Now that the election is decided, consumers and business owners are wondering how Donald Trump’s proposed policy changes are going to affect them. Questions abound, from when changes will happen to what their effects will be on the economy. While business and politics don’t always mix well, here’s a roundup of several common questions and views from a lender’s perspective.
What changes are ahead?
On the campaign trail, Trump promised to focus on tax cuts, tariffs, and immigration reform if elected. He also showed support for cutting regulations and establishing a more lenient attitude toward antitrust issues. His plan for tariffs is to offset tax reductions by taxing goods and services outside the United States. He’s hoping this approach will promote foreign direct investment (FDI) by manufacturers from other countries – essentially forcing them to build products and services back into the United States with American workers to avoid tariffs. The U.S. has followed FDI strategy for the last 50 years, a position that has been an outlier among trading partners.
The potential effects of these policies along with expected interest rate reductions, if enacted, are a mixed bag. Merger and acquisition activity could get a boost, and jobs could be created by more onshoring of manufacturing to avoid tariffs. At the same time, prices for goods and services could go up, and decreased tax revenues could result in more government borrowing, both of which could weaken the economy.
How soon will new Trump policies go into effect?
A president cannot completely alter U.S. trade policy without the consent of Congress, but has significant statutory authority to raise tariffs. This means tariffs could happen fairly quickly after Trump’s inauguration.
Other policies, such as making the provisions of the 2017 Tax Cut and Jobs Act permanent, could take longer. The TCJA, which has been set to sunset at the end of 2025, would need congressional action to be extended or expanded. While passage is likely given Republican control of both houses of the legislature, the process will take time.
Changes in the regulatory environment will take longer to be felt. They are influenced by the cabinet members and other high-level appointees named by President-elect Trump. These positions must meet Senate approval, a process that can take months. With Republican control of the Senate, however, it is expected that most of Trump’s appointees face a relatively easy road to approval.
How will new policies affect taxes?
As part of making the TCJA permanent, Trump is pushing for a return to 100% bonus depreciation, which would allow businesses to write off 100% of many large expenditures as expenses in the year of purchase rather than depreciate them over several years. Trump also aims to restore research and development costs as expenses, rather than amortized capital expenditures.
In addition, corporate income taxes could also fall. Trump has called for decreasing the corporate income tax rate from 21% to 20%, or even lower for companies that manufacture in the U.S.
What about prices?
Nearly all economists agree that imposing tariffs will likely cause prices to rise, at least in the short term. Companies that import goods from abroad will have to pay the tariff, and that cost will likely be passed on to consumers. As many U.S. manufacturers use components built abroad, even the prices of many domestically manufactured goods are likely to be affected.
Increased prices are not the same as inflation, however. If the tariff rate stays the same year after year, its effect will be to cause a one-time increase in prices, but it will not change the overall slope of the inflation curve.
What does the future of interest rates look like?
In September 2024, the members of the Federal Reserve Board reported their median expectation was for cuts totaling 100 basis points in 2025. The Fed operates independently from the government, and there seems to be confidence that these reductions will happen with or without tax cuts.
It will take time for rate cuts to be felt by consumers and business borrowers. The wholesale price of money (what banks charge each other) is running about 4.75%, but retail borrowers (consumers and businesses) are still paying about 10%. Eventually, retail rates are expected to fall. As that happens, consumers will be more likely to spend on big-ticket purchases, and businesses that provide those items will benefit. It will also make it less expensive for businesses to borrow for expansions, upgrades, and M&A activities.
Closing thoughts
Much remains unknown about how the Trump presidency will play out and how many of his campaign trail promises will be put into effect. As a business owner, preparation for change is the single-best approach to navigating uncertain times. The pace of technological advancements and fluctuating economic conditions create an environment where businesses must be agile and proactive. Recognizing that change is inevitable and being ready for it are highly effective strategies for business success regardless of the political environment.
Rick Dennen is founder and CEO of Indianapolis-based Oak Street Funding, a First Financial Bank company, with customized loan products and services for specialty lines of business including certified public accountants, registered investment advisors and insurance agents nationwide.
