How did federal spending, tax cuts, or tariffs in 2025 affect small businesses and wages?
Executive summary
federal-fiscal-choices">Federal fiscal choices in 2025 — a mix of one-time and permanent tax changes, robust federal spending projections, tariff measures and episodic disruptions from a prolonged government shutdown — produced a mixed outcome: small businesses felt immediate cost pressures and cash-flow disruptions while wages continued modest growth, but tax changes and strong reported revenues also lifted taxable income and provided short-term demand support [1] [2] [3] [4] [5].
1. How tax policy changed the short‑run landscape for small firms and workers
Lawmakers passed the One Big Beautiful Bill Act (OBBBA) in 2025, which extended and added tax cuts tied to the 2017 Tax Cuts and Jobs Act and other provisions, giving households and pass‑through businesses continued tax relief that raised disposable income and left many small firms with a lower immediate tax burden; fiscal analysts caution that those cuts increase projected deficits considerably over the decade if treated as permanent [1] [6]. The Congressional Budget Office also attributed higher 2025 revenues in part to stronger wage and business income, signaling that taxable income growth — not just tax law changes — played a role in the revenue picture [5]. That duality meant small-business owners sometimes saw both relief from lower marginal rates and the benefit of still-healthy consumer demand funded by stronger wages, but the CRFB flagged the tradeoff: short-term boosts in demand versus larger future deficits that can crowd fiscal space for small‑business support [1] [5].
2. Tariffs and tariff uncertainty squeezed margins and hiring
Industry and JEC minority analyses reported that tariffs and the uncertainty around them raised input costs for many small firms, prompting some to raise prices, pull back on hiring, or enact layoffs where pass‑through cost increases could not be absorbed — outcomes concentrated in manufacturing and trade‑dependent sectors [2]. Those price pressures contributed to the widespread small‑business concern about rising costs — 75 percent of firms in a 2025 credit survey cited higher costs for goods, services or wages as a top challenge — which feeds directly into hiring decisions and wage growth strategies at the firm level [7] [2].
3. Federal spending patterns and disruptions: a double‑edged sword
Federal outlays and program adjustments — including larger Medicare costs and rising entitlement spending — shaped the macro backdrop by keeping demand and certain contract streams alive, but episodic events in 2025 had outsized local effects: the longest government shutdown disrupted federal contracts, halted pay for federal employees and contractors, and delayed loans and reimbursements, which directly reduced small‑business revenues and led some contractors to consider layoffs or stop orders while cash flow evaporated [8] [3] [9]. Analyses from the White House CEA and CBO estimated material drops in consumer spending and persistent wage losses for affected workers from prolonged shutdowns, underscoring how federal operational breakdowns can immediately depress small‑business revenues and household pay [9] [8].
4. Wages: modest growth but uneven effects
Across 2025 the Federal Reserve’s reports and payroll data showed wages rising modestly rather than surging, with contacts and surveys describing “wages up modestly” and compensation costs growing at a more sustainable pace of roughly 4 percent in many small‑business reports — a headline that helps consumer demand but still leaves smaller firms squeezed by input cost inflation and uneven local demand [4] [10]. CBO modeling also projects that taxable wages and salaries would be higher in 2025, contributing to increased individual income tax receipts even as wage growth decelerates after 2025 from pandemic-era peaks [5].
5. Net effect and competing narratives for small businesses and workers
The net 2025 effect was a patchwork: some small businesses benefited from sustained consumer spending and lower tax bills, while others — especially those tied to federal contracting chains or vulnerable to tariff‑driven input costs — faced cash‑flow shocks, order delays and staffing pain during shutdowns [11] [3] [2]. Policymakers and budget analysts explicitly warn of a longer‑term fiscal cost from permanent or extended tax cuts that could reduce future support options for small firms and workers, creating an implicit agenda tradeoff between short‑term relief and fiscal room for targeted assistance [1] [5]. Where evidence is limited in the provided reporting, finer-grained measures of firm-level employment changes by sector or household income distribution effects were not fully detailed in these sources and would require additional microdata to resolve.