The Economy, Taxes, Tariffs and Debt
“We’re gonna win this one.
Take the country by storm.
We’re gonna be elected.
You and me together, young and strong.
We’re gonna be elected.
Elected. Elected.
Respected. Selected.
Call collected.
I wanna be elected.”
Donald J. Trump has opened about a 10 front war against the forces of Neo-Marxism within the United States and without. None of these will be easy fights. But some are more perfunctory, like cleaning out the rot within the federal government and closing the borders. Ending Joe Biden’s two wars will be difficult because of the foreign leaders involved. But the deal-maker-in-chief is particularly well positioned to do both.
More difficult, in my opinion, will be the economic side of things. That is because some of the aspirations of Mr. Trump in this regard could trigger consequences which are contrary to other objectives of his administration. Let’s take a look at some of the challenges here.
But first, I probably should have used this week’s song before the election. I haven’t necessarily been looking at Arizona native Alice Cooper’s lyrics since “I Love the Dead” just doesn’t seem to fit with much that I write. I just feel that the strong message in this great song of we are going to win, fits the zeitgeist of Trump world right now. OK, back to the meaty stuff.
Economy: There have basically been three things that have held up the U.S. economy in the last year. The $2 Trillion deficit plus Treasury’s pumping tons of liquidity into the financial system has been very stimulative. Secondly, the AI hype and spending has generated a lot of investment activity. Finally, people with assets that have appreciated greatly in the last five years (stocks, homes, crypto, gold, interest rates) have been spending that new wealth.
However, all three of these inputs are slowing down or perhaps reversing. Through DOGE, Mr. Trump and Mr. Musk hope to reduce that deficit in half in the near future. Great! But the stimulus from that money pumping out will be reduced. Secondly, the DeepSeek scare this past week is causing some to question just how much money needs to be spent on AI and what the return will be. So, that will likely slow down as well. Thirdly, if the S&P 500 and Bitcoin and housing prices do not have another year of rising 25% to 100% in dollar terms in 2025, those owning these assets may need to slow down as well.
When I was in Congress, I was Chairman of the subcommittee that had the responsibility of overseeing the Federal Reserve. The idea that they are apolitical is ridiculous. Nothing in Washington is apolitical. And Joe Biden’s appointments to this board were almost all highly political academics. It is clear that the Fed and Treasury did everything they could in the 60 days prior to the election to stimulate the economy to help Kamala Harris. They lowered interest rates and pumped in cash. But it failed. Now, they have reversed to try and hurt Trump. They are keeping interest rates up and withdrawing cash from the system.
Mr. Trump’s team is counting on lower taxes and regulation and all the positive vibe from his policies will offset these negative economic forces. Hopefully they will.
But if they don’t, history can be instructive here. Republican Herbert Hoover faced the 1929 stock market crash less than eight months after his inauguration. He had Republican majorities in both the House and the Senate and was able to keep them, despite losing seats, in the 1930 midterms. He and those majorities were swept out by FDR in 1932 not so much because the depression occurred on his watch, but because his policies had failed to fix it.
Ronald Reagan faced a recession only five months after being inaugurated, although there had been a brief recession the year before and the economy was not great to start with. However, unlike Mr. Hoover, the 1981/82 recession, though quite deep and long, was in full recovery by the time Reagan ran for reelection. He won 49 states in 1984 and held a Republican majority in the U.S. Senate for all but the last two years of his presidency.
The point here is that a downturn in the first year of a president’s term is not fatal. But, it better not last.
Taxes: When I was in Congress, the “Fair Tax” was all the rage with many Republicans. This was a proposal to eliminate the income tax and replace it with a national sales tax. Part of the “sell” was that the IRS could be done away with under the Fair Tax and it is economically better to tax consumption than income and savings. I always opposed it in part because I was afraid that unless you repealed the 16th amendment, which authorized the income tax, you would eventually wind up with both taxes. Changing the constitution is hard, by design. Unless of course you are Joe Biden (or probably really his staff) in which case you can create a 28th amendment by executive order, which he actually tried to do. I also never thought you would eliminate the IRS as you would still need an agency to collect and enforce the national sales tax. That agency would likely be more intrusive than the current IRS because instead of just looking at your income, it would necessarily have to look at all of your spending and purchases.
