tariffs will cut into the economy. The CBO estimates they will shave 0.6 percentage points off of growth over a decade and will immediately raise inflation by 0.4 points.

Tariffs also hit lower-income households harder than high earners. The bottom 10% of earners will effectively lose 2.5% of their income from the current tariff scheme, versus 1% for the top 10%, according to the Yale Budget Lab.

How the pro-growth aspects of the tax bill combine with the anti-growth effects of tariffs isn’t entirely clear. Declining growth from tariffs would presumably cut into tax revenue, for instance, potentially raising the cost of the tax bill. (The CBO declined to comment on that question.)

Tariff revenue is also highly uncertain. The Court of International Trade has already struck down the biggest part of Trump’s tariffs as illegal, though revenue is still being collected pending appeal. The bond market is likely to discount any promises that tariffs can pay down the debt.

But that speaks to the administrations have-your-cake-and-eat-it-too economic strategy. It wants to be able to insist that tariff revenue is a reason to extend the tax cuts, without subjecting tariff revenue to the full scrutiny—and accountability—of having Congress enact it into law.

The Senate is expected seek changes in the tax bill. Some senators have questioned bill’s cuts to Medicaid, for instance, noting that their constituents may suffer as a result. In principle, the Senate’s rules allow it to raise the deficit by more than $5 trillion, significantly more than the House’s plan. Whether it does or not is all down to the member-by-member political calculation of what can let them face their constituents without fear of a revolt.

And that’s really the issue that Dimon and Moody’s have focused on. There is little appetite at the end of the day to make the hard choice to choose to actually shrink the federal government’s footprint on the economy. Whether the bill passes or not won’t change that.

Write to Matt Peterson at matt.peterson@dowjones.com