Trump! Impact the new administration could have on business

By Andy Busch, Political Economist and Contributing Author

How the new administration may impact your business in 2017.

On January 20, 2017, President-elect Donald J. Trump will be sworn into office and usher in a new relationship between government and business. Trump and his Cabinet nominees have vowed to reduce business taxes, reduce regulatory burdens and increase economic growth. Without question, this will be a major shift in priorities and could alter several policies away from the path set by the Obama presidency.

Here are the key business takeaways:

  • Congress is already in the process of creating a tax reform bill to reduce and simplify business taxes
  • President-elect Trump can immediately notify trade partners of his intent to renegotiate the North American Free Trade Agreement (NAFTA), pull-out of the Trans-Pacific Partnership (TPP) trade deal and end negotiations for the Transatlantic Trade and Investment Partnership (T-TIP)
  • President-elect Trump can act quickly to reduce regulatory burdens or red tape via executive order and by changing the leadership in the major regulatory agencies, but major regulations, like Dodd-Frank and Affordable Care Act (ACA, also known as Obamacare), will need Congressional action

Below is an overview of the specific targeted areas and key players involved. There is a potential for some of the president-elect's nominees to be delayed over necessary paperwork. This could translate into a slower deregulatory environment, but the change in direction is clear. However, I believe this will usher in a new, friendly business environment overall and lead to reduced compliance costs, increased profits and a stronger economic environment. Given the U.S. economy is expected to grow in at a 2 to 2.5 percent rate for 2017, these tax and regulatory changes can have a significant impact on growth and interest rates over the next year.

The chart below reflects the market optimism to President-elect Trump's victory, as stocks have rallied significantly since Nov. 8, 2015.

S&P 500 Large Cap Index


Key Issues

Tax reform. President-elect Trump has outlined a plan to cut the nominal corporate tax rate from 35 percent to 15 percent. For pass-through entities like subchapter S corporations or LLCs, his plan limits the tax rate to 15 percent from 39.6 percent (top tax rate). On international taxes and to eliminate incentives for inversions, he has a one-time 10 percent tax on all foreign profits currently held overseas, which are estimated to be over $2.3 trillion. Lastly, he wants to eliminate all other corporation tax expenditures or breaks, eliminate the corporate Alternative Minimum Tax and substantially reduce the deductibility of interest expenses from debt. These items sync closely with U.S. Speaker of the House Paul Ryan’s plans to simplify the U.S. tax code and reduce the overall business tax burden.

Why does this matter for business? There will be winners and losers from tax reform. Overall, the tax burden on businesses large and small will be reduced and streamlined. This is a major shift from the Obama administration and a major positive for economic growth. Yet, there will likely be losses of tax breaks for things like deductibility of debt costs and potentially added burdens for importers (border/destination adjustments). Similar to 1980s tax reform under President Ronald Reagan, we can expect a great deal of political horse trading to be done prior to producing a final bill. For the economy, this has the potential to significantly increase economic growth and profitability for U.S. business. In turn, this may cause the Federal Reserve to raise interest rates faster and raise the value of the U.S. dollar.

Trade. President-elect Trump repeatedly criticized U.S. free trade agreements like NAFTA and TPP. He has threatened to impose 35 percent tariffs on goods coming in from Mexico and has continued to tweet out criticism to Ford, GM and Toyota over moving plants south of the border. President-elect Trump has threatened to put 45 percent tariffs on China and sent tweets out over the unbalanced nature of the Chinese-U.S. trade relationship. Lastly, he has mentioned a willingness to pull out of the World Trade Organization (WTO) and 20 current free trade agreements.

Why does this matter for business? International trade is a cornerstone for the U.S. economy. Since the recovery began, U.S. real GDP is up 2.3 percent at an annual rate, and exports have contributed one-third (0.7 percent) to this growth (USTR). Also, approximately three quarters of the world’s purchasing power, and over 95 percent of world consumers, are outside of America’s borders. If President-elect Trump were to follow through on his comments over free trade and tariffs, the U.S. could be involved in a trade war. Per the Peterson Institute for International Economics, this would plunge the U.S. economy into recession and cost more than 4 million private sector American jobs. “…export-dependent US industries that manufacture machinery used to create capital goods in the information technology, aerospace, and engineering sectors would be the most severely affected. But the shock resulting from Trump’s proposed trade sanctions would also damage sectors not engaged directly in trade, such as wholesale and retail distribution, restaurants, and temporary employment agencies, particularly in regions where the most heavily affected goods are produced.” While President-elect Trump’s tweets are disconcerting for the specific companies involved and for overall international trade, the 140-character announcements could be simply part of his opening negotiations with both multinational corporations and foreign nations over plant locations and trade.

Regulations. During the Obama administration, regulations are estimated to have cost $743 billion and required 11.5 billion in work hours. To put the last number into perspective, Homo sapiens have been in existence less time. Below is a chart of mega rules (costing greater than $100 million) since 2001.

Total Billion Dollar Rules 

Source: AAF

President-elect Trump has pledged to reduce the regulatory burden on U.S. business. During his acceptance speech for the Republican nomination for president, he said, “We are going to deal with the issue of regulation, one of the greatest job-killers of them all. Excessive regulation is costing our country as much as $2 trillion a year, and we will end it very, very quickly.” He vowed to replace the Affordable Care Act, to dismantle Dodd-Frank regulations and to lift restrictions on the production of American energy. As of tomorrow, he can declare a moratorium on all new regulations like what President George H.W. Bush (41) and President George W. Bush (43) did.

Why does this matter for business? Over the last eight years, the regulatory burden has increased significantly for U.S. business, increased costs of compliance and reduced profitability. The shift in policy will help begin the process to stop or reverse the current regulatory course. This will not likely be accomplished as quickly as many hope given the complexity of regulations and how many regulations have been already adopted by major agencies. Also, there will likely be uncertainty created over removing the current regulations and transitioning into new or reduced regulations (Example – ACA: repeal and replace?). Make no mistake, this is a radical shift in relations between government and business. It has the potential to increase economic activity, increase job growth and increase profitability.

 

The views and opinions expressed in this article are solely those of the author and do not represent the view of MB Financial, its Board of Directors, employees or shareholders.