Donald Trump has shocked the world, proving the pollsters wrong and defeating an opponent who spent nearly a lifetime preparing to win. When the dust from this shock settles there will be much to consider regarding how President-elect Trump may change our lives. Regarding tax and economics, we have insight to share…
The Market. We don’t know what we don’t know, and there is no crystal ball, but the market was up the morning after the election. Normally a GOP controlled government is good for business. Tax reform and deregulation could benefit corporations and small businesses alike. Though history has shown market gains under GOP control, there is no GPS for the road we’re venturing down. Steady as you go – only time will tell.
Taxes. President-elect Trump proposes to consolidate the current 7 income tax brackets in to 3: 12%, 25%, and 33%. He also proposes to streamline itemized deductions, leaving mortgage interest and charitable contributions. The plan proposes allowing an exclusion for child care expenses and an increase in the standard deduction (to $25,000 for single taxpayers and $50,000 for married taxpayers).
Trump seeks to cut business taxes to 15%, and allowing businesses to fully write-off investments in assets. He also proposes a ‘tax holiday,’ or a one-time opportunity to repatriate offshore profits.
Trump calls for the elimination of the estate tax. This tax currently is imposed on taxable estates larger than $5.49 million for 2017, $10.98 million for a married couple.
In general, the plan is a reduction for all taxpayers. Lower income families with child care may benefit. Higher bracket individuals may benefit as well, but the reduced tax deductions make it less clear by how much.
The main question is the cost of his plan. According to the Brookings Institute, the plan would lower revenue by $6.2 trillion over the first decade, and debt would rise by $7.2 trillion over the first decade. Penn Wharton estimates the plan will stimulate the economy by 1.1% in 2018, and lowers GDP by 2027 by -0.78%.
In order to recover this revenue loss, massive spending cuts would have to be passed. Trump has promised not to cut Social Security or Medicare, so that means all other federal spending must be slashed by 50%.
Since the Senate appears to be Republican by a narrow majority, no party has a 60 vote lead necessary to run a bill through easily. This is good. It means the change Trump proposes may indeed happen, but it will be negotiated, checked and balanced before it happens. He may struggle to pass both his main tax initiatives and the leaner budget he needs.
Trade: Present-elect Trump opposes free trade agreements and has vowed to repeal NAFTA and eliminate the Trans Pacific Partnership. Ironically, Trump’s position is in opposition to the US Chamber of Commerce, and actually lines up with many liberal Democrats. Can the president kill NAFTA? He can impose tariffs, and NAFTA allows any party to the Agreement to withdraw with 6 months’ notice.
A possible outcome to changing trade agreements are trade wars. Countries faced with tariffs would likely retaliate, and the net result would probably be higher prices, richer lawyers and fully disrupted supply chains.
Present-elect Trump could theoretically renegotiate a great and simple deal on NAFTA: the countries don’t charge significant tariffs on each other’s goods. We shall see.
Repealing ACA. President-elect Trump has indicated that he will overturn all of President Obama’s executive orders and repeal the Affordable Care Act, or ‘Obamacare’. Although repealing Obamacare is a main Republican mission, that seems unlikely based on math. First, remember Obamacare survived a constitutionality question. Second, recognize that it would take 60 votes in the Senate to override a filibuster. After the election the Senate appears to be narrowly Republican, so no party has an easy majority. According to the Congressional Budget Office, repealing Obamacare would add as much as $353 billion to the US budget deficit through 2025.
Sectors probably positive under President Trump. If Trump follows his campaign plans, and follows through on his platforms, here are some areas we think may be positively affected.
- Multinationals with offshore money. Companies with large offshore cash troves, like Apple, GE, Microsoft and Google would benefit from the 15% corporate tax rate and the tax holiday. Some of that benefit might be offset by trade wars. According to Oxfam, in 2014, US companies held $1.4 trillion abroad
- Non-renewable energy. President-elect Trump is pretty aggressive with the Middle East and is relatively militaristic when it comes to oil. More access to US oil reserves and Middle East and NAFTA energy distribution could be good for oil companies.
- Trump is pro-coal.
- Present-elect Trump has indicated that he wants to build and improve the nation’s infrastructure. Cement, steel and heavy equipment may do well under this plan.
- Defense stocks, particularly aerial defense, may expand under the Trump presidency.
- Small companies. Small companies that do most of their business in the US, would likely benefit from the Trump corporate tax cuts and not be as hurt by trade wars.
Sectors probably negative under President Trump.
- If Obamacare is dismantled, healthcare insurance providers will be hurt.
- Big Banks. Reinstating Glass-Steagall is a Trump platform item and will hurt big banks.
- Trade wars will hurt importers.
- The huge deficits caused by the tax cuts would put a strain on the bond markets and likely cause interest rates to rise.
Overall, the big change touted by Trump may not come so fast. Our Founding fathers were smart enough to build defense mechanisms into our political system. Gridlock is good. It forces change to be meaningful. And, as we know, politicians can say one thing and do another. We’ll see how it shakes out. As for me, I’m glad this election is over.