What Trump’s Economic Policies Mean for You

FORECASTS & TRENDS E-LETTER
by Henry Rohlfs
November 19, 2024

IN THIS ISSUE:

Trump Economic Proposals
Economic Effects
What About Inflation?
A Balanced Budget?

In a recent edition of Forecasts & Trends, I mentioned a report by the Committee for a Responsible Federal Budget that projected Trump economic proposals would increase the national debt by as much as $8 trillion over four years. Today we’ll look at a different analysis, this time by the University of Pennsylvania Wharton School.

The Penn Wharton Budget Model gives us a different view of Donald Trump’s proposed economic policies. Read on to see what the major components of the policies are and the Wharton School’s analysis of how they could affect the economy and your pocketbook.

Trump Economic Proposals

President-elect Trump proposes to permanently extend major components of the 2017 Tax Cuts and Jobs Act (TCJA). This includes provisions that will expire after 2025 as well as provisions that have already ended. The Trump administration has further proposed additional tax cuts for corporations and for elderly households receiving Social Security benefits.

The Wharton School has published an independent analysis of how Trump policies could impact the economy and your money. Here is some of the analysis from the Penn Wharton Budget Model of specific Trump proposals:

Extend the individual income tax provisions of TCJA. For individuals, extending the TCJA would keep seven ordinary tax brackets with TCJA thresholds and rates. The top rate would be kept at 37% versus 39.6% pre-TCJA. The standard deduction would remain roughly twice as high as before 2017 and personal exemptions would remain eliminated. For households who itemize deductions, the cap on the Mortgage Interest Deduction would remain at $750,000 in mortgage debt and up to $10,000 of State and Local taxes could be deducted. The Child Tax Credit would remain at $2,000. The Other Dependent Credit, which provides a $500 nonrefundable credit for dependents that do not qualify for the CTC, would remain in effect. Married filers would be able to deduct 20 percent of the first $315,000 in income from pass-through businesses, subject to limitations. Estate tax exemptions would remain at their higher post TCJA levels.
Eliminate taxes on Social Security benefits. Under current law, individuals drawing social security benefits are required to pay taxes on 50-85% of their benefits, with lower-income retirees paying taxes on a lower share than higher-income retirees. This proposal would exclude all Social Security benefits from taxable income for all individuals.
Extend the business tax provisions of TCJA. Lawmakers made several changes to the tax treatment of business investment in the TCJA, creating a tax system that was more generous to businesses in the years immediately following the law’s enactment but became less generous over time. Initially, businesses could immediately deduct from their taxable income 100 percent of most tangible investment costs – known as “bonus” depreciation – and 100 percent of expenditures for research and experimentation (R&E). This change was partly offset by a new limitation on deductions for interest expenses. In the years since, the bonus depreciation percentage has dropped 20 percentage points per year (falling to zero in 2027). Moreover, since 2022, businesses have been required to deduct R&E costs spread over five years instead of taking the deduction in a single year. Beginning in 2023, the limitation on interest deductions became more restrictive. The Trump campaign proposal would undo these changes, restoring and making permanent the regime that existed immediately after TCJA’s enactment
Lower the corporate income tax rate to 15 percent. The TCJA permanently reduced the corporate tax rate from a statutory tax rate of 35 percent of taxable income to 21 percent. The Trump proposal would lower that rate to 15 percent.

Below is the Wharton analysis of how changing the above tax policies will put more money into Americans’ pockets. The first four categories are “quintiles” – fifths of the wage-earning population. The final quintile is divided into the top percentages of wage-earners to give the comparisons more clarity. All income levels will see increases in their incomes after taxes and federal spending transfers.

Chart showing every wage earner will see more net income

Economic Effects

The Penn Wharton Budget Models projects that the Trump proposals would increase deficits by $5.8 trillion on net over the 10-year budget window from 2025 to 2034 on a conventional basis. However, they believe GDP increases will offset losses by about $1.7 trillion. That leaves a primary deficit increase of $4.1 trillion over 10 years.

The economy could initially grow slightly faster under Trump's plans to cut corporate taxes, but that impact could fade over time.

Ryan Sweet, chief U.S. economist at Oxford Economics, writes that Real GDP growth could be 0.3 percentage points higher in 2026 than if current economic policies continued. He also adds that GDP growth could eventually fall to 0.6 percentage points lower in 2028 than earlier projections due to the impact of deportations and higher tariffs.

What About Inflation?

The Trump campaign repeatedly spoke to consumers’ concerns on inflation. Voters consistently ranked inflation as one of their biggest concerns. Although the U.S. inflation rate has fallen close to the Federal Reserve’s 2% annual goal, most Americans still describe inflation as high because prices have still not come down.

That said, many economists caution that Trump’s plans could reignite inflation. More than two-thirds (68%) of economists recently surveyed by The Wall Street Journal said prices would be higher under Trump.

“Two main pillars of his policy proposals, tariffs and mass deportations, are likely to cause prices to rise as they will make it more difficult for businesses to produce goods," said Jacob Channel, chief economist at LendingTree.

A Balanced Budget?

It occurs to me that the incoming Trump administration has a real opportunity at balancing the Federal budget. If Elon Musk and Vivek Ramaswamy succeed in substantially reducing government spending, those savings could offset the projected budget deficit of $4.1 trillion over 10 years.

Last weekend, Musk tweeted about a Government Accountability Office report on 10 “outdated or obsolete” government IT that cost the federal government about $337 million a year to operate. That would be in addition to further cuts leading to the $2 trillion goal Musk and Ramaswamy have.

This presents the incoming administration with an opportunity to have a balanced budget by the end of Trump’s term. It’s sorely needed and would be a welcome goal.

But just as important would be reinventing government so government can be trusted. Transparency in spending would engage stakeholders at all levels so the process can continue in future administrations.

All the best,

[Henry]