The election is over, FINALLY. No more crazy debates, controversial tweets, and other political gossips, I hope. Now it doesn’t matter how we voted, how we feel, good or bad, we will have a new President in January: Donald Trump. So how will his policies affect our financial life?
The biggest thing that Trump’s campaign highlighted was to reduce taxes. This is for most people especially high-income earners and businesses (per his website, the business tax rate will drop from 35 percent to 15 percent). He believes that if people have more money to keep, they will spend more, thus increase sales, expand output, create more jobs, and ultimately boost our economy.
On a personal tax level, everyone’s tax rate should decrease and low-income Americans will have an effective tax rate of 0. And the highest tax rates for personal returns would fall from 39 percent to 33 percent. For more information regarding taxes and other proposed policies, please refer to his website at Trump’s Tax Policies.
There’s a very good chance of some tax reform under Trump’s administration. This is because it is an aspect that unites many Republicans who are now in control of Congress as they were back in George W. Bush’s administration.
What Should I Do?
Once this lower tax rate kicks in, I plan to save most and spend some. I haven’t figured out my exact allocation yet, but I also don’t want to spoil myself of the extra take-home income I’ll have.
Investing the extra funds you can receive via tax cuts can be a good option too. There is much speculation that the stock market will drop following the election (although it didn’t really happen the day after as the Dow was trading 250 points higher the day after Election Day of 11/8/16 – see news comments on the right of the chart below). And here’s the actual Dow Jones chart two days after the election where it was at an intra-day high (please click to enlarge chart):
My logic for the stock market trading higher is this: Trump supports lower taxes for businesses.
That means businesses can operate more freely and with less regulation, that means businesses have the opportunity to earn more revenue, that means profits go up, that means stock in the business is more attractive/expensive, that ultimately means the stock market will continue to rise.
All of these look like great things right? But there are also risks like opportunities for fraud if there is less regulation, end-consumers wanting to spend more if there is less regulation (essentially what happened in the great 2008 recession).
So Can Lower Taxes Be a Problem?
Well, logically speaking lower taxes can mean lower funding for public health and social service programs. These include wages for public service workers like parks, state and federal government employees, public schools, and other public workers like policemen and women. So if you visit local parks, museums, beaches etc. you may be affected by fewer services and personnel providing customer services.
At the same time it is possible this can be offset because if businesses continue to expand because of lower taxes and higher sales, tax revenue for the government may not be affected that much.