President Trump came into office with a clear view about what was wrong with the US economy. “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs,” he said in his inauguration address in January. “Protection will lead to great prosperity and strength. America will start winning again, winning like never before. We will bring back our jobs. We will bring back our borders. We will bring back our wealth. And we will bring back our dreams.”
One group of people who started dreaming happily in the immediate aftermath of Trump’s election victory in November were US investors. A mini boom in share prices culminated in the Dow Jones Industrial Average breaking through 20,000 points for the first time three days after the president’s inauguration. Investors were clearly hoping the new administration’s economic policy would boost growth and corporate earnings by increasing infrastructure spending, cutting taxes and regulation; and trying to improve the fortunes of US businesses in general.
But the so-called “Trump bump” is no longer visible. The president is severely constrained by political and practical realities; by political opposition, including from within his own party; and by the checks and balances built into the US political system to limit presidential power.
At the same time, ongoing investigations into possible links between members of the administration and the Russian government, combined with upheaval within Trump’s inner circle, have made this a highly unpredictable presidency, and there is nothing the markets – and business leaders – like less than uncertainty.
One of the items near the top of the president’s agenda is reform of the federal tax system. His plan includes reducing the number of tax bands for personal taxes from seven to three (10%, 25% and 35%); and repealing estate tax and the alternative minimum tax (AMT), which prevents the wealthiest members of society using tax deductions to avoid tax completely. The plan would mean the highest earning 0.1% would receive an average tax cut of 14.2% of after-tax income, while middle-income households would receive a 1.8% tax cut.
But perhaps the most striking tax proposal is to cut federal corporation tax from 35% to 15%. Part of the rationale behind this is a desire to encourage US businesses to repatriate profits currently being held overseas in countries with more competitive tax rates. There could be $2.6trn of cash being held in other countries in this way, according to figures obtained by the Congressional Joint Committee on Taxation.
Although the latter measure might boost government revenue, the overall result of implementing these proposals would be to reduce revenues significantly overall, by $6trn over 10 years, according to Oxford Economics. Analysis from the Tax Policy Center (TPC) completed in October suggests the Trump tax plan would increase the federal deficit by almost 3% of GDP.
But it is difficult to imagine Democrats in Congress backing them. “It’s extraordinarily difficult for the US to make big changes to the tax system, because the two parties are so far apart in terms of what they think the tax system ought to be for,” notes Ian Young, technical manager at the ICAEW Tax Faculty. “The last major tax reform was in 1986, which shows how difficult it is to get people to agree on anything.”
But he does think a reduction in corporation tax will be passed by Congress at some stage, in part simply because of the scale of the problem of profits being kept overseas. An additional measure Trump has proposed to address this problem would be a tax holiday during which any of this money being repatriated would be taxed at a low rate, of, say, 10%.
The president wants to introduce a “border tax adjustment”, designed to make imports more expensive, to help reduce the $500bn trade deficit the US runs with the rest of the world. In combination with tariffs (of 30% or more) on imports from specific countries, this could strengthen the dollar, thus making imports cheaper, so reducing any negative impact on US consumers.
One problem with this theory, says Barret Kupelian, senior economist at PwC, is that trade flows are not the only factor determining the strength of the dollar. Interest rate movements in the US and elsewhere, the general outlook for the US economy and – perhaps most problematically of all – economic uncertainty, could all counteract the effects of the border tax.
Other countries could take retaliatory action, raising tariffs on US products. A trade war could cut GDP by 3% in two years and cost 4 million jobs in the US private sector, according to research from the Peterson Institute for International Economics (PIIE). The consequences could be particularly damaging for US companies with international supply chains. Ultimately, workers and consumers could end up paying a high price for the policy, which would be politically awkward for the president if tax cuts for big business and wealthy individuals had been approved.
“[The president] is beginning to appreciate the backlash that would occur if he were to try to implement this plan by cutting back imports,” says Gary Clyde Hufbauer, a senior fellow at PIIE, and a former deputy assistant secretary for international trade and investment policy at the US Treasury. He thinks it will be very difficult for the administration to persuade some sceptical Republican senators to back the proposals.
