Who Might Benefit From Trump’s Tax Policy Proposals?

Summary

Summary of Morgan Stanley’s “Thoughts on the Market” Podcast Episode: "Who Might Benefit From Trump’s Tax Policy Proposals?"

Introduction

In the February 10, 2025 episode of Morgan Stanley’s podcast Thoughts on the Market, hosts Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy, and Todd Costagno, Head of Global Valuation, Accounting, and Tax, delve into the implications of President Trump’s tax policy proposals. The discussion centers on the potential beneficiaries of these policies, the macroeconomic impacts, and the political feasibility of implementing significant tax reforms.

---

Overview of Trump’s Tax Policy Proposals

The episode begins with an overview of President Trump’s promise to enact the largest tax cut in American history, as stated during the World Economic Forum in Davos. Although details have been sparse, the administration has emphasized substantial tax reductions for workers and families.

Extension and Modification of Existing Tax Laws

Todd Costagno outlines the primary components of Trump’s tax agenda:

• Extension of the Tax Cuts and Jobs Act (TCJA): Currently set to expire in 2025, the administration is likely to seek an extension of the existing policies. Costagno notes, “The Tax Cuts and Jobs Act under his first administration starts to expire in 2025, and so what we view is the most likelihood is an extension of those policies going forward” (01:11).

• Lower Corporate Tax Rates: There is an ambition to further reduce the corporate tax rate to approximately 15%. This could be achieved through domestic tax credits and new incentives rather than solely lowering the statutory rate.

• New Tax Incentives: Additional proposals may include enhanced corporate deductions and incentives aimed at fostering domestic manufacturing and research and development.

---

Macroeconomic Impact of Tax Cuts

Michael Zezas assesses the broader economic ramifications of extending current tax policies:

• Limited Immediate GDP Growth: Zezas explains that extending existing tax cuts is unlikely to provide a significant boost to GDP. “There’s no net new impulse for households or companies to behave differently... no reason to look at this policy and think that it is going to provide a definitive uplift to the growth forecast” (02:03).

• Long-Term Economic Effects: While some provisions, such as raising the cap on state and local tax deductions and domestic manufacturing tax credits, may benefit higher-income households and specific industries, their overall impact on economic growth will likely be gradual and difficult to quantify in the short term.

• Comparison to Previous Legislation: Referencing the Inflation Reduction Act, Zezas points out that such policies take years to materialize within the economy, indicating that the benefits of Trump’s tax proposals will similarly unfold over an extended period (03:07).

---

Beneficiaries: Sectors and Companies

The discussion shifts to identify which sectors and companies stand to gain the most from Trump’s tax policies:

• Domestic Companies: The proposals are primarily designed to benefit domestic corporations, particularly within the industrial sector. Costagno mentions, “policies being articulated… mostly orient towards domestic companies, industrials, for instance, R and D incentives, powering our AI plants, energy” (04:21).

• Small Businesses: Beyond large multinationals, small businesses could see advantages through measures like accelerated depreciation. “Being able to deduct a piece of machinery day one versus over seven years… benefits that are not in the rate itself that can accrue through smaller businesses” (05:10).

• Innovative and Energy Sectors: Enhanced deductions for research and development and incentives for energy initiatives could drive growth in these areas, aligning with broader economic and technological goals.

---

Impact on Individual Taxpayers

The episode examines how individual taxpayers, especially the middle class, might be affected:

• Child Tax Credit: Costagno highlights the possibility of reinstating an enhanced child tax credit, which was temporarily expanded post-COVID. “There is bipartisan support in President Trump as well, bringing back a version of an enhanced credit” (05:17).

• State and Local Tax (SALT) Deductions: There may be efforts to revert SALT deductions to their pre-TCJA levels. However, Costagno cautions that the political landscape makes such changes complex and uncertain.

---

Political Feasibility and Constraints

Michael Zezas addresses the political challenges facing the implementation of Trump’s tax proposals:

• Legislative Hurdles: With Republicans holding a slim majority in both the House of Representatives and the Senate, passing a comprehensive tax overhaul is challenging. Zezas states, “Republicans have a very slim majority… they’re unlikely to get Democratic representatives crossing the aisle to vote with them on a tax package this large” (05:58).

• Scope of Tax Packages: Given the partisan divide, the likely outcome is a more modest package focused on extending existing tax cuts and incorporating a few additional measures rather than the expansive cuts initially proposed by the administration.

• Budgetary Considerations: To mitigate the fiscal impact, the administration might opt for shorter-term extensions of tax cuts or prioritize specific incentives closely tied to broader trade and economic objectives.

---

Conclusion

The podcast concludes with a consensus that while President Trump’s tax policy proposals hold the promise of significant benefits for certain sectors and individuals, the broader economic impact may be muted in the short term. Political constraints are likely to result in a scaled-back tax package, emphasizing extensions of current laws with selective enhancements. Investors and stakeholders should monitor these developments closely, considering both the immediate and long-term implications of the proposed tax changes.

---

Notable Quotes

• Todd Costagno: “The Tax Cuts and Jobs Act under his first administration starts to expire in 2025, and so what we view is the most likelihood is an extension of those policies going forward.” (01:11)

• Michael Zezas: “There’s no net new impulse for households or companies to behave differently... no reason to look at this policy and think that it is going to provide a definitive uplift to the growth forecast.” (02:03)

• Todd Costagno: “policies being articulated… mostly orient towards domestic companies, industrials, for instance, R and D incentives, powering our AI plants, energy.” (04:21)

• Michael Zezas: “Republicans have a very slim majority… they’re unlikely to get Democratic representatives crossing the aisle to vote with them on a tax package this large.” (05:58)

---

Key Takeaways

• Extension Focus: The administration is more likely to extend existing tax cuts rather than implement extensive new tax reforms.

