Post-Election Analysis: Trump’s Tax Plans and Economic Impact

Join hosts Kyle Hulehan and Erica York in this episode of The Deduction as they break down the US tax policy implications of Donald Trump’s next presidential term. With the GOP gaining control over the White House and likely both chambers of Congress, the discussion centers around potential legislative changes, the future of tax cuts, and the impact of tariffs on everyday taxpayers. Get insights into what Trump’s tax extensions and new proposals could mean for the economy, federal revenue, and household finances.  

Links:
https://taxfoundation.org/research/all/federal/donald-trump-tax-plan-2024/ 

https://taxfoundation.org/blog/trump-tariffs-revenue-estimates/ 

https://taxfoundation.org/blog/largest-tax-increase-harris-trump/ 

Transcript

Kyle Hulehan: 0:00

Hello and welcome to The Deduction, a Tax Foundation podcast. I'm your host, Kyle Houlihan, and we are back again today with another election episode with my co host, Erika York, Senior Economist and Research Director here at the Tax Foundation. Erika, how are you doing today?

Erica York: 0:15

Doing well, Kyle. How are you?

Kyle Hulehan: 0:16

I'm good. The election is finally over. I have had an overwhelming amount of ads that I am so thankful to be done with and to never watch anymore. I'm in New Jersey right across the border from Pennsylvania and I have been crushed by ads. So that's done. The election is over. And today we're going to break down what Donald Trump and his presidency are going to mean for you. So let's just dive in. Uh, you know, Erica, it looks like the GOP is going to have control over the House, the Senate and, of course, the presidency. What do these results mean for the U. S. Going forward and tax plans and such?

Erica York: 0:54

Yeah. So a GOP trifecta means that the Venn diagram of what leaders in the Senate and leaders in the House and of course the president want to do has a lot of overlap. Um, so the, the buzzword that people are probably going to start hearing a lot is reconciliation. Um, this is a legislative procedure that essentially Let's Congress fast track, um, policy, pass it with a simple majority in the Senate. It's the tool that was used to enact the 2017 tax law, the tax cuts and jobs act. And it's probably the tool that's going to be used again to act on taxes. Um, you know, there's rumblings right now. There's been reporting that, um, lawmakers want to rip off the mandate and pursue tax policy changes like right from the get go. So I think it's, um, Watch and see there's the potential that something on tax policy could happen very fast in the new year.

Kyle Hulehan: 1:51

So when we're talking about these, you know, something happening on tax is the president is his plan to extend the TCJ. We had had this whole episode about, you know, our tax cuts are expiring and that would be a lot of money for us. So what's the plan there?

Erica York: 2:05

Yeah, it's, I would say it's a, it's a question mark. Um, Trump obviously campaigned on extending those tax cuts. That alone would reduce revenue by more than 4 trillion over the next decade. He also campaigned on adding a lot of tax cuts on top of that. So exempting tips, exempting social security, exempting overtime pay from income taxes. Creating this. Um, itemized deduction for auto loan interest, all of these various ideas. So now the question becomes given that those tax cuts all add up to, you know, about 8 trillion of lower revenue over the next decade for the federal government. What does Congress do with that? We know what. Trump's opening bid is it's all of those tax cuts. Um, but deficits are going to be a big concern because we have high interest rates. We already have climbing debt, um, for the federal government. So that puts pressure on lawmakers to find ways to trim the cost. Um, and that complicates the debate quite a bit when there are even more asks. I think what happens is some form of extension of those expiring tax cuts. One thing that I've been thinking through is how would an everyday taxpayer You know, feel that we're all used to the tax cuts and Jobs Act. We've been paying taxes under that for the past six years. Um, you know, we have a 2000 child tax credit. It's not really going to feel like a tax cut. If that gets extended, it's just going to feel like the same old policy. Um, and then if you layer it on top of that, You know, offsets, ways to pay for that on top, you could actually feel worse compared to what you feel right now. Um, and that's because, you know, everyday taxpayers operate under a different baseline than Congress does. Congress knows those tax cuts are expiring. If they extend them, that's a tax cut in budget terms. But for everyday people, it might not feel like it. So I think it's going to be tough politically for Congress to figure out what to do.

Kyle Hulehan: 3:59

That's really interesting. I, I think, I'm wondering, do you feel like there are any specific ideas, or has anything been talked about, about what would be cut, because 8 trillion is so much.

Erica York: 4:11

Yeah, there hasn't been a lot of detail yet. And unfortunately, um, some of some of the offsets, some of the ways that, um, they, you know, quote unquote paid for some of these tax cuts. The first time around was to place limitations on itemized deductions. So we limit how much people can deduct and we use that revenue to reduce rates. There's been a lot of pushback against some of those limitations, particularly the limitation on state and local tax deductions. Salt might be, you know, a buzzword people have heard about. Um, if you lift the salt cap, that actually makes it even more expensive to do the tax cuts. So, I haven't seen anything clear. I think there's probably a lot of brainstorming going on right now. You know, what do we prioritize? Can we look at other areas of the tax code? One idea that Trump has that is is a good one is to look at some of the green energy tax credits passed in the Inflation Reduction Act and pull back on on some of those. Um, we've estimated that if you got rid of All of those entirely, that would raise a little more than 900 billion dollars, which is a lot, but you know, it's less than a fourth of the cost of the tax cuts, the revenue loss of the tax cut extension. Um, so that would still mean they come up really short and that might also be politically difficult to pull back on what have proven to be pretty popular tax credits.

