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KEY TAKEAWAYS
- Congress will have to write a new tax bill, given several provisions in the 2017 Trump tax law are set to expire. This is an issue that will swing dramatically depending on the composition of Congress and who is in the White House to sign this bill.
- We don’t expect the independence of the Federal Reserve to be compromised.
- If former President Donald Trump wins, we expect his agenda for the first 100 days would focus on policies he can implement without Congress such as tariffs and immigration restrictions.
It may sound cliche to say we’re living through an unprecedented moment in U.S. politics, but this is a truly remarkable election year. We should expect more twists and turns to come, especially when the news cycle is moving so fast. But it feels like the contours of the race are coming into focus, with the Democratic Party’s rapid convergence behind Vice President Kamala Harris as its nominee following President Joe Biden’s decision to drop out of the race.
The U.S. is deeply divided on key issues that are profoundly personal and emotional. Abortion, inflation, health care and immigration will be critical factors for people when choosing a candidate. As such, we believe it will be a tight race in November, although the likelihood of a Republican sweep of both branches of Congress also appears to have diminished with Biden’s exit. In this article, we highlight some of the key economic issues discussed in a recent webinar.
Tax implications for individuals and corporations
One thing we know for 2025 is that Congress will have to write a tax bill, given that several provisions in the 2017 Trump tax bill are set to expire. This is an issue that will swing dramatically depending on the composition of Congress and the future occupant of the White House.
At the Republican National Convention, Trump promised supporters he would lower taxes for individuals and companies. That could prove difficult to accomplish. The issues that matter most to Trump — defense spending, border security, etc. — are expensive. Estimates of a simple extension of the 2017 tax bill (without any further cuts) show costs between $4 trillion and $5 trillion.
Harris appears likely to stick with the Biden campaign pledge of not raising taxes for anyone making less than $400,000 a year. Those above that threshold should be prepared to see an increase in the individual rate. If the Democrats retain control the White House or one branch of Congress, we expect they would force corporate taxes to be part of the negotiations for 2025. It is unlikely corporate tax rates will ever go back to 35%, but we could see an effort to hike from 21% to around 25%. However, until we hear more solid plans from the Harris campaign, it is difficult to say how the party’s platform will shape up.
Regardless of which candidate wins in November, Congress will likely need to generate revenue to offset some of the costs of the tax bill. This could result in a combination of spending cuts, allowing some of the 2017 tax provisions to expire and closing some so-called tax loopholes. Dividends and tax incentives to save and invest could also come under a microscope.
Some Republican leaders have proposed making fundamental changes to the private retirement system to raise short-term revenue. If investors are incentivized to use Roth accounts versus traditional 401(k)s and IRAs, it would take away tax revenue from future years and recognize it in the current 10-year budget window. That’s a gimmick, but it could be part of the plan to offset some of the costs of renewing the bill or lowering taxes further.
Tariffs appear nearly certain under either party
Donald Trump’s campaign has been clear about how he wants to accomplish as much as he can as quickly as possible in a second term. It was no secret that during his presidency he was frustrated with how slowly Congress acts. So, for the first 100 days of a new term, it is likely he would focus on what he can do without Congress.
Among things he could do is impose tariffs, just as Nixon did back in 1971. Trump has proposed boosting tariffs on China as high as 60% and restricting Chinese ownership of U.S. infrastructure. The former president has also indicated he would try to promote U.S. exports by devaluing the dollar and imposing a baseline 10% tariff on most imported goods coming from regions other than
China.
During Biden’s first term, the U.S. kept the tariffs on China enacted in the Trump era intact and implemented new tariffs on sectors such as steel, aluminum and electric vehicles. To date, the Harris campaign has not provided many details on potential trade policy, but we do not expect her plans to deviate dramatically from Biden’s agenda.
Fed’s independence and probability of lower rates
If elected to a second term, Trump will likely push aggressively for lower interest rates. However, we don’t think the independence of the Federal Reserve will be compromised. Central bank autonomy has strong support in the Senate.
While there has been a lot of talk about the next Fed chair, Trump has stated he would not seek to replace Jerome Powell before his term expires. Under Harris, we expect the Fed to remain at status quo.
Border security and immigration
Immigration is another area where Trump could act quickly and unilaterally if reelected. Trump took a hardline stance on immigration and border security in his first term and has pledged to expand upon those policies in a second term. His campaign promises include carrying out one of the largest deportation operations in history, restricting legal immigration and ending birthright
citizenship.
Harris’ campaign has not outlined the specifics of her immigration policy, but we expect it will be similar to Biden’s. Before exiting the race, Biden proposed additional funding to help rebuild resettlements to support up to 125,000 refugees in 2025 and create a smoother, expanded visa process, allowing immigrants who are in the U.S. illegally to apply for legal status. While the issues around border security and immigration have multiple dimensions, economic research has shown that immigrants are net contributors to GDP growth rates. To the extent that immigration slows, it will likely have a dampening effect on economic growth rates in the near term.
