Focuses in the Trump 2.0 Administration
Washington Policy Research
President Trump’s second administration is moving at an accelerated pace on many fronts. Having already served one term and then been out of office for four years, the president and his team have a plan and are focused on what they want to accomplish. Amidst all of the noise in DC, we present three key themes to help frame the priorities of the new administration.
Trump proposes tariff increases to secure policy changes.
Tariffs are an important part of President Trump’s agenda. He uses tariff threats to secure policy changes from other countries and to send a message to the world that he is serious about what he wants to accomplish. It is important to distinguish between tariffs on China and tariffs on the rest of the world. Trump does want to move supply chains out of China and reduce U.S. reliance on Chinese goods. Notably, additional 10% tariffs have been imposed on China, but other countries have thus far been able to negotiate deals to avoid tariffs (Canada, Mexico, Colombia). Still, the tariff risk has not dissipated. Trump has issued a presidential memorandum to set in place reciprocal tariffs on other countries based on their barriers to U.S. trade. He also issued an executive order on his first day in office directing his team to look at various trade issues and to make recommendations for how to address them by April 1. As a result, we expect more trade actions to come from the administration after April 1.
Trump and Republicans in Congress want to cut spending to get back to pre-pandemic levels.
Federal spending spiked during the COVID-19 pandemic to 35% of GDP and, despite a considerable drop as the pandemic subsided, the U.S. is currently spending 3.9 percentage points higher than our long-term average (going back to 1960). To reduce the budget deficit and get back to the pre-pandemic trend, the Trump administration and Republicans in Congress are focused on cutting spending. This ties into the work the Department of Government Efficiency (DOGE) is doing, efforts to reduce the federal workforce, and efforts to reduce spending across federal agencies.
Offsets are needed to extend the 2017 tax cuts.
One of Trump’s key priorities is to extend the tax cuts enacted as part of the 2017 Tax Cuts and Jobs Act that are expiring at the end of 2025. Those tax cut extensions will cost $4 trillion over 10 years to extend. Congress is also looking to enact Trump’s campaign promises to end taxes on tips and to lower the corporate tax rate for domestic manufacturers to 15%, which will add to the cost of the bill. Allowing for a large deficit increase related to tax cuts without providing offsets would lead to a negative reaction from the bond market. Instead, payfors will need to be included, which will include spending cuts as well as some tax increases, such as an increase in the 1% buyback tax and an increase in the tax on private universities’ endowments. Congress is also likely going to have to pare back the number of years that the tax cuts are extended for (e.g. from 10 to 5) in order to reduce the cost. Congress is at the beginning of this process and we will be watching this debate closely as it evolves and moves forward – check out our 2025 tax themes piece from January here.
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