Back to Trumponomics: Tariffs and tax cuts

IT WOULD not be an exaggeration to suggest that the 2024 presidential election turned on the economy. Roughly 40 per cent of voters said the economy was their top concern, far outstripping any other issue, and the majority of those voters favoured Donald Trump.

The economists may have been saying that the American economy was doing great. And, indeed, Trump would inherit a relatively strong economy with a falling inflation rate from President Joe Biden.

But most Americans disagreed with this assessment, having borne the brunt of high prices and feeling pessimistic about their economic future. Half of Trump voters said those higher prices were the biggest factor in their decision to re-elect the former president and expressed nostalgia for the low inflation and pre-pandemic positive economic conditions of his first term from 2017-2020.

When President-elect Trump assumes the presidency in January, he would have an opportunity to respond to the economic anxieties of the voters by implementing his plans, which are very similar to those he pursued in his first term in office, and include sweeping tariffs on foreign goods, corporate tax cuts and a wave of deregulation.

Candidate Trump has said that, if elected again, he would impose an across-the-board tariff of either 10 or 20 per cent on every import coming into the US, as well as a tariff upward of 60 per cent on all Chinese imports.

He has also proposed a 100 or 200 per cent tariff on cars made in Mexico or on the products made by companies that move manufacturing from the US to Mexico.

Trump claims that tariffs would boost American manufacturing, create new jobs and bring in billions of dollars to help pay for other policy initiatives, including tax cuts.

But it’s doubtful that the revenue generated from new tariffs would fully cover his spending proposals. The tariffs would also likely raise prices for American consumers and lead to a rise in inflation.

President Trump’s first-term tariffs had no major effect on inflation because they were relatively modest and the economic conditions then, including subdued global demand and investment, pushed inflation in the other direction.

But this time, Trump is proposing much higher tariffs during an economic environment when demand is strong and inflation pressures remain high, suggesting that tariffs would be more of an inflation risk than during his first term.

Some of the president-elect’s aides have insisted that he uses tariffs as a negotiating tool to press other countries to lower their barriers, which suggests that the tariff hikes would be less than he has threatened.

Then there are the tax cuts. Some parts of the 2017 Tax Cuts and Jobs Act, one of Trump’s signature achievements during his first stint in the White House, are scheduled to lapse at the end of 2025.

Trump wants to extend all the individual income and estate tax cuts that the 2017 law provided. This includes, among other things, an increase to the standard deduction, lower marginal income tax rates for most income brackets, and an increase to the estate tax exemption.

He also suggested that he would get rid of the cap on state and local state deduction. He has called for lowering the corporate tax rate, which was slashed from 35 per cent to 21 per cent during his first term, to a proposed 15 per cent in his upcoming term, and to restore companies’ ability to immediately deduct investments in equipment and research. The expectation is that the corporate tax cuts would be limited to domestic manufacturers only.

The president-elect has rolled out a series of targeted tax breaks, including eliminating federal taxes on tips, Social Security benefits and overtime pay, and promised to consider eliminating both federal income taxes and payroll taxes, which fund Social Security and Medicare.

And the president-elect has also floated the idea of ending the federal income tax and replacing it with revenue from tariffs.

While extending the 2017 tax law would probably not have much effect on growth and interest rates, the president-elect’s other tax proposals, including lower corporate tax rates and exempting tips, could add about US$4 trillion to the deficit over 10 years, according to some estimates, and put pressure on interest rates.

The Committee for a Responsible Federal Budget estimates that Trump’s fiscal policies would add an extra US$7.75 trillion in government debt over the next decade.

During the election campaign, Trump promised to reverse course on many Biden policies and lower the prices of gas, groceries and other essentials. He nevertheless hasn’t provided many details on how he would accomplish all that.

Among other things, he has said he will bring down prices by boosting oil and gas production, vowing to allow for more drilling and reduce regulations.

Indeed, the oil companies are likely to emerge as one of the major winners during a second Trump term.

Hence, he is expected to immediately pull the US out of the 2015 Paris Climate Agreement, which aims to dramatically cut global emissions. He has also pledged to end a Biden administration freeze on permits for new liquefied natural gas experts, and said that he would auction more leases for oil drilling in the Gulf of Mexico and lift restrictions on drilling in the Alaskan Arctic.

But those efforts may have a limited effect on prices at the pump, which in the US are highly dependent on the global oil market.

And who would help Trump implement his ambitious economic agenda? Topping the list of candidates for the Treasury Secretary position in the Trump administration is Scott Bessent, a hedge fund manager who served as an economic adviser to the former president.

Other possible contenders for the job include Robert Lighthizer, the former US trade representative; Senator Bill Hagerty from Tennessee, who served as US Ambassador to Japan during the first Trump administration; and Jamie Dimon, JPMorgan Chase CEO.