Why do I bring this up now? It is apparent that Mr. Trump and his new Treasury Secretary Bessent would like to at least partially replace income taxes with revenue from tariffs. Tariffs are functionally equivalent to a Value Added Tax (VAT) or sales tax, except that they only impact goods and services from other countries. Secretary Bessent has suggested a flat 2.5% tariff on all imported goods. A back of the envelope calculation indicates that this could raise maybe $80 Billion annually. That sounds like a lot of money. But against Biden’s starting $2 trillion deficit, it is not much. Make that 10 times as much at 25% and you are now talking real money, though not nearly enough to replace the entire income tax.
The Republican majorities are almost certain to pass something major relative to taxes under “reconciliation,” which only requires 51 votes to pass in the Senate. But, under the arcane rules of Congress, (rules passed to make spending easier by Democrats when Nixon threatened to cut spending. He signed the bill while weakened by Watergate in 1974) the bill needs to be revenue neutral over the arbitrary term of 10 years. So, renewing the 2016 tax cuts either needs to be short term again or have offsetting spending cuts and tariff revenues.
I expect the 2016 tax cuts to be extended with a bunch of tweaks, like probably enlarging the State and Local Tax Deduction to maybe $20,000 from $10,000 and eliminating the tax on tips (both of which proposals I oppose). But the kabuki dance to put this all together with tariffs and spending cuts will be quite the maneuver.
Debt: I don’t want to give this the short shrift, but I am coming up on my self-imposed word count limit. The debt is obviously a huge problem. Mr. Trump is a real estate developer and like most of that breed (a number of you read these missives regularly), he loves debt and low interest rates. Buy a piece of property. Load it up with debt. If it works out, profit! If it doesn’t, give it back to the bank and move on.
If Mr. Bessent does what he has said he would do with Treasury issuance, which is go back to the normal distribution of short term bills vs. long term bonds, the 10 year bond yields will almost certainly go up, absent a major recession as discussed above. Mortgage rates are based on the 10 year Treasury rate so this could increase those and perhaps send house prices down. He could instead keep up the Janet Yellen path, which has inflationary risks. Or, he could look to do yield curve control, where they basically fix the yield on bonds well below the market rate and force banks and others to buy them. This has been done before in the U.S. and elsewhere. By reducing the interest on the debt it also reduces the deficit. But it is a defacto tax on those organizations and people required to buy the below market bonds.
The Federal Reserve plays a role here as well. They could operate cross-purpose to whatever Treasury is doing. That could be a problem. Mr. Trump can, and I’m sure will, lean heavily on the Fed and use his bully pulpit to try to bend them to his will.
Conclusion? That’s a lot. And I just scratched the surface. This is all kind of in my wheelhouse as a CPA with a Masters in Taxation who oversaw the Fed and Treasury and was on Budget Committee in Congress. So, you’re saying “John, what is going to happen then?”. That is really hard to say because of all the factors and people involved and all the cross-currents. It is pretty clear that there are factors in play to slow down the economy. The question is whether Mr. Trump’s psychological stimulus can offset them. Most of the 2016 tax cuts will be renewed. But for how long and what else comes along with them? Tariffs are probably not just a negotiating ploy but part of long term revenue. Does this have the desired affect on increasing production and jobs in the U.S.? And the debt will have to be dealt with. But in what manner will they do that?
Stay tuned to this Bat Channel, and the radio and X links below, and I’ll let you know as soon as I can see through the fog to where we might be headed. Maybe for that missive, I will use the Johnny Nash song, “I Can See Clearly Now.” I think I may have used that before, however.
I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free
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