More Tax Cuts? How Trump Could Seek a Stronger Economy in 2020
Author: Greg Valliere
July 10, 2019
WE BEGIN WITH THIS PREMISE: Donald Trump will do virtually anything to get the economy booming ahead of the 2020 election. We have talked with Republican strategists who are convinced that winning another four years has become an obsession for him. “You can’t indict a sitting president — don’t think he’s not aware of that,” says one GOP veteran.
WITH THE ECONOMY PRESENTLY in mediocre territory — GDP growth probably didn’t exceed 2% in the second quarter — we think Trump will consider all options to goose growth:
TAX CUTS: Maybe there’s only a two or three quarter “sugar high” from tax cuts, but we think Trump will go to this well once again in 2020. At the least, we think he will insist on making his 2018 tax cuts permanent for individuals; many of these tax breaks expire in 2025 (although most of the corporate tax cuts are permanent). Making the individual tax cuts permanent could be a major Trump rallying cry, starting with his State of the Union address in January.
BUT HE COULD GO BEYOND THAT: Trump is addicted to the polls, which show that most Americans believe his tax cuts only benefited the wealthy and big corporations. So what a perfect time to call for new tax cuts aimed largely at the middle class? (Perhaps he might throw in the indexation of capital gains, which would benefit the rich.) A big package of tax cuts, lowering the top rates in all brackets, could make political sense, because the Democrats already have conceded that they need higher taxes to pay for their huge laundry list of new spending.
COULD TRUMP GET TAX CUTS THROUGH THE HOUSE? Probably not, but the Senate does virtually everything Trump wants. Suppose his proposed tax cuts next year really do focus on middle class rates — he would demonize House progressives for blocking lower rates for their constituents, and some moderate Democrats in close 2020 races might consider a deal.
TRUMP WILL WEIGH OTHER OPTIONS: We think he will back away from fiscal restraint, which many Republican deficit hawks favor; more spending helps the economy in the short run, and we expect plenty more, starting with defense. And we don’t rule out an infrastructure bill — not this year, but it’s a perfect pitch for an election year.
SEEKING A WEAKER DOLLAR: We believe Trump will ratchet up the pressure for a weaker dollar, which he believes would help U.S.exporters. At the least, he will jawbone for a weak dollar; at the most, he might demand that the Treasury Department intervenes to lower the dollar, especially against countries that Trump believes are manipulating their currencies. The key to a weak dollar, of course, is Fed policy.
WE’RE ON RECORD AS PREDICTING that Trump will seek to fire or demote Fed Chairman Jerome Powell this winter. Powell is the perfect foil if the economy sputters, and we’re convinced that he won’t cut interest rates fast enough for Trump. Simply picking a new Fed chairman is not enough to sway the FOMC, of course, but Trump will have an excuse if GDP isn’t growing by 3% next summer.
ENDING THE TARIFF WARS would be another plus for the economy, so we think there’s a good chance Trump will agree to a deal with China sometime this winter. Regardless of whether it’s a strong deal, the easing of business uncertainty on tariffs would remove an economic headwind — probably good for several hundred points in the stock market.
ON THE OTHER BIG GEOPOLITICAL ISSUE — confronting adversaries like Iran, North Korea, and Venezuela — Trump will talk tough but refrain from military action; the last thing he wants heading into an election is public anxiety over another foreign war.
THERE ARE OTHER ISSUES THAT AREN’T DIRECTLY LINKED TO THE ECONOMY: Trump will push hard to keep the U.S. judiciary moving rightward; he undoubtedly would love another Supreme Court vacancy. He will boast that arrests at the U.S. border with Mexico are coming down, while he will continue to press for wall funding (he probably will get a little). And Trump will maintain his populist drumbeat against drug companies and the tech industry.
WILL THESE AND OTHER PROPOSALS BE ENOUGH for Trump to win re-election? It’s too early to tell. But we’re convinced that Trump will throw everything but the kitchen sink at the economy, and he clearly controls the news cycle. The key in 2020 may be whether the Democrats will be able to sell a credible economic plan of their own — and on that score, the jury is still out.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI is registered as a portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.
