Macro Sequencing: Tariffs, Tax Cuts, and a Quick Take on Nominations

However, this time around we expect tariffs, at least with regard to China, to be enacted within his first 100 days. The anticipated 10%-20% tariffs on the rest of the world could be delayed and be included in the massive tax bill next year, something we will discuss below.  

China Tariffs 

We see Trump’s ~60% tariffs on China being the first of his major initiatives on the docket. However, much like Trump’s tariffs on China in his first term, we are likely to see plenty of exceptions for consumer-facing products (think Apple (APPL) iPhone’s). Trump’s tariff announcement could also be accompanied by an initial tougher stance on Taiwan, additional export controls, and country of origin issues (Chinese products entering through third-party countries).   

There is also a potential scenario where Trump announces the China tariffs with plenty of lead time before their effective date, potentially in order to dampen any negative market reaction.   

We believe Trump’s ultimate goal is to reach an agreement with the Chinese late next year or early in 2026, in time to try and boost the GOP’s chances in the midterms. What is hoped for is an agreement that will roll back some, if not all, of the recent tariffs on China.  

An agreement to roll back all tariffs seems unlikely. However, we could see the Trump administration:  

• Eliminating/lower some of the tariffs;  

• Moderating the stance on Taiwan, maybe in the form of fewer arms sales, or limits on the highest performance platforms the U.S. sells to the island; and  

• Making concessions on high tech and other strategic exports from the U.S. that have been in the crosshairs. 

In exchange, we believe Trump would like concrete concessions from China in the form of: 1) commitments to purchase U.S. products, including agriculture; 2) reductions in tariff and non-tariff barriers to U.S. goods and services; and 3) potential commitment to build factories/facilities in the U.S.  

It is uncertain if Trump and Xi can be work out an agreement on Trump’s timeframe, but we think it is in both countries’ interest to reach a truce eventually.    

Tax Cuts 

Unlike the first Trump administration, we believe tax cuts will follow tariffs, at least the ones for China. House Republican leaders are boasting that they will pass an extension of the 2017 Trump tax cuts plus much more within the first 100 days. While that is an ambitious plan, we are skeptical it can be done in such a short period of time.  

The GOP Congress will certainly have to consider a massive tax bill under reconciliation, which prohibits the bill from being filibustered in the Senate.  However, before a reconciliation bill can be considered, the House and Senate must pass identical budget resolutions (this is not the same as the government funding bills) that include the reconciliation instructions for the tax cut measure.  

To indicate how difficult budget resolutions are to pass, Congress has failed to pass one in 10 of the last 16 years.  During that period, only when Congress was controlled by one party did, they pass a budget resolution. In addition, the law states that budget resolutions are supposed to be passed by April 15, which in 2025 would be 85 days into Trump’s first 100 days. However, the last time a budget resolution passed by April 15 was way back in 1996.  Keep in mind, that’s the budget resolution and not the tax bill itself.   

Even in the unlikely event that the House can pass a tax bill in the first 100 days, we see very little chance that the Senate can, given it is more deliberate and slower to act even under reconciliation.  We believe the earliest a tax bill would pass both chambers is realistically in September. Keep in mind that the 2017 Tax Cuts and Jobs Act (TCJA) wasn’t signed into law until December 22, 2017. Of course, Republicans did have to deal with the 2018 appropriation bills and also failed at its time-consuming attempt to repeal and replace the ACA.  

Tax Cut Provisions  

Trump is expected to push to extend all the tax cuts in the TCJA, which, if extended permanently, could cost ~$4.6 trillion according to the Congressional Budget Office. Add another ~$1.5 trillion for the R&D tax cuts, bonus depreciation, interest deductibility, an enhanced child tax credit and some of Trump’s ideas on the campaign trail like eliminating taxes on tips and lowing the corporate rate to 15% for domestic manufactures and the ten-year total could approach $6.1 trillion.  

However, we expect this tax bill will not be permanent and will expire after five to seven years, cutting the cost dramatically (until another extension is potentially considered).   

