The Impact of the Next Administration
By Sean Snaith
One major source of uncertainty hanging over the U.S. economy has been resolved. To the surprise of many, Donald Trump won the 2016 presidential election and will be the country’s 45th president when he is sworn into office in January. What does a Trump administration mean for the economy in the U.S., Florida and Central Florida?
A definitive answer is not immediately available as many of the economic proposals laid out during the campaign remain short on details; however, based on what we do know, most of the proposed economic policies would boost economic growth in the U.S. and here in Florida as well.
The one potential and significant pitfall would come with regard to international trade policy. President-elect Trump has vowed to renegotiate trade deals to get more favorable terms for the U.S. and has threatened countries that do not play fair with tariffs.
This America first trade policy vows to go after countries that manipulate their currencies or provide subsidies to domestic industries, with China specifically being called out for such behavior.
The danger here is that countries subjected to such tariffs could return the favor with a worst case scenario of a trade war breaking out. Such behavior is self-defeating, harming all parties involved, and the threat of such a mutually assured economic destruction could ultimately allow cooler heads to prevail.
What are some of the major planks of Trump’s economic platform and what impact could they likely have on the economy?
Proposals here include a reduction of the number of brackets of the income tax from seven to three, with every income level receiving a tax cut. The plan would cap the level of deductions and the standard deduction would more than double, eliminating the need for many taxpayers to itemize, thus reducing the burden of filing taxes for most taxpayers.
Business taxes would also change substantively. Corporate income tax rates would fall from one of the highest in the world at 35 percent to 15 percent. A 10 percent tax would be levied on repatriation of profits that are currently held overseas by American companies currently holding a total of $2.5 trillion in offshore tax havens.
Other tax policies include allowing for full expensing of plant and equipment for U.S.-based manufacturers and allowing small businesses to pay a 15 percent rate on business income instead of paying the personal tax rate on this pass-through income.
The fiscal impact of such policies aside, these changes and simplifications of the tax system should work to boost economic growth.
The rollback by the Trump administration of the regulatory morass that has flourished over the past two administrations is, in my mind, potentially the most powerful of all the incoming president’s proposed economic policies.
I have written extensively on the Affordable Care Act and the Dodd-Frank financial regulatory reform law and the adverse consequences of these laws for the economy. The policy uncertainty that we have created via Dodd-Frank, the Affordable Care Act, and thousands upon thousands of pages of new rules and regulations have weighed down recovery. The promised repeal of most of these will free the economy from the deluge of red tape that has entangled and hobbled economic growth.
The Trump administration is calling for a complete regulatory overhaul with the removal of all job-killing and needless regulations. The benefits such an overhaul could reap for the economy could be quite significant.
The incoming administration has proposed a $1 trillion dollar infrastructure investment program, which represents nearly a tenfold increase in the level of infrastructure spending that was included in the American Reinvestment and Recovery Act of 2009; coupled with tax reform, this represents a double-barreled fiscal stimulus.
As mentioned earlier, the Trump administration’s stance toward international trade could be the Achilles’ heel of their economic platform. Strong statements, many directed toward China, toward enforcement of violations of existing trade agreements and alleged currency manipulation with the imposition of tariffs and taxes, set the stage for retaliatory action by countries subjected to such penalties.
The worst case scenario would be an all-out trade war where the U.S. and its trading partners impose tariffs and other barriers to trade upon one another at such levels that international trade plummets.
Throughout his campaign, president-elect Trump has made hyperbolic and controversial comments. Are his statements and threats on trade issues just more of the same? It could be all the tough talk is merely a negotiating tactic, but the response of Mexico or Canada to such threats is unknown and their capitulation to any demands made by the U.S. is not certain.
The devil is in the details and the details are still scarce. But what we do know about the proposed economic policies of the Trump administration suggest that economic growth should be significantly higher. If a trade war can be avoided, and I think it ultimately will, Florida and Central Florida could very well reap the benefits of a stronger economy.
Sean Snaith earned his M.A. and Ph.D. in Economics from Pennsylvania State University and is the Director of the UCF Institute for Economic Competitiveness, which is part of the College of Business Administration at the University of Central Florida. He is frequently interviewed and quoted nationally in The Wall Street Journal, USA Today, The New York Times, The Economist and CNNMoney.com and has appeared on CNBC and the Fox Business Network