To many, a Trumpian economy promises chaos and calamity; to others, it promises utopia. Having decisively secured the title of America’s 47th president, Donald Trump vows sweeping economic changes, many of which will build off of his first term. From tax cuts to universal tariffs, Trump’s policies highlight a growing “America First” fiscal ideology. While the economic outcomes of these policies remain uncertain, certain impacts are more predictable. Tariffs are likely to heighten trade tensions, while tax cuts are expected to add trillions to an already ballooning federal deficit.
Nevertheless, Americans want change. Voter frustration with inflation, which reached a record high of 9.1% under the Biden administration, and an economy struggling under high interest rates significantly contributed to Trump’s return to the White House. It is now up to him to live up to those expectations.
Taxes
Lowering taxes is central to Trump’s economic agenda. His campaign supports extending many of the expiring provisions under the 2017 Tax Cuts and Jobs Act (TCJA), which were signed into law during Trump’s first term and are due to expire in 2025. The TCJA was a major overhaul of the U.S. tax code that reduced taxes paid by individuals and businesses alike. Among other things, Trump plans to make permanent the individual tax provisions under the TCJA, which involve reduced income taxes and a greater standard deduction — a fixed amount taxpayers can subtract from their income before taxation.
Trump’s administration has promised to cut the corporate income tax rate from 21% to 20%. More substantially, he plans to cut the corporate income tax rate for domestic manufacturers from 21% to 15%.
Also key to his tax plans, Trump will exempt tips, overtime pay, and Social Security income from taxation. While not official, Trump has called for expanding the child tax credit, ending American taxation abroad, and instituting a tax credit for family caregivers.
Tax cuts as a philosophy are central to classical fiscal conservatism and economic stimulation. Republicans argue that corporate tax cuts spur technological advancements, job creation, and wage growth, while lower individual taxes give families more freedom to spend, save or invest. Overall, reduced taxes make the U.S. more business-friendly and shift spending power to the people.
The truth behind these notions has always been heavily debated. A 2017 study from the International Monetary Fund (IMF) finds that tax cuts provide a one-time boost to consumption, GDP and investment, but are never enough to prevent a loss of government revenue. Tax cuts would have to be funded through public debt, spending cuts or raised taxes elsewhere.
The study also found a tradeoff between growth and income inequality. Tax cuts for higher-income groups boost GDP growth through higher labor supply and investment but worsen income inequality. Conversely, cuts for lower-income groups reduce inequality but offer smaller growth benefits. Tax cuts, even for higher earners, can indirectly benefit lower-income groups by increasing demand for services they provide and raising wages for lower-skilled labor.
Contrary to popular belief, Donald Trump is not solely focused on cutting taxes for the wealthy. During his first term, the Tax Policy Center reported that over 80% of the population benefited from his tax cuts. Moreover, the Tax Cuts and Jobs Act reduced the top tax rate for the wealthiest Americans only slightly, from 39.6% to 37%.
According to the Congressional Budget Office, Trump’s tax cuts would add roughly $9 trillion to the federal deficit. This calculation factors in the extension of the TCJA tax cuts, the reduction of the corporate income tax, and the elimination of taxes on tips, Social Security benefits and overtime pay.
Nine trillion is certainly a frightening figure. The U.S. federal deficit has reached extraordinary levels and continues to grow, posing serious economic risks. Higher interest rates, reduced investment, depressed wages and inflation are just some of the potential consequences. Trump’s proposed tax cuts make it clear that slowing deficit growth is not a top priority in his economic agenda.
But the situation is not as bad as it seems. The $9 trillion figure doesn’t account for revenue gains from GDP and consumption growth. As the IMF notes, tax cuts can spur short-term economic growth, partially offsetting their cost. While this is likely true, it would not come close to offsetting the cost of tax cuts.
Additionally, exempting certain income categories from taxation would likely reduce government revenue less than anticipated, especially in the case of tips. Since only 2.5% of the workforce earns tips and over a third of these workers already don’t pay federal income taxes due to low earnings, eliminating taxes on tips would have a minimal effect on revenue.
The most significant factor mitigating the deficit impact is Trump’s focus on spending cuts. He has tasked the newly formed “Department of Government Efficiency” (DOGE), led by Elon Musk and Vivek Ramaswamy, with reducing wasteful spending, slashing regulations and restructuring federal agencies. Additionally, Trump plans to end student loan forgiveness programs and repeal green energy tax credits from the Inflation Reduction Act, though it remains unclear how much these measures can reduce spending.
