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

Voters' frustration with their economic lives was crucial to Donald Trump's second term. Now it's up to Trump to try to change that course and make good on his sweeping promises of economic revival.

Trump will inherit an economy that is already on relatively solid foundations. Inflation has slowed and wages have begun to keep pace with higher prices. Even though companies are no longer hiring as quickly as they did after the pandemic, the job market remains strong by historical standards, with low unemployment and about one job open 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 key concerns by voters in the run-up to the election. Housing costs have been a major pressure point on household budgets after rents rose an average of 24% over the past four years and buying a home was out of reach for many households as mortgage rates topped 6%. Food is another rising expense: The average cost of food has risen 22% in the last four years and the number of people seeking help from food banks is at record levels.

Trump has offered a wide range of proposals that he says would improve America's financial situation, many of which will require action from Congress, where Republicans control the Senate and hope to control the House. Trump's economic plans include deporting millions of immigrants, imposing sweeping tariffs on all goods entering the U.S., boosting oil production, cutting corporate taxes and eliminating taxes on Social Security income and tips.

Some of these proposals could impact the economy as follows:

Tariffs

While inflation has been a top issue for voters, one of Trump's central campaign promises – imposing tariffs on all goods imported into the US – would likely raise prices and cost workers their jobs, say economists, business groups and even some Trump- Allies. Trump has rejected these claims.

“To me, the best word in the dictionary is 'tariff,'” Trump said during his speech at the Chicago Economic Club. “It’s my favorite word. It needs a PR firm.”

Under Trump's proposal, the U.S. would impose a tariff of at least 10% on all goods imported into the U.S. from overseas and a 60% tariff on products imported from China. The tariffs are paid to the federal government by the company that imports those goods, such as a retailer or manufacturer. These companies can either pass the costs on to consumers through price increases or absorb the costs and take a smaller profit.

If past tariffs are any indication, consumers will likely see higher prices. Not only do companies often pass on the increase, competitors who are not subject to the tariff also often increase their prices. Companies like AutoZone and Black & Decker have already warned investors that they will raise prices if Trump follows through on his tariff proposal. Tariffs imposed 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 by the National Bureau of Economic Research.

In the shoe industry, consumers and retailers were hit by a 7.5 percent tariff that Trump imposed in 2019 on hundreds of millions of shoes imported from China. While some retailers absorbed the cost of these tariffs, cutting into their profits, others passed the fee on to consumers by raising the prices of their shoes, said Matt Priest, head of the Footwear Distributors and Retailers of America

“We can confirm that charging us more to deliver a product makes it more expensive for the consumer to purchase 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, creating jobs and increasing sales for U.S. producers.

However, multiple studies, including of Trump's previous tariffs and previous rounds of tariffs under various administrations, found that rising tariffs neither resulted in significant relocation of businesses to the U.S. nor created jobs for domestic producers. Rather, according to a Federal Reserve Board study, Trump's tariffs on steel and aluminum in 2018 led to a decline in manufacturing employment because of higher costs for companies that use steel and aluminum in their products.

For shoe manufacturers, Trump's 2019 tariffs did not result in companies moving production to the U.S. due to high labor costs and a lack of U.S. supply chains and materials, Priest said. He said he didn't think another round of tariffs from Trump would change that calculus.

“Its higher labor costs, a lack of labor interest in making shoes, a lack of materials and material suppliers here in the States,” Priest said of moving shoe production to the United States. “You can raise tariffs to 200% on imports, and” it still won’t happen. It’s just not competitively priced.”

inflation

Trump has vowed to “defeat” inflation, although the rate of price increases has already returned to the historical norm of 2% to 3% in recent months after peaking in 2022. But prices for many essential goods are still well above their pre-pandemic levels.

To reduce housing costs, Trump said he would allow homes to be built on federally protected land, which could help increase the supply of homes in places like Nevada and Arizona. He has also announced plans to cut regulations for developers, although many housing construction regulations are set at the state and local levels. He said he would encourage home ownership through tax incentives, but his campaign gave no specifics on what those incentives would look like.

Trump has said he would cut overall costs by cutting energy prices by 50% in his first year in office, something industry experts say is unlikely. To achieve that, Trump said he would allow oil companies to drill in more places, such as on federal lands in Alaska, and remove barriers to speeding up production.

Oil producers are already pumping record amounts of oil in the U.S. and are constrained by labor and infrastructure constraints in the amount they can drill. Companies are also not incentivized to flood the market with too much oil, as this would drive down the price and they would potentially lose money on each barrel produced. Oil prices are also driven 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 said he would carry out “the largest deportation in our country's history” of undocumented immigrants, claiming it would help the economy by freeing up housing and creating jobs for U.S. citizens.

But business groups have warned that deporting millions of immigrants could create a labor shortage that would ultimately drive up prices, particularly in sectors such as food production and housing where immigrants make up a significant portion of the workforce.

In the construction industry, which already faces a shortage 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 Pew Research Center data provided to NBC News.

Jim Tobin, CEO of the National Association of Home Builders, told NBC News last month that a massive deportation of immigrants would “hurt 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 collapsed following the Great Recession. As homebuilders have increased construction of single-family homes and apartment buildings in recent years, they have faced higher labor and material costs, further driving up home prices.

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

Steer

Trump has proposed a series of tax cuts, including a complete elimination of the federal income tax. However, the likelihood of these plans being implemented varies, as Congress would have to pass legislation to change the tax system. While some of the plans are light on details and there are many variables as to how his proposals would be implemented, economists at the University of Pennsylvania estimate that Trump's tax and spending plans would add $4.1 trillion to the deficit, given the The impact they would have on the overall economy is taken into account.

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

Trump has proposed cutting the corporate tax rate even further, to 15%.

One of Trump's more consistent campaign promises was to eliminate the tip tax, which could affect about 2.5% of workers who receive tips as part of their income. However, there could be significant disruption to worker pay if more industries switched to a tipping system, in which workers are paid a minimum wage and expected to derive the majority of their income tax-free from tips. Even white-collar workers could implement a system where a portion of employees' income is classified as tips.

That could have devastating consequences for workers and consumers and reduce the amount of income taxes the federal government collects.

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

Abolishing a tax on social security 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.