The 115th U.S. Congress delivered its first major legislative accomplishment of 2017 today, passing a landmark bill that makes sweeping changes to the country’s tax code. The bill is an important one for financial markets, as it lowers tax rates for both households and businesses and is likely to provide a modest boost to both the U.S. economy and corporate earnings. But the price tag for this stimulus package isn’t cheap. The Joint Committee on Taxation estimates that it will cost the U.S. government roughly $1.5 trillion over ten years.

From a timing standpoint, the passage of the bill is very unconventional, given that it’s late in the economic cycle. In a nutshell, Congress is effectively adding accommodation while the U.S. Federal Reserve (the Fed) is removing it. In other words, two of our most important government institutions are working at cross purposes. It’ll be fascinating to see how this all plays out.

Typically, fiscal policy—while slow to move through Congress—has an immediate impact on the economy once enacted. On the flip side, monetary policy is often fast to implement but has a delayed impact on the economy. In this spirit, the new tax bill is likely to provide ashort-term bump for activity that the Fed will very carefully take away. With that as a 30,000-foot view, let’s zoom in on some of the key provisions of the legislation.

Lower corporate tax rate

The single most important provision for markets is the reduction in the statutory corporate tax rate from 35% to 21%. The math gets very complicated very quickly, but when we factor in a number of offsets like the Base Erosion and Anti-Abuse Tax (BEAT), we estimate that the effective corporate tax rate for the S&P 500 ® Index companies—what companies actually pay on their tax bill—will be reduced by 3 to 5 percentage points in 2018. Put differently, this is likely to provide a 3 to 5 percentage point boost to 2018 earnings growth. That’s good news and partly explains why the U.S. equity market has outperformed most of its global peers since the end of October (in anticipation of this), as the chart 1 below shows.