An Investor’s Guide to the New U.S. Tax Law

Jul 17, 2025

The One Big Beautiful Bill Act delivers a lower corporate tax burden that could boost certain U.S. equity sectors, but it also raises concerns over rising U.S. deficits and higher rates.

Author
Monica Guerra, Head of US Policy, Morgan Stanley Wealth Management
Author
Daniel Kohen, US Policy Strategist, Morgan Stanley Wealth Management

Key Takeaways

  • Key provisions of the new tax law include making the 2017 Tax Cuts and Jobs Act’s individual and corporate tax cuts permanent, introducing new individual and business tax cuts, reducing spending and increasing the debt limit by $5 trillion.
  • Business-friendly provisions in the new tax law could reduce the effective corporate tax rate to as low as 12%, the lowest rate in U.S. history.
  • Additional spending under the tax law is projected to push the deficit-to-GDP ratio to more than 7% by 2026 – more than double the historical average prior to the 2008 financial crisis.
  • A lower corporate tax burden is likely to support capital spending in advanced tech sectors like semiconductors and AI data centers. 
  • Greater deficit spending could add upward pressure to bond yields and interest costs, potentially driving a higher-for-longer interest rate environment.

In the wake of the 2024 general election, Republican lawmakers set out to reform the tax code and avert the expiration of key provisions from the Tax Cuts and Jobs Act (TCJA) by the end of 2025. Their journey culminated on July 4, 2025, in the final passage of the One Big Beautiful Bill Act – a landmark law with far-reaching implications for the economy and financial markets.

 

While the new tax law is likely to drive growth in certain sectors, it also poses challenges, particularly in the context of rising deficits and interest rates. Here’s what investors should know about the risks and opportunities.

Corporate and Individual Tax Cuts

The law’s biggest beneficiaries appear to be U.S. corporations. The legislation not only reinstates business-friendly TCJA provisions, such as 100% bonus depreciation and immediate deduction of domestic R&D expenses; it also introduces new measures like expanding the Advanced Manufacturing Investment tax credit and full expensing of factories. All told, these provisions could reduce the corporate tax rate from a statutory 21%, to as low as an effective 12%, the lowest rate in U.S. history.

 

For individual taxpayers, the tax law also temporarily increases the state and local tax (SALT) deduction cap to $40,000, from $10,000 previously, for households with modified adjusted gross incomes below $500,000. This provision, along with others like the $6,000 Social Security benefit for seniors and the “no tax” agenda, which includes no federal income tax on tips and overtime pay, are set to sunset after four years. As such, the tax cuts are front-loaded, while spending cuts are back-loaded in the bill, positioning the greatest fiscal stimulus to occur in fiscal year 2026.

 

The law also permanently extends:

  • Current individual tax rates, including the 37% top ordinary income tax rate, effective after Dec. 31, 2025.
  • Increased estate and gift tax exemption amounts, which rise to an inflation-adjusted $15 million for single filers and $30 million for married couples filing jointly, effective after Dec. 31, 2025.
  • The increased standard deduction enacted under the TCJA.

Fiscal Challenges

All of these tax cuts come with a cost. The law increases government spending by some $3.8 trillion over 10 years, offset by about $500 billion in revenues – adding around $3.3 trillion to the U.S. deficit, or the annual gap between revenue and spending. When considering additional interest on new government borrowing, the law’s total addition to the U.S. debt – the sum of all annual deficits – could reach $4 trillion. 

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Additional spending under the tax law is projected to push the deficit-to-GDP ratio to more than 7% by 2026 – more than double the pre-financial crisis historical average.

This fiscal expansion comes at a time when the U.S. debt stands at $36 trillion and additional spending is projected to push the deficit-to-GDP ratio to more than 7% by 2026, more than double the historical average of 3% prior to the 2008 financial crisis.

 

Tariff revenue may help offset some of the deficit impact, though tariffs remain highly dynamic and unreliable. Nonetheless, lawmakers will need to carefully weigh the outsized debt load in budget decisions, as rising interest expenses and other constraints may crowd out other spending priorities and limit the government’s ability to respond to future crises.  

Stock Opportunities and Risks

The tax law could be a boon to U.S. equity sectors with high capital expenditure needs. For example, a lower corporate tax burden is likely to support capital spending in advanced tech sectors like semiconductors and AI data centers. It could also benefit domestic industrials, communication services and energy infrastructure stocks with elevated capex needs and U.S.-based revenues.

 

Recent market trends support this outlook. The Morgan Stanley Institutional Equity Division Domestic Tax Policy Beneficiaries Index, composed of stocks positively exposed to domestic tax changes, has outpaced the small-cap Russell 2000 Index by about 3% over the past year. 

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A lower corporate tax burden is likely to support capital spending in advanced tech sectors like semiconductors and AI data centers.

That said, the law also creates challenges for certain sectors. For example, it phases out some clean energy tax credits, likely delivering a blow to industries reliant on these incentives (though clean energy stocks have continued to outperform the broader market amid expectations of Federal Reserve rate cuts and more modest than expected tax credit rollbacks). In addition, the bill’s spending cuts to Medicaid and programs to help low-income families buy food could shift health care costs to state and local governments. This could affect the credit quality of municipal bonds, particularly those issued by state and nonprofit hospitals.

Bond Yield Pressures

To accommodate higher U.S. government borrowing needs, the legislation authorizes a $5 trillion increase in the U.S. debt limit, necessitating a significant rise in Treasury issuance. This potential flood of Treasury bills into the market could lead to a supply-demand mismatch that lowers bond prices and puts upward pressure on yields. Higher yields typically mean elevated borrowing costs and interest rates, which can create challenges for stocks and bonds alike.

 

What’s more, investors in longer-term Treasuries typically demand some amount of extra yield, known as the “term premium,” often to compensate for risks associated with an uncertain fiscal outlook – and this, too, could contribute to upward yield pressure.

 

Your Morgan Stanley Financial Advisor can help you stay up-to-speed on policy developments and their portfolio implications. To learn more, ask your Morgan Stanley Financial Advisor for copies of the reports from Morgan Stanley’s Global Investment Office: “U.S. Policy Pulse: A Big Beautiful Guide to the Big Beautiful Bill” and “U.S. Policy Pulse: OBBBA Cheat Sheet.” Listen to the audiocast based on these reports.

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