What Trump’s election victory could mean for the economy and taxes

Voters’ frustration with their financial lives was central to getting Donald Trump a second term. Now it will be up to Trump to try to change that trajectory and deliver on his sweeping promises of economic revival.

Trump will inherit an economy that is already on relatively solid footing. Inflation has slowed and wages have begun to catch up with higher prices. Although companies are not hiring at the same breakneck pace as they were coming out of the pandemic, the labor market remains strong by historical standards, with low unemployment and about one job opening for every job seeker.

But despite signs of strength in the economy, the cost of living and general dissatisfaction with the economy were repeatedly cited as a top concern by voters heading into the election. Housing costs have put a huge strain on household budgets after rents have risen by an average of 24% over the past four years, and with mortgage interest rates above 6%, buying a home has been out of reach for many households. Food has been another rising expense, with the average cost of groceries a 22% increase over the past four years, and food banks have seen record numbers of people seeking help.

Trump has floated a slew of proposals he says will improve America’s economic picture, many of which would require action from Congress, where Republicans will control the Senate and hope to control the House. Among Trump’s economic plans are deporting millions of immigrants, imposing comprehensive tariffs on all goods entering the United States, encouraging more oil production, cutting corporate taxes and eliminating taxes on Social Security income and tips.

Here are the ways some of these proposals could play out on the economy:

Tariffs

Although inflation has been a top issue for voters, one of Trump’s central campaign promises — placing tariffs on all goods imported into the United States — would likely raise prices and cost workers their jobs, according to economists, business groups and even some Trump allies. Trump has denied these claims.

“To me, the most beautiful word in the dictionary is ‘tariff,'” Trump said during remarks at the Chicago Economic Club. “That’s my favorite word. It needs a PR firm.”

Under Trump’s proposal, the US would impose a tariff of at least 10% on all goods entering the US from abroad and a 60% tariff on products imported from China. Tariffs are paid to the federal government by the business that imports these goods, such as a retailer or manufacturer. These companies can either pass the cost on to consumers by raising prices or absorb the cost and take a smaller profit.

If past tariffs are any indication, consumers will likely see higher prices. Not only do the companies often pass on the increase, but competitors who are not subject to the tariff often raise prices as well. Companies including AutoZone and Black & Decker have already warned investors they will raise prices if Trump goes through with his tariff proposal. Tariffs enacted by Trump in 2018 and 2019 led to higher prices for a range of goods, including washing machines, handbags and tires, according to a study of the National Bureau of Economic Research.

In the shoe industry, consumers and retailers were hit by a 7.5% tariff Trump imposed in 2019 on hundreds of millions of shoes imported from China. While some retailers absorbed the cost of those tariffs and hit their bottom line, others passed the charge on to consumers by raising the prices of their shoes, said Matt Priest, head of Footwear Distributors and Retailers of America.

“We can attest that if you charge us more to bring in a product, it will cost more for the consumer to buy that product,” Priest said. “It’s kind of Econ 101.”

Trump has argued that imposing tariffs on goods from China would encourage companies to move their factories to the United States, which would create jobs and boost sales for American manufacturers.

But more investigations, including those into Trump’s past rates and previous rounds of tariffs under various administrations, found that rising tariffs did not lead to a significant number of companies moving to the United States, nor did it create jobs for domestic manufacturers. On the contrary, Trump’s 2018 tariffs on steel and aluminum led to a reduction in manufacturing employment due to higher costs for companies that use steel and aluminum in their products, according to a study by the Federal Reserve Board.

For shoemakers, Trump’s 2019 tariffs did not translate into any companies moving production to the United States because of the high labor costs and the lack of supply chain and materials in the state, Priest said. He said he doesn’t see another round of tariffs from Trump changing that calculus.

“Its higher labor costs, lack of labor interest in making shoes, lack of material and material suppliers here in the states,” Priest said of moving shoe production to the United States. it still won’t happen. It’s just not price competitive.”