Trump’s proposed tax cuts are less crippling than headline figures suggest. However, even with spending reductions and possible revenue gains from tax cut-driven growth, they will likely add significantly to the federal deficit. While tax cuts offer a variety of fiscal advantages, the current high deficit makes them less viable in today’s economic context.
Tariffs
Sweeping tariffs are another central pillar of Trumponomics. Under his agenda, Trump has called for a universal baseline tariff of 10-20% on all U.S. imports, and at least a 60% tariff on all imported goods from China.
Tariffs are taxes levied by a government on imported goods, requiring importers to pay fees to bring products into the country. Trump plans to use tariffs to help offset the cost of tax cuts. However, the Tax Foundation estimates these tariffs will generate only $3.8 trillion over the next decade — far short of the $9 trillion needed.
Moreover, these estimates don’t account for foreign retaliation. It is highly plausible that affected countries impose counter-tariffs on U.S. exports. Such measures can reduce export demand and trigger other downstream economic effects that further diminish government revenue.
Escalating tariffs could lead to a trade war, as seen during Trump’s first term with China, with significant consequences for both economies. Tariffs raise import costs, which are often passed on to consumers, risking a resurgence of inflation — an especially critical concern given Trump’s plan to impose tariffs on all imports. On the other hand, retaliatory tariffs can erode the competitiveness of U.S. export industries, making their goods less affordable abroad. Trade wars can also cause supply chain disruptions and disproportionately harm lower- and middle-class demographics.
In addition to raising revenue, Trump aims to use tariffs to protect and grow domestic industries. Under the pillars of Trump’s protectionist ideology, the greater cost of tariffed foreign products will theoretically incentivize consumers to purchase domestic goods, boosting domestic manufacturing and job growth. However, increased production costs of imported materials, reduced competitiveness of counter-tariffed U.S. exports and reduced consumer demand are all likely challenges domestic industries may face under Trump’s tariff plan.
Trump’s proposed 60% tariff on all Chinese imports aims to address two key issues. First, Chinese goods are artificially underpriced due to overproduction in its slowing economy and government subsidies, which allow it to flood foreign markets with cheap exports. Second, the tariffs retaliate against China’s unfair trade practices, including forced labor, intellectual property theft and illicit trade.
Although the Biden administration imposed tariffs on Chinese goods, Trump’s proposed universal tariffs represent a far more aggressive approach and will likely provoke retaliation from China, further straining an already tense relationship.
Overall, Trump’s tariffs are unlikely to significantly boost government revenue or effectively support domestic industries. Instead, they are likely to provoke retaliation, drive up prices, and damage American exports.
Deregulation and the Fed
In line with traditional GOP values, Donald Trump plans to significantly deregulate various industries. His business-friendly policies are expected to stimulate activity in the mergers and acquisitions space, which has been relatively quiet under the Biden administration’s crackdown on corporate consolidations.
Mining and fossil fuel companies anticipate looser regulations on emissions caps and green energy mandates. Additionally, after previously criticizing cryptocurrencies, Trump has promised to deregulate the digital asset industry, positioning the U.S. as a leader in this space. However, reduced regulations could exacerbate already rampant illegal activities like money laundering.
During his first term, courts blocked nearly 80% of Trump’s proposed deregulation measures. If his current policies are enacted, he may still face challenges with signing them into law, despite a Republican-dominated federal government.
Despite being a champion of small government, Trump plans to intervene with the Federal Reserve — the United States’ central banking system in charge of setting interest rates, managing the money supply and regulating financial markets. Trump has argued that the president should influence the central bank’s decisions despite the Fed’s independent status since 1951. For instance, he has pledged to lower interest rates, a move that could jeopardize the delicate balance between low prices and a strong economy. Trump has also threatened to fire Fed Chair Jerome Powell, a threat Powell has strongly rejected.
From tax cuts to tariffs, Trump’s economic agenda unequivocally reflects the rise of an increasingly popular “America First” protectionist ideology alongside the principles of fiscal conservatism. While the economy is not as troubled as often portrayed, tax cuts offer minimal benefit to our financial landscape. What they do contribute is trillions of dollars to an already record-high deficit. Though Trump’s proposed spending cuts and tariffs aim to reduce the federal deficit, they fall far short of making a meaningful impact. By the end of his second term, the U.S. can expect not only a larger deficit, but also an economy severely impacted by the fallout from tariffs.
With a GOP-controlled House, Senate, and Supreme Court, little stands in the way of the Trumpian economic behemoth.
