Introduction
Trump’s administration agenda is anticipated to prioritize important issues like trade, immigration, and tax reform. Supported by a potentially unified Republican Congress, Trump's administration aims to implement substantial reforms, revising his 2017 signature legislation, the Tax Cuts and Jobs Act (TCJA), introducing new tariffs, and implementing stricter immigration policies. Together, these changes could significantly reshape the U.S. economy.
Key Takeaways:
Business-Friendly Reforms and Tax Updates: Trump's platform includes proposed tax cuts aimed at increasing U.S. business competitiveness. These include reducing the corporate tax rate for manufacturers to 15%, reinstating 100% bonus depreciation (IRC Section 168(k)), and doubling the Section 179 expense cap for small businesses. These measures could increase the national deficit and drive the national debt-to-GDP ratio higher.
Expanding Individual Tax Relief: Trump aims to expand individual tax relief, such as exempting tips, overtime pay, and Social Security benefits from federal taxes and reinstating auto loan interest deductions for U.S.-made vehicles. He also proposes removing the $10,000 SALT deduction cap, which would benefit taxpayers in high-tax states.
Immigration and the Workforce: Trump's proposed mass deportations could worsen labor shortages, particularly in industries like construction and agriculture. This may further strain the U.S. economy by raising costs in housing and food sectors, and potentially affecting tax revenues.
Green Energy Rollbacks: Trump plans to repeal the Inflation Reduction Act (IRA) and redirect incentives from green energy to traditional energy sectors like oil and gas. This would reduce the tax credits available to renewable energy projects, shifting focus back to fossil fuels.
The 2018 Tax War Tariffs Intensified: Trump’s tariffs policies are designed to promote job growth in the U.S. and strengthen American manufacturing. However, they can also lead to higher goods prices, potentially fueling inflation. As tariffs drive up import costs, especially on products from China, these expenses may ripple through the economy, resulting in increased costs for consumers. Continuing tariffs war and other policies may lead to higher costs for consumers and businesses, potentially dampening economic activity in the short run.
The Tax Cuts and Jobs Act (TCJA): A Legacy to Build Upon
The TCJA passed in 2017, introduced sweeping reforms to the tax code, notably reducing the corporate tax rate to 21% under IRC Section 11(b). A new deduction for qualified business income (IRC Section 199A) a doubling of the Child Tax Credit (IRC Section 24) and an increase in the standard deduction (IRC Section 63(c)) were among the other significant provisions that attempted to lessen the tax burden on both individuals and corporations.
However, many of the individual provisions of the TCJA are set to expire at the end of 2025, as specified in IRC Section 1 (i.e., temporary rate cuts), among other sections. Trump's intention to extend these tax cuts could cost an estimated $4.6 trillion over ten years and is expected to dominate early legislative efforts in his next term.
Business-Friendly Reforms and Tax Updates: A Focus on Competitiveness
Additional tax breaks for businesses are suggested by Trumps campaign platform such as lowering the corporate tax rate for American manufacturers to 15%. This act could be accomplished by extending or modifying provisions under IRC Section 11 and Section 199A. Further, he proposes reinstating 100% bonus depreciation (IRC Section 168(k)) for qualifying capital investments, which is set to phase out by 2027 under current law. Trump also plans to double the Section 179 expense cap (IRC Section 179) for small businesses beyond its current $1.22 million for 2024 (adjusted for inflation). These measures are intended to make U.S. businesses more competitive, though they come at the expense of higher deficits, potentially driving the national debt-to-GDP ratio to unsustainable levels.
