Trump’s Bold Tax Cuts and Deregulation Strategy: Economic Growth on the Horizon, But at What Price?

As voters cast their ballots this year, economic concerns dominated discussions. The implications of Donald Trump’s potential return to the White House, coupled with increased Republican influence in Congress, raises vital questions about the future of the U.S. economy.

Throughout the election cycle, I scrutinized each candidate’s economic proposals. Two areas hold particular promise for fostering economic growth over the next four years. However, there are also significant costs associated with these changes.

The first significant area is tax policy. Most provisions of the Tax Cuts and Jobs Act of 2017 are set to expire by the end of 2025. If Congress fails to extend these measures, households could face a staggering tax increase—estimated at around $4 trillion through 2034. This would compound the challenges posed by recent high inflation, affecting many American families and likely contributing to Trump’s electoral success.

By extending the individual income tax cuts, marginal tax rates would remain stable. This approach is expected to increase economic output in the long run. Lower taxes generally boost demand for goods and services and provide incentives for work, savings, and investments. Consequently, this could lead to more job creation, enhanced productivity, and greater entrepreneurial activity.

Moreover, the original tax law simplified the tax process by doubling the standard deduction and increased fairness through enhancements like raising the child tax credit. As these provisions are set to expire, they would disproportionately affect lower- and middle-income households by increasing their tax burdens. Given Trump’s role in instituting this legislation, it seems plausible that he would advocate for its extension, particularly with Republican support in Congress.

Another key aspect to consider involves regulatory reforms aimed at stimulating business innovation and productivity. Many anticipated changes correlate with the 2017 tax law, including two crucial provisions scheduled to expire soon: the 20% small-business deduction and immediate expensing for essential equipment like computers and manufacturing tools.

The potential impact of the small-business deduction is noteworthy, having reportedly added 1.2 million jobs annually. Moreover, allowing businesses to fully expense equipment costs has been linked to a 5% increase in long-term economic output. If these measures do not continue, small businesses may struggle to compete, subsequently curtailing job creation.

Additionally, the 2017 tax law inadvertently raised taxes on companies by mandating that research and development expenditures be amortized over five years. Trump has signaled that he would prefer immediate expensing for R&D costs, which could further boost economic activity.

During Trump’s initial term, regulatory reform was a cornerstone of his administration, resulting in a lighter regulatory burden compared to previous administrations. Ongoing challenges posed by excessive regulations continue to stifle the economy. Trump’s intention to further reduce red tape could foster significant growth, especially as advancements in artificial intelligence promise to enhance productivity.

However, pursuing these tax cuts is not without its challenges. The extension of these cuts could exacerbate an already concerning national debt, which has surged from $10 trillion to over $35 trillion in the last two decades. Projections by the Congressional Budget Office indicate a potential increase of debt as a share of GDP from 99% in 2024 to 166% by 2054.

To mitigate revenue losses from tax cuts, reforming the tax code is essential. Yet, without corresponding spending cuts, the national deficit and debt could reach alarming levels, complicating fiscal governance. Trump could utilize the onset of a new administration to initiate a bipartisan fiscal commission aimed at establishing sustainable policy solutions.