Investing.com - More "market-friendly" elements of U.S. President Donald Trump’s policy agenda, such as corporate tax cuts and deregulation, are likely not going to be large enough to fully offset the impact of his sweeping tariff plans, according to analysts at Wolfe Research.
In a note to clients, the analysts said their estimates indicate that "the magnitude of the net tax cuts in the offing looks significantly smaller than what’s realistically on tap in terms of tariffs."
The net fiscal impulse from Trump’s tax plans could amount to 0.5% of gross domestic product (GDP) in 2025 and 0.4% of GDP in 2026, they added, noting that this would compare to "2%+ of GDP in tariffs that Trump could announce by next month."
"As a result, we wouldn’t necessarily expect that the tariff agenda will be entirely forgiven by markets once this tax bill is enacted," the analysts said.
Hopes for tax breaks and a looser regulatory environment helped to propel stocks higher following Trump’s election in November, but these gains have since been erased by uncertainty surrounding Trump’s drive to place levies on both friends and adversaries alike.
Investors have been particularly rattled by Trump’s on-and-off tariffs on traditional U.S. allies like Canada and Mexico, sparking threats of retaliation and exacerbating worries over a global trade war. More details on the levies are yet to come. Trump has vowed to impose a trade tax on autos beginning April 2 and roll out a broader agenda of reciprocal tariffs that would make the U.S. match all duties on U.S. goods imposed by other countries.
Many economists have argued that the levies could refuel inflationary pressures and weigh on broader economic growth. Trump and his officials have flagged that the economy could experience a "transition" phase due to the impact of the tariffs.
Meanwhile, after averting a government shutdown last weekend, Congressional Republicans now face a mid-year deadline to pass Trump’s tax plans before the U.S. Treasury exhausts its ability to pay its bills and the country slides into default.
Senate Republicans are now looking at ways to possibly fund an extension to Trump’s $4.6 trillion in 2017 tax cuts and other tax proposals, as well as a widespread deportations of unauthorized immigrants and increased military spending.
The GOP can keep these tax cuts from expiring after 2025 through a simple majority in Congress unlocked by a special legislative procedure known as budget reconciliation.
A Treasury report released during the final days of the Biden administration estimated that the average American would receive a 2.2% tax cut during the 2025 budget year should Trump’s tax cuts be extended. Although all income groups would stand to see an after-tax benefit, the richest Americans would get the biggest tax cuts, the Treasury said.