Businessman and reality television personality Donald Trump became the Republican Party’s presidential nominee on 19 July 2016 and has subsequently become the 45th President of the United States of America following a long, drawn out and politically bruising campaign.
President Donald Trump’s fiscal plan throughout his campaign focused on one key number: $5.3 trillion. That’s the debt he is projected to add to the US Government’s current $19 trillion in the next ten years. However you view this figure, one thing is for certain: it indicates why his policies are likely to get more of a response from the markets going forward.
Generosity may not be an attribute frequently attributed to President Trump, but – at least from a tax perspective – it is a key part of his strategy.
Income tax rates in the US are currently split into seven brackets, ranging from 10% to 39.6%. President Trump’s plan is change this to three, in turn eliminating 75 million households from paying anything at all, and demanding a maximum of 25% from the highest earners. By creating a more generous system, he claims, domestic investment will increase and tax avoidance will fall – which could see an indirect boost to both the dollar and major indices.
By halving corporation taxes, he is making a distinct effort to encourage American companies, who are withholding an estimated $2 trillion in profits overseas, to keep their operations at home. Reducing their taxes could give certain corporations’ values a shot in the arm, and in turn lead to higher stock prices – particularly for those companies not currently favoured under current tax laws.
Gaping tax hole
By cutting taxes so dramatically, President Trump is opening up a gaping tax hole in the short term, which significant cuts in the budget would be required to fill. But even his proposals to scale back federal programmes, sell off government assets and cut out ‘waste, fraud and abuse’ are at best a fractional measure – if he can implement them. Meanwhile, he has so far been unwilling to revisit entitlement costs such as social security and Medicare – by far and away the biggest drains on the budget. As such, his current fiscal policies would send the national debt spiralling out of control.
Stringent trade tariffs
Markets may have cause for concern elsewhere, too. President Trump’s threats of stringent trade tariffs on Mexico and China (35% and 45% respectively) are bound to follow him, despite his political advisors’ efforts to rectify his presidential image. At best, his bravado is likely to negatively colour foreign relations with key trading partners. At worst, he could be paving the way for a full-blown trade war.
Among the many policies that make traders nervous about President Trump, this is the one that is likely to be at the forefront of their minds. While his domestic policy is bound to change, the damage done by his readiness to antagonise – to domestic investment, to companies’ bottom lines and to the greenback as a whole – may be irreversible.