While votes are still being counted as I write this post, it appears that the GOP has swept in the 2024 elections, capturing not only the White House and the Senate, but very likely the House of Representatives, as well. If so, an undivided government could pave the way for the incoming Trump administration to enact a breathtaking overhaul of tax, trade, and economic policy in the United States. What sort of changes can we expect?
In broad strokes, President-elect Trump has indicated that he will pursue a low tax, high tariff, low immigration, protectionist (“America first”) policy. We saw hints of this in his first term as president, but with a stronger mandate this time and likely Congressional acquiescence, we can anticipate even bolder actions on all four fronts in the coming term.
TAX POLICY
Perhaps the clearest assumptions we can make regarding Trump’s policy agenda are on taxes. During the campaign, Mr. Trump floated several proposals, from ending taxes on tips, overtime pay and Social Security benefits to eliminating the income tax entirely and replacing that revenue with tariffs. How realistic some of these proposals are is certainly debatable, but one outcome that appears very likely is the extension of the Tax Cuts and Jobs Act of 2017. That law was scheduled to sunset at the end of 2025, but its main provisions, including reduced marginal tax rates on individuals and corporations, an increased standard deduction, and an enhanced estate tax exemption amount, are likely to last many years longer now. It is even possible that marginal tax rates could be lowered further, and that the current $10,000 cap on the state and local tax deduction will be raised or eliminated altogether.
TARIFFS
If you ask him, President-elect Trump will tell you that his all-time favorite word in the dictionary is “tariff.” Mr. Trump likes the word so much because he believes tariffs are a one-size-fits-all solution to many problems he would like to solve. The executive branch has wide latitude to set trade policy, which would allow the President to both “protect” favored domestic industries (e.g. auto manufacturing) from international competition, as well as “punish” foreign countries that don’t bend to his will. It is a cudgel we can expect him to use, or threaten to use, frequently. Tariffs are paid by domestic companies that import foreign goods and are likely to raise prices for consumers wherever they are applied aggressively. However, the overall impact on consumer prices nationally is difficult to gauge until we learn more specific details of his plan.
IMMIGRATION
Whether we achieve net negative migration over the next four years is unknown at this point, but it seems very likely that immigration, both legal and illegal, will slow dramatically from current levels. This will, in all likelihood, reduce the total available labor supply in the US, putting upward pressure on wages and downward pressure on the unemployment rate. All else equal, this complicates the Federal Reserve’s plans to lower interest rates because wage inflation and unemployment are two important signals the central bank uses to set monetary policy. If the Federal Reserve pauses or slows the pace of interest rate reduction in response to these new signals, it is likely to put upward pressure on the US dollar. The effect on longer-term interest rates (mortgages, for example) is much less clear because those rates are set by market forces.
As evidence-based investors, we know that historically, US corporations have demonstrated a remarkable ability to adapt quickly to changes in tax laws, regulations, and economic environments. Most recently we witnessed the surprising resilience of both the US economy and the stock market in the post-Covid era of higher interest rates and inflation. While many policies of the incoming administration are expected to be an abrupt shift from current conditions, the leaders of public companies are no doubt preparing for a new economic and regulatory environment already, and expecting to thrive in 2025 and beyond.
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