In less than one hundred days, President Joe Biden will leave office, passing the baton to President-elect Donald Trump, who will reassume control of the presidency with Republicans in charge of both chambers of Congress. This governmental trifecta means the incoming Trump administration will have a significant amount of power with which to enact their economic agenda — an agenda that could both raise prices and increase deficits.
During his campaign, Trump repeatedly mentioned repealing the income tax and replacing it with tariffs. As the Daily has covered, this idea fails basic economic theory: Importers cover the cost of high tariffs by passing the costs to consumers, raising the price of imported goods for all consumers. There is an argument that tariffs can benefit American manufacturing, but even this is unclear, as tariffs raise the cost of raw inputs needed for manufacturing. Economists have found that steel and aluminium tariffs during Trump’s first term did not help the American manufacturing industry as a whole. Furthermore, an analysis by the Peterson Institute of International Economics has found that no tariff, even one that is extremely high, can generate enough revenue to replace the income tax. Thus, if tariffs are put into place, not only would the price of imported goods rise, but deficits would rise as tariffs fail to cover the lost revenue of the scrapped income tax.
Another one of Trump’s signature policies is mass deportation; mentioned in nearly every campaign speech and the presidential debate, Trump recently stated that he plans to declare a national emergency and use the U.S. military to enact the mass deportation of millions of undocumented immigrants. However, if this sweeping policy is enacted, it would have real, negative economic consequences.
First, mass deportation would increase the deficit, costing the federal government $315 billion according to one estimate by the American Immigration Council. The AIC also estimates that deporting all undocumented immigrants would cost nearly $1 trillion over 10 years. Additionally, many undocumented immigrants pay taxes, hoping to eventually gain citizenship: In 2022 alone, undocumented immigrants paid over $75 billion in taxes, revenue which the government would be deprived of by deportations. Second, mass deportation would exacerbate inflation. While undocumented immigrants contribute to demand, they are also an essential part of the workforce, and deporting them would cause labor supply shocks that would drive up prices. Finally, as noted by The Brookings Institution, many jobs filled by undocumented immigrants are complementary to jobs held by Americans — meaning they create jobs for Americans by supporting the base functioning of industries — not supplementary jobs that would otherwise be held by Americans. This means these deportations could actually hurt American workers.
Finally, Trump has also promised to cut taxes. While this is sensible during a recession to encourage consumer spending or create jobs, the economy is growing and inflation remains above the Federal Reserve’s target of 2.0% as of publication; cutting taxes could cause inflation to rise once again. More importantly, tax cuts could add to the national debt. This is concerning, because the national debt is already out of control: Debt owed by the public sits at $28 trillion or approximately 99% of the GDP — a historically high debt-to-GDP ratio. The government must pay interest on this debt each year; in 2024, this interest payment sits at $892 billion, higher than spending on defense by more than $50 billion. This represents 13% of federal spending, up from 7% in 2017. As the debt grows, interest payments will continue to rise, making it harder to spend money on sectors like infrastructure and to sustain spending for social services. Therefore, any presidential administration should attempt to reduce the national debt, not enact policies like tax cuts that increase it.
Truthfully, we do not know what the future holds. Though many of the economic policies Trump has discussed fail to stand up to rigorous economic scrutiny, it is unclear if any of them will be enacted, even in a Republican-controlled Congress. Trump ran on repealing Obamacare in 2016, but he was unable to do so during his first term, despite a Republican Congress. Furthermore, Trump’s appointees have directionally identified real economic problems. For example, Vivek Ramaswamy and Elon Musk seem to recognize the deficit is too high and austerity is needed, though their plans for deficit reduction have been critiqued.
Trump is inheriting a strong economy: The economy is growing, unemployment is low and inflation is under 3%, albeit above the Federal Reserve’s 2% target. Furthermore, the amount of control presidents have over the economy, to either improve or harm it, is often overstated. A future in which unemployment and inflation remain low, and robust economic growth continues throughout the Trump presidency is very possible. We must simply hope that Trump will govern in a way that brings this future to fruition.