Inflation

Trump has promised to “defeat” inflation, even though the rate at which prices are rising has already done so returned to its historical norm of 2% to 3% in recent months after peaking in 2022. But prices for many essential commodities are still well above their pre-pandemic levels.

To lower housing costs, Trump has said he would allow homes to be built on federally protected land, something that could help increase housing supply in places like Nevada and Arizona. He has also said he would cut regulations on builders, even though many regulations on housing are set at the state and local level. He has said he would promote homeownership through tax incentives, but his campaign has not been specific about what those incentives would be.

Trump has said he would lower costs overall by cutting energy prices by 50% during his first year in office, something industry experts have said is unlikely. To do this, Trump has said he would allow oil companies to drill in more places, such as on federal land in Alaska, and remove barriers to speed up production.

Oil producers are already pumping record levels of oil in the US and are limited in how much they can drill by labor and infrastructure limits. Companies are also barred from flooding the market with too much oil because that would depress the price, causing them to potentially lose money on every barrel they pump. Oil prices are also set by a global market, where other countries, such as Saudi Arabia or Russia, could cut production to drive up prices and maintain profitability.

Immigration

Trump has said he will carry out “the largest deportation in our country’s history” of undocumented immigrants, claiming it would help the economy by freeing up housing and opening jobs for American citizens.

Business groups have warned, however, that deporting millions of immigrants could create a labor shortage that would eventually drive up prices, especially in areas such as food production and housing, where immigrants make up a significant portion of the workforce.

In the construction industry, which is already facing a lack of hundreds of thousands of workers, there are an estimated 1.5 million undocumented workers, making up about 13% of the total workforce, according to data provided to NBC News by the Pew Research Center.

National Association of Home Builders CEO Jim Tobin told NBC News last month that a massive deportation of immigrants would be “harmful to the construction industry and our labor supply and exacerbate our housing affordability problems.”

NABH and other industry groups have said a key reason for higher housing costs in recent years has been a mismatch between supply and demand after housing construction slumped after the Great Recession. As home builders have increased construction of single-family homes and apartment buildings in recent years, they have faced higher costs for labor and materials, further increasing the price of housing.

Across the economy, a analysis by researchers at the University of New Hampshire found that a mass deportation of immigrants could reduce the U.S. economy, measured by gross domestic product, by as much as 6.2%, or about $1.7 trillion in lost productivity.

Taxes

Trump has proposed a series of tax cuts, including the complete elimination of the federal income tax. But these plans have varying likelihood of passage, as Congress would have to pass legislation to change the tax system. While some of the plans are thin on details and there are many variables as to how his proposals would pass, economists at the University of Pennsylvania estimate that Trump’s tax and spending plans would increase the deficit by $4.1 trillion when taking into account the effects they would have on the wider economy.

One of the most likely tax proposals to come to fruition would be an extension of the tax cuts passed under Trump’s first administration, which are set to expire in 2025. Those cuts lowered the corporate tax rate to 21% from 35%, reduced the individual income tax rates and increased the standard deduction.

Trump has suggested that he would lower the corporate tax rate even further, to 15%.

One of Trump’s more consistent campaign promises has been to eliminate taxes on tips, which could affect approx 2.5% of workers who receive tips as part of their income. But it could cause major disruptions in how workers are paid if more industries switched to a tipping system, where workers are paid a minimum wage and expected to get the majority of their income tax-free from tips. Even the white-collar industry could adopt a system where part of the employees’ income is classified as tips.

That could wreak havoc on workers and consumers and reduce the amount of income taxes the federal government brings in.

Trump has also said that the income seniors receive from Social Security should be tax-free. About 40% of Social Security recipients pay federal income tax, typically because they have other sources of income that raise them above a certain threshold where they are required to pay income tax, according to to the Social Security Administration.

Eliminating a Social Security tax would mean a loss of tax revenue for the federal government, which would then either increase the deficit or have to be offset by cuts.