A Look At The Potential Outcomes of Donald Trump’s Economic Policies
Donald Trump has been elected as the 47th President of the United States, and a significant voter issue that led to his election is the belief that he will “improve” our economy. But what does this mean, and how does he plan to do that?
An improvement in the economy for the average voter seems to be synonymous with more affordable living. For the past 15 months, housing prices have been at record highs, and a fifth of households that earn over $150,000 a year are living paycheck-to-paycheck (Goldman, 2024). Americans largely attribute this predicament to Joe Biden’s presidency, and although this reasoning isn’t unfounded, as prices are currently 20% higher than when he took office, it is slightly misleading.
It is important to note that Bidenomics (the economic policies that were implemented under the Biden administration) helped America bounce back from the effects of the COVID-19 pandemic faster than nearly every other G7 country (an informal grouping of seven of the world’s advanced economies, including Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, and the European Union). By the fourth quarter of 2021, the United States’ GDP was growing at the same rate as it was pre-pandemic, something that other G7 countries didn’t achieve until early 2022. This was largely due to Biden’s American Rescue Plan (ARP), which provided financial support to local and state economies to boost the national economy, preventing underinvestment, an issue that created a drag on the national economy following the 2007-2008 financial crisis (U.S Department of Treasury, 2024). America’s inflation rate is now back to a nearly healthy 2.4% (Foster, 2024), slightly above the target growth rate of 2%. This was primarily due to the Federal Reserve. The Federal Reserve is America’s national bank, and to combat the high inflation rate, they increased interest rates to decrease borrowed spending, thereby decreasing the inflation rate. The 2.4% inflation rate, along with an acceptable unemployment rate of 4.1% (Bureau of Labor Statistics, 2024)—a remarkable recovery from the 14.8% unemployment that America faced in March of 2020—is evidence that the economy is currently quite strong. If this is the case, why are prices so high?
It was America’s swift recovery from the Covid-19 pandemic that created higher prices. As Americans emerged from their homes with cash to spend, demand for goods increased, and prices followed suit. This led to the highest inflation rate in nearly 40 years, at 9.1% (Srinivasan, 2024). Currently, although the growth rate is near acceptable levels, prices are still increasing, just at an economically healthier rate. Despite the fact that Biden is often blamed for these high prices, it is difficult to ascertain just how much of an impact the president has on the economy, as most economic policies are implemented by the Federal Reserve, not the president. In any case, Trump will be inheriting an economy that, by many metrics, is strong despite unfavorable living prices.
Trump campaigned on two main economic plans, and this article will analyze why he wants to put these plans into place and the effects they will have on the economy. The first was a continuation of the tax cuts he implemented in 2017 with the Tax Cuts and Jobs Act (TCJA). The TCJA was signed into law by Trump in 2018 and was the first significant overhaul of the U.S. tax code since 1968. It offered tax cuts to both corporations and individuals. The TCJA reduced the tax rate to a flat 21% as opposed to the previous law, which increased tax rates as businesses generated more income. The TCJA is projected to create positive change in the long run, with the Tax Foundation modeling the new law over 15 years and finding that capital stock, or the total value of a company’s equity that has been sold to investors will increase by 7.4%, a positive development which means that companies will continue to grow. This would also lead to an increase in real, or inflation-adjusted, wages in the long run by 0.9% (Mcbride, 2023).
The TCJA also had significant individual tax cuts, the most popular of which was doubling the maximum per-child credit amount from $1,000 to $2,000. Additionally, nearly every tax bracket except the bottom-most bracket, which remained at a 10% tax rate, and the 35% bracket, which also remained the same, saw a deduction in their tax rates under the TCJA. The TCJA was controversial, however, as many people argued it benefitted the upper class (households with more than $169,000 in annual income) more than it did the middle class (households ranging from $86,000 to $169,000 in annual income). This is somewhat true. While the upper class did receive the most significant tax cut, it was because the upper class contributes an overwhelming majority of federal taxes. According to the Tax Foundation, the top 25% of earners pay 90% of America’s federal income taxes. It stands to reason, then, that an almost universal tax cut would create a more significant decrease in taxes paid by the upper class than in taxes paid by the middle class. However, these provisions are set to expire in 2025. With no extension, average Americans could see a significant tax increase. Trump has claimed that extending these tax cuts should be “easy” (Adamcyzk, 2024), and he’s right.