Kyle Hulehan: 5:36

And to get to what has been so far, uh, you know, sort of the magic bullet, uh, the thing that's going to raise a lot of money for everything, how will tariffs be implemented, and how much could this cost taxpayers?

Erica York: 5:50

This is another really uncertain area. So Congress has delegated a lot of authority to the executive, allowing a president to impose tariffs in certain instances. Um, Trump used a lot of these authorities during his first term to put tariffs on steel and aluminum, China, washing machines. solar panels. Um, and he's talked about using those authorities again to increase tariffs on China to impose tariffs on Mexico and potentially do this universal baseline tariff idea. We just published new estimates yesterday on how much revenue could be raised by this universal tariff. If it's set at 10%, which Trump has talked about, we estimate it would raise about 2 trillion in higher tax revenue over the budget window. If he does it at 20%, it would raise a bit more than 3 trillion. So still well short of that 4 trillion number. And the burden of those tariffs would fall hardest on lower and middle income households, um, lower and middle income households, as we've talked about before, consume more of their income than higher income households who can afford to save more of their income. So by consuming more and consuming more traded goods. Um, you know, most of, of the things we, we buy at Walmart, um, a lot of our food, especially if you think about, you know, access to fresh food during the winter, um, coffee, that sort of thing that's imported. Um, if the cost of that goes up, that's particularly hard on lower and middle income households. And then that brings me back to that point I was talking about earlier, you know, just continuing the tax cuts isn't going to feel personally like a big tax cut. And if you combine that with. Higher prices at the grocery store that that feels like you're worse off by quite a bit. And in fact, some lower and middle income households would be worse off under tariffs as a pay for. So I don't think that's a useful avenue, but it does seem like it is at least somewhat. Politically possible, especially because that authority lies with the president and we know that Trump has a different view of tariffs and really believes in them and so is probably like likely to pursue them in some form or fashion.

Kyle Hulehan: 8:03

So wait, could you, could you clarify that for me real quick? He, he can just, the, President Trump is, Can just implement tariffs on his own. He doesn't really need anybody else's authority.

Erica York: 8:13

Right. There's no up or down vote in Congress for, for tariffs. Um, now there are some procedural rules that have to be followed. Um, for instance, you know, it might require an investigation by the United States trade representative or the commerce department. Um, so they would go through that investigative process, issue a report with recommendations, and then the president can act on those recommendations and, you know, choose to, to implement tariffs. Um, some of the, the, like, Statutory reasons for, um, and instigating an investigation or things like unfair trade practices, national security concerns. So the, the big question is like, whether those authorities would really allow the president to do a universal tariff on everything. There are some emergency authorities where the president can declare some sort of national emergency. And then in response to that, do a universal tariff. And that case, those would be temporary universal tariffs Um, so that complicates the question of, like, can these pay for tax reform if they're only a temporary thing? Um, can he just continually reauthorize the temporary tariffs? Lots of questions, um, but, you know, what we saw in the first term was that the Trump administration Didn't have much hesitancy for kind of pushing the envelope on what trade authority is permitted. And so I, I don't have a lot of doubt that we would see something similar this time around.

Kyle Hulehan: 9:42

Okay. Wow. Yeah. I mean, I think that might surprise a lot of listeners to know that the president has so much power over tariffs. It's sort of a an unchecked power. Now we've been a little negative again. I mean, you know, maybe not as hopeful and positive. You know, I think, you know, very clearly, you know, the election was a very clear result. Um, the there was a rejection of the Biden administration. No doubt. Um, and And economy was a big important issue. And I'm just wondering if, you know, we have modeled Donald Trump's tax plan and there is some good in it. And I'm wondering maybe if you could share some of that good to maybe end on a little bit of a hopeful note that maybe the economy would do a little bit better.

Erica York: 10:21

Yeah, I went to what Trump has proposed on taxes, especially if we look at the, Investment type provisions that he's talked about, even on the campaign trail. Um, he talked about full expensing for capital investment, full expensing for research and development. Um, all of those are good things. Those would boost incentives to invest in the U S economy. They would grow wages. They would grow how much we produce here. Um, so, so that's, that's good. Um, and generally on taxes, we, we see several good ideas like that. We also see the, the complicated ideas, um, The big deficit impact, the tariffs, um, so the net effect that they have on the economy will really depend on what gets prioritized and what gets implemented, but there is promise for improvement on the tax policy front.

Kyle Hulehan: 11:08

So there you go, folks. I mean, look, we can't, we can't, you know, uh, give you, you know, a hundred percent perfect picture of everything that's going to happen. We don't know what's going to happen. I think there to some degree, um, President Trump, um, when he's on the campaign trail says some things and, you know, that's okay. I think we'll, we'll see what he does and we have his, his plan modeled. You can check that out on our website. Um, but real quick before we sign off, I do want to plug we have an online event next week. So please subscribe to our YouTube channel here, you know, click that little bell and you'll be notified for our event. Uh, it's a big event, uh, next week about just election takeaways, you know, and that's on November 15th, and you'll get a lot of information about the election and our takeaways and where tax policy and the economy is going. Erica, I just want to say thank you for being on the show today. It's been a pleasure doing this with you.

Erica York: 11:59

Yeah. Thank you, Kyle. This has been a lot of fun.

Kyle Hulehan: 12:01

It really has been. And so before we sign off, if you have any more questions, keep sending them our way. And you can do that at Podcast at tax foundation. org. That's our email. And then on Twitter, it's at deduction pod. Thank you for listening.