With another 7 weeks before the beginning of the new administration, the president-elect has now made clear his choices for the key roles in his economic team. We can now draw some conclusions on what direction policy will likely take in his new Administration.
Let me begin by saying that his choices suggest to me that Trump will likely make a good attempt to enact the agenda he articulated during his campaign. Specifically, I think it’s realistic to expect that he will look to pursue an industrial policy that seeks to encourage domestic manufacturing, renegotiate major trade agreements, reduce tax rates and reform the tax code. His choices suggest that he does not intend to hand over the reigns to subordinates, but rather people who are likely to be less independent than many expected.
Given the fact that the Republicans now have control of both the congress and the presidency, it’s realistic to expect that most of the new president’s appointments should be confirmed by the senate.
But, this does not mean that the appointments won’t face come challenges. Each appointee will go through committee hearings and questioned by Democrats. And it’s also important to note that Trump will continue to face continued hostility from most of the major media outlets, including the financial media (in particular, the Wall Street Journal, Bloomberg and CNBC.) This can be attributed to Mr. Trump’s history and style, but also due to substantial ideological disagreements on issues of trade and regulatory policy that he has with financial industry leaders in the media and in business. Trump also faces substantial resistance from members of his own party who strongly opposed him in his rise to power and who have relative security in their positions (e.g. Sen. Lindsay Graham of South Carolina and Megyn Kelly at Fox News.)
That having been said, the following appointments suggest significant changes are coming.
WILBUR ROSS, SECRETARY OF COMMERCE
Ross is a highly prominent hedge fund manager and frequent contributor at CNBC. A billionaire, his background is largely in using leveraged buyouts to turn around distressed businesses and he had a strong association with the coal industry. While Commerce Secretary has often been a somewhat irrelevant role, his choice indicates there’s strong reason to believe that Ross will be a major player and spokesperson for the administration. Ross, like Trump, is known for his some heretical views on trade policy - where he’s argued that a large trade deficit is a major concern and an indicator of unhealthy trends, something that’s a fairly rare perspective among mainstream Republicans. Ross has not held positions in government previously, but his frequent public comments have suggested that he will also favor an agenda of bilateral trade agreements, as opposed to regional ones like the Trans-Pacific Partnership which dominated the Obama Administration’s agenda for the last few years.
STEVEN MNUCHIN, SECRETARY OF THE TREASURY
Mnuchin was a virtual unknown before having taken over as head of Trump’s campaign finances. A former Goldman Sachs banker (something that has been endlessly observed by Trump’s opponents), he also has an extensive and varied history in business, including working as a spectacularly-successful Hollywood producer and in the mortgage business. While little is known about Mnuchin’s views, his comments so far have given some guidance; Specifically, he’s indicated that the administration will pursue a tax overhaul that will be largely revenue-neutral, with simplification and elimination of deductions offsetting cuts in rates.
What Mnuchin’s selection largely indicates to me is that Trump intends to exert a highly active role over Treasury policy and Mnuchin is expected to be a loyal subordinate.
JEFF SESSIONS, ATTORNEY GENERAL
This will be Trump’s most controversial pick because he represents the far right on most issues related to immigration, drug policy and most social issues. Sessions will be leaving one of the safest seats in the US senate and enjoys a position of independence of power that’s far greater than any of Trump’s other designees so far. This should be encouraging to (but not completely reassuring of) those who are concerned that Trump will use the executive branch in a highly personal way to strike out at his enemies.
Less examined is Sessions’ views on economic issues, which will play some role in his position. Notable is his opposition to the Bush Administration’s 2008 Troubled Asset Relief Program (a.k.a. bailout of the banks) and his 100% rating by the National Federation of Independent Businesses. It’s safe to assume that Sessions will be largely favorable to business interests - particularly those of small companies.
WHAT DOES ALL THIS MEAN FOR TAXES?
There exists an opportunity, unseen in nearly thirty years, for a widespread overhaul of the tax code. While meaningful reforms were passed in 2003, the last time the code was meaningfully overhauled was in 1986. There is widespread consensus that an overhaul is preferable and most of what has been suggested is just that. More so, the new president will likely be able to get reforms fairly easily through the congress. What Trump has proposed would mean that, by most analyses, significant cuts for most clients’ (and most Americans) taxes. Particularly significant is the proposed elimination of the Alternative Minimum Tax (AMT). However, secretary - designee Mnuchin has also stated that the administration does not intend for the reforms to translate into an “absolute cut for the upper class.”
The experience of the 1986 cuts was that a major overhaul will result in both winners and losers. For some clients, there will undoubtedly be major implications - as there were especially for real estate investors in the wake of 1986. Most notably, Trump’s agenda would limit deductions to $100,000 for single filers and $200,000 for married. It’s reasonable to expect that certain communities, like real estate investors, will find the administration’s legislative goals are highly aligned with theirs, where others (perhaps venture capitalists and hedge fund managers) might not see their interests well represented.
At present, and most obviously, the most substantial tax cuts would emerge would be the cutting of the corporate tax rate from 35 to 15%, which would apply (according to the campaign) to small businesses as well. This would be a huge cut for small businesses and would likely have significant long-term impact on the self-employed and those in partnerships. It seems likely that many client’s in unusual tax arrangements will need to adjust their tax strategy accordingly.