With a simple majority of Republicans in Congress, Trump’s bill to extend the individual tax cuts, along with his plan of further decreasing corporate tax rates to 15%, should be passed with relative ease. This further reduction of his previous tax cut will likely not have the effect that most Americans hope for: it will not reduce prices. Tax cuts are considered slightly inflationary, as they give people additional money to spend, although some do choose to save their money, which limits the inflation that occurs. It is agreed upon amongst many economists that if Trump immediately cuts taxes upon entering office, things could get worse before they get better. Wages will grow much slower than prices, as Trump is hoping for a “trickle-down” effect, which means that he hopes cutting corporate taxes will increase real wages. However, this effect takes time and is often disproportionate to the rate at which taxes were cut, as those at the top of the company often give themselves a much larger share of the new cash at hand than they do those at the bottom (Stiglitz, 395).
Trump’s significant tax cuts would lead to a substantial budget deficit for the government, which he hopes to offset through tariffs. Tariffs are taxes placed on goods imported from other countries. Although the business that imports the goods pays the extra fee, studies have shown that businesses often raise their prices in response. Therefore, the consumer is actually paying for the majority of the tariff. The main benefit of tariffs is that they decrease the unemployment rate, as businesses often shift to producing goods domestically to avoid having to pay tariffs, and Trump is further encouraging this by providing tax breaks to companies that manufacture domestically (Floyd, 2023). This is another economic policy that will likely prove beneficial in the long run but may hurt consumers in the short run.
So, will Trump’s economic plans create more affordable living? In the short term, no. The long term is a different story. As real wages increase due to corporate tax cuts and industries begin to move to the U.S., prices could fall. However, it is likely that prices will not be going back to what they were pre-pandemic anytime soon. This is because, for an economy to remain healthy, inflation rates must increase marginally every year. The hope is that real wages will catch up to inflation rates and improve consumers’ buying power, which Trump plans to accomplish via corporate tax cuts. In truth, there is no way of knowing precisely what the economy will look like in four years, but Trump’s central campaign policies appear to be more focused on the long term than the short term. Overall, the entire country’s goal is to promote the economic well-being of its citizens. Regardless of political affiliation, it is imperative that our governing bodies share this vision and take the appropriate steps to reach this goal.
Works Cited
Adamczyk, Alicia. “With Trump’s Election, Extending Expiring Tax Cuts Should Be “Easy.”” Fortune, 8 Nov. 2024, fortune.com/2024/11/08/trump-tax-cuts-reelection-tariffs/. Accessed 15 Nov. 2024.
Floyd, David. “Trump’s Tax Reform Plan Explained.” Investopedia, 23 Jan. 2023, www.investopedia.com/taxes/trumps-tax-reform-plan-explained/.
Foster, Sarah. “Latest Inflation Statistics: The Prices Rising and Falling Most.” Bankrate, 15 May 2024, www.bankrate.com/banking/federal-reserve/latest-inflation-statistics/.
Goldman, David. “What Just Happened? It Was the Economy, Stupid.” CNN, 6 Nov. 2024, www.cnn.com/2024/11/06/economy/economy-trump-reelection/index.html.
“On the Third Anniversary of President Biden’s American Rescue Plan, Treasury Releases New Data on How State and Local Aid Fueled National Economic Recovery.” U.S. Department of the Treasury, 13 Mar. 2024, home.treasury.gov/news/press-releases/jy2166.
