Donald Trump has pulled off one of the unlikeliest upsets in the history of U.S. politics by capturing votes in the swing states and being elected President. One of the key questions that now looms for financial advisors and retirement savers is, how will the Trump Administration impact our businesses and bottom lines, not to mention the ability to save and plan for retirement? Trump has outlined a basic series of steps that he would like to take to overhaul the tax code and make other changes while leaving Social Security and Medicare untouched. Both his stated domestic and foreign policies promise to impact the markets and the economy in several respects.
Trump’s plan to overhaul the tax code will start by reducing the number of tax brackets from seven to three. Income up to $75,000 would be taxed at a rate of 12%, and income from $75,000 to $225,000 would be taxed at 25%. All income above that level would be taxed at 33%. Trump’s plan would effectively lower the tax rate for wealthy taxpayers by eliminating the 39.6% tax bracket. He would also raise the standard deduction for single filers to $15,000 and $30,000 for joint filers. A cap will be placed on itemized deductions of $100,000 for single filers and $200,000 for marrieds filing jointly. Trump has also promised to abolish the estate tax while retaining the mortgage interest deduction. And he would cap business taxes at 15% across the board. (For more, see: Donald Trump's Tax Plan: Who Will Love It?)
Merrill Matthews, resident scholar at the Institute for Policy Innovation, a conservative-leaning think tank in Texas, told TheStreet.com that "His tax plan is one of the most dynamic and pro-growth tax plans out there. You would find a huge amount of new business investment and companies willing to put their money out there to begin growing the economy." The Tax Foundation has calculated that Trump’s tax plan will cut taxes by nearly $12 trillion over the next decade and cause GDP to grow by 11%. Wages would rise by 6.5% and capital stock would rise by a whopping 29%. In addition, 5.3 million new jobs would be created. However, Trump’s tax plan will cost the federal government heavily, as revenues are drastically reduced and the federal budget deficit would increase enormously.
Trump’s plan for families begins with a guaranteed paid leave from work for families, and parents with up to four kids will be able to deduct the cost of raising them, which could provide a huge tax break. Trump also provides a break for taxpayers with incomes that are too low for them to owe any tax by raising the Earned Income Tax Credit to "half of the payroll taxes paid by the lower-earning parent. The income limits for this credit will be $31,200 for single taxpayers and $62,400 for joint filers. Trump will also institute savings accounts that would be used to pay for dependent care. Taxpayers could contribute up to $2,000 a year into them and contributions would grow tax-deferred. Account balances could be rolled over and used for higher education expenses when the child turns 18. The annual limit on the business tax credit for child care that employers offer at their workplaces would also be raised from $150,000 to $500,000. (For more, see: Donald Trump Economic Policies.)
Trump’s plan to deal with illegal immigrants will have a substantial impact on the agricultural sector. Farm income could decrease substantially, which in turn would lead to a rise in food prices. Companies that market to immigrants would see a drop in income as well, which could lead to fewer jobs and higher prices.
The markets may also become more volatile as a result of Trump’s election, at least until it becomes clearer what he will be able to do and the initial impact of his policies are felt. The markets had a violent initial reaction to his victory in Tuesday night trading, but had largely equalized by the time they began their morning trading. Trump’s manner of making off-the-cuff remarks may also roil the markets on a regular basis as they react to his comments. The huge budget deficit that will likely result from Trump’s tax plan may also have a negative impact on the markets as creditors demand higher interest rates on their debt securities.
Doug Holtz-Eakin, the president of the American Action Forum and chief economic policy adviser to Sen. John McCain's 2008 presidential campaign stated, "I can't imagine markets would react well to it. I can't imagine global investors looking to relocate will look on a United States that is driving deliberately over a fiscal cliff. Sending the U.S. into a debt spiral where you're borrowing interest on previous borrowing will generate a market reaction that will be far from benign and that will, I think, in the end overwhelm the beneficial effects."
Trump’s election could spell the end of the Department of Labor’s fiduciary rule that is scheduled to go into effect next April. He supports the Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act (CHOICE), which will block the DOL’s fiduciary rule until the SEC has had a chance to come up with its own version of this rule. The CHOICE Act will also repeal the Dodd-Frank Act. Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said “In my conversations with Mr. Trump, he and I share the view that Dodd-Frank has not led to economic growth in America, and we agree on” [the CHOICE Act].
Anthony Scaramucci, a managing partner of Skybridge Capital and an adviser in Trump’s campaign also told InvestmentNews, “We're going to repeal it [the DOL rule]. It could be the dumbest decision to come out of the U.S. government in the last 50 to 60 years. It's about like the Dred Scott decision. The left-leaning Department of Labor has made a decision to discriminate against a class of people who they deem to be adding no value. They are judging what should happen in a free market and attempting to put financial advisers out of work. When market forces cyclically adjust again, they will be having congressional hearings about how big the mistake was to do this.” (For more, see: Can Trump Roll Back the Fiduciary Rule?)
Although Trump has stated that he will take measures to strengthen Social Security, he has yet to directly address retirement saving, although his economic policies may likely result in substantial growth in investment portfolios, despite the misgivings of the markets regarding him. What is clear is that adjustments need to be made to Social Security to preserve the program, and Medicare will need larger, more complex structural changes amid quickly rising costs to preserve it. Time will tell what Trump is ultimately able to accomplish and the impact that it will have on the economy.