The sequel

What a second Trump term could mean for the U.S. economy.

In his victory speech on Nov. 6, 2024, Pres.-elect Donald Trump strongly declared, “I will not rest until we have delivered the strong, safe, and prosperous America that our children deserve and that you deserve.” His second presidency “will truly be the golden age of America…” This raises the question: Does a second Trump presidency necessarily mean good news for the U.S. economy? That answer largely depends on how his policies deal with the mounting U.S. debt.  

At $36 trillion and rising, federal debt currently exceeds the entire value of the U.S. economy, or Gross Domestic Product (GDP). Even after removing debt the government owes itself, debt held by the public stands at $28 trillion, or 99 percent of GDP. Despite these shocking numbers, neither Vice Pres. Kamala Harris nor Trump talked about how they planned to deal with the issue during their campaigns. One reason is because both campaigns offered proposals that would add to the deficit. A more concerning explanation is that the growing debt is not a concerning issue, which is a mistake. Growing debt is perhaps the biggest fiscal risk facing the federal budget and the U.S. economy. As the Congressional Budget Office (CBO) — a federal agency that provides analysis on budgetary issues to Congress — declared, rising debt “will slow economic growth, push up interest Growing debt is perhaps the biggest fiscal risk facing the federal budget and the U.S. economy. payments to foreign holders of U.S. debt” and “pose significant risks to the fiscal and economic outlook.”  

Deficit spending during the pandemic already overheated the economy, leading to the runaway inflation that hurt American households in 2022. To curb inflation, the Federal Reserve Bank raised interest rates, making borrowing expensive for individuals, families, and businesses. Thanks to out-of-control borrowing and rising interest rates, spending on interest payments reached $882 billion in the 2024 fiscal year. This is more than what the U.S. spent on each of Medicare, national defense, and Medicaid. In its June 2024 publication, the CBO projected that under current policies, debt held by the public will exceed $30 trillion or reach 122 percent of GDP by 2034. Annual deficits (which totaled $1.7 trillion and $1.8 trillion in 2023 and 2024, respectively) will persist, reaching nearly $3 trillion or seven percent of GDP in 2034. Spending on interest payments will reach over $1 trillion — or cost over $6,000 per taxpayer — for the first time in history in the 2025 fiscal year and continue to grow, potentially reaching $1.7 trillion by 2034.  

American taxpayers are sending thousands of dollars every year to Washington, D.C. not for education, health care, or infrastructure, but to pay U.S. debt holders. Unfortunately, some of the promises Trump mentioned during the campaign trail will worsen the debt problem.  

At the core of Trump’s fiscal agenda are two key policies: tax cuts and tariffs. In his first term, Trump successfully passed the Tax Cuts and Jobs Act of 2017 (TCJA) through Congress. The TCJA — or the Trump tax cuts — lowered individual income tax rates across the board, reduced the corporate income tax, doubled the standard deduction, and made the child tax credit more generous. Alongside these reforms between 2018 and 2019, Trump introduced and accelerated tariffs on numerous goods from China and imposed tariffs on steel and aluminum from most parts of the world (some of these tariffs were later lifted).  

While most of the corporate income changes to the TCJA were permanent, the individual income tax changes and a few corporate tax changes are scheduled to expire in 2025. For his second term, Trump has proposed to make those temporary changes permanent. He has also suggested exempting tips, overtime pay, and Social Security benefits from the federal income tax. To offset the potential revenue loss, he proposed a 10 to 20 percent tariff on all imports, as well as a 60 to 100 percent tariff on imports from China. Another proposal — though not as loudly proclaimed — is to eliminate income taxes and replace them with tariffs. 

Tax cuts have significant benefits such as spurring investment and economic growth. The TCJA, for example, is credited with contributing to the economic boom that raised median household incomes to a record high in 2019 and lowered unemployment and poverty to historic lows. These gains came with a trade-off, however, as the TCJA also raised the federal deficit. In comparable fashion, Trump’s proposed tax cuts for his second term have no corresponding spending reduction. As a result, studies estimate that these policies could cause debt to rise even more rapidly than if current policies are left unchanged. Although tariffs might recoup some lost revenue, they could also raise consumer prices and contract the U.S. economy. 

The CBO estimates that permanently extending TCJA’s individual income tax provisions could add $3.7 trillion to the deficit between 2025 and 2034. A study by the Tax Foundation, a policy organization based in Washington, D.C., estimates that taken together, major Trump tax proposals (including a 20 percent tariff) would add approximately $2.5 trillion to the deficit between 2025 and 2034. In addition to raising prices, tariffs would also lower total national income and “offset more than two-thirds of the long-run economic benefit of his (Trump’s) proposed tax cuts.”  

Without including revenue from tariffs, the Penn Wharton model at the University of Pennsylvania estimates that extending the Trump tax cuts and exempting Social Security benefits from the federal income tax would increase the deficit by $4.1 trillion between 2025 and 2034 and shrink the economy starting in 2034 as rising debt crowds out private saving and investment. Analysis by the Committee for a Responsible Federal Budget, which does not consider the impact of tax cuts, estimates that Trump’s tax plans, and other policies such as deporting immigrants, would push debt to 142 percent of GDP by 2035, instead of 125 percent of GDP under current policies. 

If Trump aims to lead America into a new era of prosperity, he must focus on policies that balance tax cuts with reductions in government spending. Relying on tariffs will likely only raise prices — especially for low-income families — while potentially stunting economic growth, slashing jobs, and lowering household incomes.