President Trump has also said he wants to renegotiate trade deals to address the trade deficit. His decision to pull the US out of the Paris Accord on climate change was framed in similar terms to his opposition to the North American Fair Trade Agreement (NAFTA) – that it was unfair to the US and damaged the country’s economy. In both cases, the president’s opponents claim the opposite is true.
But reconfiguring complex trade relationships could have unpredictable consequences, says Oren Klachkin, senior economist at Oxford Economics. Trade is also an area where the differences between the rhetoric of Trump the candidate and the actions of the president are beginning to look particularly stark – as can be seen in his apparent change of heart concerning China, for example.
“The trade war with China that looked all but certain has faded into the background,” says Hufbauer. “That’s a good thing, but it does mean that the idea of getting a big reduction in the US trade deficit is now kind of pie in the sky.”
There is also currently little sign of the major infrastructure programmes about which the president spoke during the campaign and at his inauguration. The key problem to overcome here, says Hufbauer, is how large-scale projects are to be paid for. The suggestion is that public/private partnerships could be harnessed to complete the work. Such an approach is largely unfamiliar in the US and could be problematic because the process of selecting projects and gaining approval for them from state, city and local government agencies could be extremely lengthy.
“With a major project you could be looking at five years from the day you start to the day you actually start building,” says Hufbauer. “Maybe 10 years. This is very discouraging to private firms.”
Another aspect of the president’s rhetoric that has softened in recent months has been pronouncements in relation to immigration. This may be because Trump is facing economic reality, Kupelian suggests.
The main sources of GDP growth are growth in labour, primarily through immigration, because of prevailing demographic trends, and improvements in productivity, he explains. “Productivity rates have not really responded, post the financial crisis, to the extent people thought they would, so if there was going to be less reliance on labour as a source of growth there would need to be more reliance on immigration.”
The president’s thinking could be described as broadly in line with the rest of the Republican party is in his desire to cut regulation. As part of this agenda he has promised an overhaul of Dodd-Frank, the key financial regulation and consumer protection measure passed by the Obama administration in 2010.
Iain Coke, head of the Financial Services Faculty at ICAEW, wonders about the consequences of this complex proposal. “Will he make it harder for non-US banks to compete in the US market?” he asks. “If he does, does that make the US more or less attractive as a capital market?”
What does seem to be the case is that all his economic policies will depend on whether or not he can repeal and replace the Patient Protection and Affordable Care Act – aka Obamacare. At the time of writing, although a compromised version of the president’s alternative healthcare legislation has been passed by the House of Representatives, it looks unlikely to be approved by the Senate, where the Republican majority is much smaller, without further, significant, compromise. The aim is that by repealing Obamacare the administration will be able to save several hundred billion dollars that could then be used to help fund the president’s proposed tax changes.
Hufbauer believes the chances of Trump’s new Act being enacted seem “pretty modest”, not least as a result of figures released by the Congressional Budget Office that suggest 23 million people would drop out of insurance as a result over the course of the next four to five years, severely restricting their access to healthcare and creating a plentiful source of discontent for Democrats to exploit.
“My guess is that this part of the Trump programme will not be enacted,” Hufbauer says. “Without the money that would be saved from the healthcare plan it’s hard to see how you could have a revenue-neutral sharp reduction in business tax, plus the reductions in personal taxes.”
The most likely outcome is that the president’s economic policy will deliver changes, with a reduction in federal business tax likely, although again possibly not quite such a big cut as currently proposed. The extent to which his other plans will be implemented remains to be seen.
Some question whether preventing Trump from implementing his programme is the best outcome. Mark Coles, managing director at private investment firm Jade Invest and ICAEW Council Member for the US, feels that some changes in government policy will be required to increase the US’s competitive position, boost economic growth and provide sustainable support for popular social programmes.
“There is sensationalism on both sides that has manifested into what some may see as a dysfunctional government and political system,” says Coles. “But from a global perspective, it is really in the world’s interest for the US to succeed, and no matter which political party is in power, we should be thinking about how their priorities will affect us and our businesses, provide constructive input to guide policy changes and any strategic shifts that we need to make to respond to the new environment”.