Recall that in accordance with reconciliation instructions, under which this tax measure is almost certainly going to be considered, the legislation is prohibited from adding to the deficit beyond the 10-year budget window, making it necessary to either offset the costs at the end of that budget window or having much/all of the bill expire within that 10-year timeframe.  

Regarding the TCJA’s 21% corporate rate, that tax change was made permanent in the 2017 bill and doesnot expire at the end of next year like the individual tax cuts. Of course, Trump may push for a 15% corporate rate for domestic manufactures, though we think he is unlikely to prevail.  

Tax Cut Payfor: 10%-20% Across-the-Board Tariffs on Non-China Countries  

There will certainly be revenue- raisers to pay for Trump’s tax bill, and one of payfors under consideration is enacting the 10%-20% tariffs on across-the-board on non-China countries as part of the reconciliation bill, which we have written about before. So, the sequencing of some tariffs might come with the tax bill, which means they would not go into effect until 2026. 

Putting the 10%-20% tariffs in a reconciliation bill would allow the revenue raised, which is estimated to be $2-$4.5 trillion though we expect exceptions that would lower such estimates, to be used as an offset to the tax bill. However, if the administration implemented them on their own, those tariffs would not get any credit as an offset to the tax cuts.  

Now, getting tariffs attached to a reconciliation bill is likely to be an uphill battle.  There are numerous free traders in the Senate GOP caucus, including newly elected Senate Majority Leader John Thune (R-SD).  Nonetheless, Trump may opt to try and get these tariffs in a reconciliation bill, given how much revenue they raise even if the provision eventually falls the way of the Border Adjustment Tax (BAT) back in 2017 (ended up not being included in TJCA). Such a move would still have the effect of delaying the implementation of these tariffs.  

TCJA as a Payfor 

A number of tax increases included in the TCJA also expire on Dec. 31, 2025 so extending them would help offset the revenues lost from the tax cuts.  Back in 2017, the Joint Committee on Taxation estimated that those tax hikes would raise roughly $2.5 trillion over ten years (see table). Some of these, like the SALT deduction, might be modified and therefore would provide less revenue.  

Recall this $2.5 trillion JCT score was from back in 2017 and the numbers today would surely be higher.    

Expiring Tax Increases Under the TCJA 

Other Payfors 

Republicans are surely going to try and cut funding usually done through the appropriations channel as offsets.  Such spending reductions would be difficult to achieve through the non-reconciliation process because Democrats would filibuster attempts at any material spending cuts.   

However, Democrats pushed the envelope with the Inflation Reduction Act (IRA), a reconciliation measure, by adding spending provisions traditionally done through the appropriation process. Republicans will likely do the reverse and use reconciliation to cut spending by reclassifying it as mandatory spending.   

It is unclear to us how much can be saved in this way, given the various constituencies for government spending. But Republicans could try to cut funding from the CHIPS Act or the Infrastructure Investment and Jobs Act (IIJA), though we doubt highways funds would be touched, for example. 

With Trump wanting Elon Musk and Vivek Ramaswamy to recommend federal funding cuts and ways to make the government more efficient, we see those policies potentially being manifesting into the reconciliation bill. However, we are skeptical that the massive cuts Musk has talked about or getting rid of entire agencies like the Department of Education are politically viable.  Some might not be allowed by the parliamentarian to be included in a reconciliation bill. Trying to do these massive cuts outside of reconciliation are unlikely to prevail as Democrats would filibuster any such ttempt. 

Republicans will also likely target many of the green energy tax breaks in the IRA, much like was reported today on the $7,500 EV tax credit, which we think is likely going to be eliminated.  JCT has recently estimated that eliminating the tax breaks in the IRA could bring in $669 billion over ten years.   

Add all of the potential revenue raisers in this category and one might get to $1 trillion over 10 years.  Include the low estimate of $2.5 trillion from extending the expiring TCJA tax increases and potentially, though unlikely in our view, revenues from legislated tariffs, and you could get to $5.5 trillion plus, close to paying for the entire bill.