President-elect Donald Trump’s economic plan

 

Former President Donald Trump won the recent presidential election partially because of the poor sentiment around the economy, especially centered around higher prices. Republicans will also control the Senate and House of Representatives.

 

Below is a primer on where Trump stands on many important economic issues.

Corporate Taxes

Trump and a Republican-controlled Congress enacted the Tax Cuts and Jobs Act (TCJA) in 2017. (The TCJA is arguably the most significant economic issue that Trump needs to address for individuals and corporations.) Part of the TCJA expires at the end of 2025. The law cut the corporate tax rate to 21% from 35%. Note that the corporate income tax rate provision that reduced the rate to 21% does not expire. Also, the law allows pass-through businesses (S-Corps, LLCs, etc.) to deduct 20% of their qualified income. This will no longer apply if the TCJA expires. It also allows for bonus depreciation of qualified business property through 2026 but at a diminishing yearly rate. Any extension of that provision would require additional legislation.

 

Trump’s Platform: Vows to make the law permanent, restoring the regime that existed immediately after the TCJA’s enactment. Also, Trump said he wanted a 20% corporate tax rate and has floated a levy as low as 15% for companies that produce in the U.S.

Income Taxes

The TCJA cut taxes for many income levels, including the highest earners. For example, the law decreased individuals' top marginal income tax rate to 37%. The top rate will go back to 39.6% if the TCJA expires. The bill also nearly doubled the standard deduction and doubled the estate tax exemption. It also capped the state and local income tax (SALT) deduction at $10,000. This will no longer apply if the TCJA expires. Lastly, the TCJA increased the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly, eliminating many itemized deductions. Standard deductions will be reduced by roughly half if the TCJA expires.

 

Trump’s Platform: Vows to make the TCJA permanent. Trump also wants to eliminate taxes on tips. He’s also considered eliminating taxes on Social Security benefits. Republican leaders have also expressed interest in a larger child tax credit. Under Trump’s plan, the top 1% would see their after-tax income rise by $47,000 in 2026, according to a recent study by the Wharton School of the University of Pennsylvania. After the Wharton study, Trump suggested amending the SALT cap higher for larger deductions. Trump and congressional Republicans included the SALT cap, which limits a taxpayer’s state and local tax deduction to $10,000, in the TCJA. The cap primarily impacts high earners in high-tax states.

Tariffs

Trump imposed nearly $80 billion in new tariffs in 2018 and 2019. President Joe Biden kept most of the tariffs and increased tariffs on China. Academic and governmental studies found that the imposed tariffs acted as a tax on Americans by an annual average amount of $625 per household.  

 

Trump’s Platform: Endorses baseline tariffs on all foreign-made goods. Trump wants 60% tariffs on China and 10% on all other countries’ goods. If businesses pay more for foreign goods, those costs are often paid by consumers. Market participants widely see tariffs as inflationary, which could force the Federal Reserve to leave interest rates higher if inflation flares up again.

Government Deficits/Debt

In fiscal year 2024, the U.S. posted a $1.833 trillion budget deficit. According to recent estimates by the Congressional Budget Office, that figure could increase 42% to $2.6 trillion by 2034. Because of the rising debt burden and tighter monetary policy, the interest cost to service the debt ballooned to $882 billion in 2024. The country’s interest expense on the debt is growing substantially and needs to be addressed. The total U.S. debt now stands around $34 trillion. If the country’s deficit spending does not slow down, higher taxes on individuals will be required. Furthermore, the largest spending remains in areas that are “non-discretionary” obligations, such as Social Security, Medicare, interest, and defense.

 

Trump’s Platform: The Wharton study found that his economic plan would add almost $6 trillion to the debt over a decade. Extending the individual income tax cuts would cost $3.4 trillion over ten years; doing the same for the corporate income tax cuts would bring the total to about $4 trillion. Trump wants to cut the corporate income tax even further to 15% from its current 21% at an estimated cost of $600 billion and abolish the income tax on Social Security benefits, which would cost another $1.2 trillion. The Wharton study concludes that Trump’s proposals would increase the national debt by 9.3% above its current trajectory by 2034 and 12.7% by 2054.

GDP Growth

The U.S. economy (real GDP) grew a solid 2.5% in 2023. Overall, GDP has held up remarkably well during 2024, growing by an average of 2.5% through the first three quarters.

 

Trump’s Platform: The U.S. GDP would fall by a relatively modest amount of 0.4% relative to the current baseline by 2034 and by 2.1% in 30 years (2054), according to the Wharton study.

Social Security Funding

Social Security and related costs are the largest expenditures for the U.S. government. The program faces a long-term financial shortfall due to a combination of factors.

 

Trump’s Platform: Endorses protecting the program and will not cut it. Also, vows to leave the retirement age unchanged. Trump has discussed making Social Security tax-free, which could further strain the system’s funding. He has also promoted cutting expenses elsewhere in the budget to maintain Social Security benefits. Neither Trump nor Republican officials have expressly said how they will keep Social Security solvent.

Final Thoughts

These positions can change over time and be modified depending on how much control (and time) either party has, as actual legislation, like the TCJA, can take a long time to pass through Congress and become law. The nation’s debt is an issue that we expect will make some of Trump’s platform challenging to achieve. Bond yields spiked after Trump’s election in part because of the expected deficit spending Trump’s policies bring. On the flip side, equities rose on the hope of less regulation and taxes.

 

A key implication of the election is the potential for higher interest rates. The Federal Reserve may need to slow down the path of policy to neutral, reflecting looser fiscal policy. This may spill over to emerging market central banks. It is not likely that the path for policy rates in other advanced economies will significantly change because of the outcome of the U.S. election. Uncertainty over Trump's stance on the conflicts in Ukraine and the Middle East also adds to the risk of greater instability in both regions, which could take a toll on regional, and even global growth.

 

Remember, markets largely act independently of elections and the results. While historically, the markets tend to decisively improve in the remaining days of the year after election results are known.

 

As always, contact your 1834 team if you have any questions.

 

Article published: November 13, 2024

 

Sources: Wall Street Journal, Capital Economics, Oxford Econimcs, Republican Party Platform White Paper, Tax Policy Center, Tax Foundation, Axios, The Wharton School of the University of Pennsylvania.