Expanding Individual Tax Relief Benefits for Families and Certain Groups
Trump's administration is also considering policies that would expand individual tax relief, such as exempting tips, overtime pay, and Social Security benefits from federal taxes. These ideas could be integrated into reforms to IRC Sections 104(a) (exemptions for certain income types) and 86 (taxation of Social Security benefits). Proposals to reinstate auto loan interest deductions for U.S.-made vehicles could be reflected through changes to IRC Section 163, which governs interest deductibility. Additionally, Trump may seek to remove the $10,000 deduction cap on state and local tax (SALT), which the TCJA introduced under IRC Section 164(b). This change would disproportionately benefit taxpayers in high-tax states. Currently, high-tax states are California (13.33%), Hawaii (11.00%), Oregon (9.90%), Minnesota (9.85%), New Jersey (10.75%), New York (8.82%), Vermont (8.75%), Iowa (8.53%), and Wisconsin (7.65%), whereas these individuals living in these high-tax states pay income tax in the range of 8.00% to 13.33%.
Immigration and the Workforce: Navigating a Tight Labor Market
Trumps most recent campaign statement stated, "I vow to carry tout the largest deportation effort in American history.” This method of enforcing immigration laws would result in mass deportations which would have a major effect on industries like construction and agriculture. These policies worsen labor shortages and could increase the price of housing and food further straining the U. S. economy.
While it is unlikely that these policies will directly affect the tax code, they may have an impact on tax revenues, labor force participation and economic growth. In a 2022, research conducted by Pew Research Center, estimated that 11 million undocumented immigrants were living in the U.S. Further research showed that the construction industry sector employs an estimated 1.5 million of undocumented workers (Pew Research Center).
Green Energy Rollbacks: Revisiting the Energy Landscape
A significant part of Trump's economic agenda includes repealing the Inflation Reduction Act (IRA), which introduced various incentives for clean energy under IRC Sections 45Q and 48A. Trump's approach will likely focus on redirecting federal incentives from green energy projects to traditional energy sectors, such as oil and gas, which could limit the tax credits available to renewable energy companies. The energy tax provisions under the old and new codes have substantially impacted the development of clean energy, but Trump's rollback could shift the focus back toward fossil fuel incentives. Given Trump's recent statement, "...drill baby drill," this will result in his administration focusing on redirecting federal incentives from green energy projects to traditional energy sectors, such as oil and gas.
The 2018 Tax War Tariffs Intensified
Trump's proposed tariffs, including a 20% universal tariff on imports, a 60% tariff on Chinese goods, and potentially higher tariffs on imports from Mexico, could exacerbate inflationary pressures. These tariffs could significantly affect the cost of goods, particularly electronics, appliances, and other imported items. Like the tariffs imposed in 2018, these measures may act as indirect taxes on imports, which would affect both businesses and consumers. Trade policies are unlikely to have direct impacts on the IRC, but they could lead to shifts in economic activity, tax revenues, and business behavior, which could have indirect effects on the tax code.
The historical impact of tariffs under Trump's first administration showed that businesses and consumers bore the brunt of the tariff costs, resulting in higher prices and retaliatory tariffs. If these policies continue, businesses could face rising costs, and consumers might pay more for essential goods.
As the tax war tariffs continues this could lead to inflation rising under his administration, the Federal Reserve may face challenges in controlling inflation, which could influence interest rates and fiscal policy.
The Function of the Federal Reserve in A Challenging Economic Landscape
The Federal Reserve will likely remain cautious in adjusting interest rates, particularly if inflation persists due to tariffs and other economic factors. Although interest rate cuts could help stimulate the economy, they may not be feasible if inflationary pressures remain high. The combination of tariffs and a tight monetary policy could create a difficult economic environment in 2025. With the war on tariffs, we can expect the Fed to maintain higher interest rates to keep inflation in check, influencing borrowing, investment, and consumer spending.
A Complex Economic Landscape Ahead
The return of Donald Trump to the White House in 2025 will usher in a wave of significant reforms, particularly in tax, trade, and immigration policies. Trumps potential revisions to the TCJA (IRC Sections 1, 11, 199A, and 168) and proposals to extend tax cuts will likely have far-reaching economic implications. However, continuing tariffs and other policies may lead to higher costs for consumers and businesses, potentially dampening economic activity in the short-run.
The Federal Reserve's monetary policy will be critical in navigating these challenges, with inflation and interest rates playing key roles in shaping the economic environment.
