Taxes and Fiscal Policy: Navigating the New Washington Landscape

Text on screen: PIMCO

Text on screen: Libby Cantrill, HEAD OF U.S. PUBLIC POLICY

Cantrill: So the kind of the big takeaway we've been talking to clients about this, the deficit was going to be the biggest loser on November 5th, and I don't think anything about the election results have changed that. Remember that the initial conditions here are quite different from when President Trump started, came into office in 2017. Deficits then were running around three, 3.5%. Now they're around 6.5%. So regardless of whether it was going to be Trump or Harris, our view was that neither candidate was going to do really anything in terms of reducing the deficit in terms of fiscal consolidation.

And if anything, they both were probably going to pass policies that were going to add to the deficit. And that sort of leads to the second big takeaway. Tax is going to dominate Washington next year. That was going to be the case if Harris was elected. It's definitely the case now that Trump has been elected. But again, the size of those majorities are really going to matter in terms of what Trump can get done. I think our base case is that the individual Trump tax cuts that all expire at the end of next year will likely be extended. I think President Trump would love to extend them for ten years. Practically, he may have to shorten that window just in terms of sort of keeping the eye on the deficit. So maybe it's shortened to three or four years. Maybe you could also see some of those promises he made on the campaign trail getting kind of passed, but maybe not passed to the extent that he would like to.

He's talked a lot about no taxes on tips. You know talking to Trump transition team. I think they feel like they need to do something on that. But maybe it's going to be quite scaled back. And then SALT, the SALT deduction for those folks who are living in California, New York and New Jersey. Pretty important. That's probably not going to come back fully under Trump or a Republican Congress. But you could see that $10,000 cap increase. So these are the types of things that we will be navigating kind of on behalf of our clients next year.

Images on screen: Shipping ports

And then the third thing is around tariffs. We just go back to try to understand kind of President Trump and his worldview, he's been talking about tariffs since the early 1980s. He was talking about tariffing Japanese VCRs in 1984, for instance. He was against NAFTA. He was against China sending to the WTO. So he's been very consistent in terms of a more kind of protectionist approach in terms of a world view. Now, he's also very mindful of the markets. We know this. We know that there will be a reaction function in terms of if he does increase tariffs, he will likely be sensitive to the markets. But one thing I just do think is important here is that the direction of travel on tariffs is clear.

Text on screen: Tariffs are set to increase under President Trump, but the specifics remain uncertain

Images on screen: The White House

Tariffs are going to be going up under President Trump.

Now how they go up, how fast they go up, what that looks like, I think that's a big question mark.

I don't think that this baseline tariff that he's been talking about, the 10% tariff kind of across all the countries, which would likely have an impact on inflation. I don't think that's viable. But what I do think you'll see, and potentially day one is some tariffs going up on China in particular. And then sort of over the subsequent year or two of his administration, I do think you're going to see potentially some tariffs going up on specific products and potentially specific countries. So he is going to pick and choose again, probably not kind of a baseline tariff.

But I do think that could create potentially some indigestion in the marketplace and potentially some upward pressure at the margin, at least on inflation. But again, it's too early to speculate exactly how the read through for from the economy perspective, I do feel like it's just lastly important to reinforce this is his worldview, and he's been incredibly consistent on this one issue. So I do think we should expect the tariffs will be going up to some degree under his administration.

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