The reelection of Donald Trump after the presidential elections on November 5, 2024 has taken the world by storm. Trump’s campaign promised a lot in terms of the regulatory framework and tax policy of the United States under his presidency, which included a more business-friendly approach in key areas of the economy and a focus on reducing the deficit of the United States budget.
However, while the specific tax and regulatory changes are yet to be seen, the markets have been quick to speculate on how the new tax policy could alter the U.S. economy, with proponents lauding the reduction in government waste and red tape, while critics citing the dangers of ballooning the national debt through austerity measures.
Corporate Taxes
Trump’s first term in office saw a major overhaul in corporate federal taxes in the United States. Contrary to the progressive corporate taxes until 2017, Trump introduced a 21% fixed corporate income tax, which meant considerable savings for corporations big and small in the country.
While critics were quick to point out the favoritism towards major corporations, the 2025 tax plan also includes making these tax cuts permanent, as they are set to expire in the same year.
This would mean that the members of the S&P 500 are likely to benefit considerably from the new tax laws, which is part of the plan to revive U.S. manufacturing, alongside replacing taxes with tariffs on foreign goods, particularly those imported from China.
However, Trump’s corporate tax plans also include cutting the rate down to 15% on many C Corporations as well.
Income Taxes
Federal income taxes, which are divided into seven brackets and range from 10% to 37%, are unlikely to be greatly altered under Trump’s presidency.
What Trump has promised is the boosting of child tax credits for families, which is unlikely to cause significant shifts in the purchasing power of individuals.
Taxes on securities trading will continue to be treated as ordinary income and taxed in accordance with the income tax brackets of the individual, which means that the taxes on FX trading gains are also likely to remain unchanged under Trump’s presidency.
Tax Breaks and Subsidies
Trump’s tax plans also include abolishing the many tax breaks and subsidies that have existed under the Biden administration, such as those on greentech companies as part of the Paris agreement, as well as the subsidies for Obamacare.
The 2022 Inflation Reduction Act, which was introduced by president Joe Biden, is likely to be axed under Trump, which is part of the “waste-cutting” measures promised during the Trump campaign.
On the other hand, Trump’s budget plans include significant tariffs on all foreign exports, which will be levied at different rates depending on the country, with China expected to receive the brunt of the economic damage from the process. This can be attributed to Trump’s protectionist policies, particularly when it comes to energy and manufacturing sectors.
Taxes on Tips
A minor issue perhaps, but Trump has also promised making service tips free of tax, which would mean that hundreds of thousands of Americans engaged in the services industry will be able to keep all of the tips receivable from customers.
While a minor change, the plan aims to increase non-taxable income for Americans working service jobs, such as bartenders, servers, baristas, etc.
The Department of Government Efficiency (D.O.G.E)
Trump’s budget plans also include forming a new government agency, the Department of Government Efficiency, which will be spearheaded by Elon Musk and Vivek Ramaswamy, aiming to cut wasteful spending and regulation wherever possible, an initiative which also has its proponents and doubters.
Proponents argue that the U.S. economy is overregulated and could benefit from more freedom to do business, while those against have expressed concerns regarding which regulations may be cut and how they could affect the safety of working conditions in the country. Potential conflicts of interest between Elon Musk and the regulatory bodies overseeing car manufacturers and green energy, citing vested interests in skirting regulations in these fields.
Possible Outcomes
While the tax cuts have been broadly popular among the American electorate, experts and investors have mixed opinions regarding the effects Trump’s tax policy may have on the U.S. economy.
For example, Warren Buffett has been noted for selling a significant portion of Berkshire Hathaway’s Apple holdings, due to concerns regarding the U.S. deficit and ballooning debt, which he has deemed likely to cause taxes to rise in the country, thus, justifying liquidating some holdings at a 21% corporate tax rate, while still possible.
Many have been left wondering how austerity could be the key to reducing the budget deficit, as the likelihood of major budget cuts are unlikely to be approved by the Supreme Court.
Whether the tax cuts will cause U.S. debt to soar remains to be seen, but critics have pointed out his first presidential term, which saw the national debt increase by a whopping $7.8 trillion.