• Targeted Benefits: Domestic companies, especially in industrial and innovative sectors, alongside small businesses and middle-class taxpayers, stand to gain the most.

• Economic Impact: Immediate GDP growth from tax extensions is expected to be limited, with broader effects unfolding over time.

• Political Constraints: Legislative challenges will likely result in a more confined tax package, balancing fiscal responsibility with policy objectives.

This comprehensive discussion provides valuable insights for investors, policymakers, and individuals seeking to understand the potential ramifications of President Trump’s tax policy proposals.

Transcript

[A]

Before we get into today's episode, the team behind Thoughts on the Market wants your thoughts and your input. Fill out our listener survey and help us make this podcast even more valuable for you. The link is in the show notes and you'll hear it at the end of the episode. Plus, help us help the Feeding America organization. For every survey completed, Morgan Stanley will donate $25 toward their important work. Thanks for your time and support. I onto the show. Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's global head of fixed income research and public policy Strategy.

[B]

And I'm Todd Costagno, head of Global Valuation, Accounting and Tax.

[A]

Today we'll focus on taxes under the new Trump administration. It's Monday, February 10th at 10:00am in New York. Recently at the annual meeting of the World Economic Forum in Davos, President Trump stated his administration will pass the largest tax cut in American history, including substantial tax cuts for workers and families. He was short on the details, but tax policies were a significant focus of his election campaign. Todd, can you give us a better sense of the tax cuts that Trump's been vocal about so far?

[B]

Well, there's tax cuts and tax extensions, so I think that's an important place to set the baseline. The Tax Cuts and Jobs act under his first administration starts to expire in 2025, and so what we view is the most likelihood is an extension of those policies going forward. However, there's some new ideas, some new contours as well. So for instance, a lower corporate rate that gets you in the 15% ballpark can be through domestic tax credits, new incentives. I think there's other items on the individual side of the code that could be explored as well. But but we also have to kind of step back and creating new policy is very challenging. So again, that baseline is an extension of kind of the tax world we live in today. So, Michael, looking at the broader macro picture and from conversations with our economist, how would these tax cuts impact GDP and macro in general?

[A]

Well, if you're talking about extension of current policy, which is most of our expectation about what happens with taxes at the end of the year, the way our economists have been looking at this is to say that there's no net new impulse for households or companies to behave differently. That might be true on a sector by sector basis, but in the aggregate for the economy, there's no reason to look at this policy and think that it is going to provide a definitive uplift to the growth forecast that they have for 2026. Now, there may be Some other provisions that could add in there that are incremental that we'd have to consider. But still, they would probably take time to play out, or their measurable impact would be very hard to define. Things like raising the cap on the state and local tax deduction that tends to impact higher income households who already aren't constrained from a spending perspective. And things like a domestic manufacturing tax credit for companies that could take several years to play out before it actually manifests in new spending.

[B]

And you're kind of seeing that with the prior administration's tax law, the Inflation Reduction Act, a lot of this takes years in order to actually play through the economy. So that's something that investors should consider.

[A]

Yeah, these things certainly take time. And, you know, back in 2018, it had been a long ambition, particularly of Republican lawmakers, to reduce the corporate tax rate. They succeeded in doing that, getting it down to 21% in Trump's first term. Now, Trump's talked about getting corporate tax rates lower again here. If he's able to do that, how do you think he would do that? And would that affect how you're thinking about investment and hiring?

[B]

So there's the corporate rate itself. It's at 21% currently. There is a view to change that rate, lower it. However, there's other ways you can reduce that effective tax burden through what we've just discussed. So enhanced corporate deductions, timing differences. Companies can benefit from a tax system that ultimately gets them a lower effective rate, even if the corporate rate doesn't move much.

[A]

And so what sorts of companies and what sorts of sectors of the market would benefit the most from that type of reduction in the corporate tax burden?

[B]

So if you think the mosaic of all these items, it's going to accrue to domestic companies, that might sound kind of obvious, but if you look at our economy, we have large multinationals and we have domestic companies and we have small businesses. The policies that are being articulated, I think, mostly orient towards domestic companies, industrials, for instance, R and D incentives, again, powering our AI plants, energy, et cetera.

[A]

Got it. And is there any read through on if a company does better under this policy, if they're big, relative to being small?

[B]

There are a lot of small business elements as well. So I mentioned that timing difference, being able to deduct a piece of machinery day one versus over seven years. So there's a lot of benefits that are not in the rate itself that can accrue through smaller businesses.

[A]

And what about for individual taxpayers, particularly the middle class? What particular Tax cuts are on the table there.

[B]

So first and foremost is the child tax care credit. So it's current policy, but after Covid, it was enhanced a higher dollar amount, different mechanism for receiving funds. And so there is bipartisan support in President Trump as well, bringing back a version of an enhanced credit. Now, the policy is a little bit tricky, but I would say there's very good odds that that comes back. You know, you mentioned the state and local tax deduction. Right. The politics are also tricky, but there could be a rate of change where that reverts back to pre tcj. But one of the things, Michael, is all these policies are very expensive. So I'm just curious, in your mind, how do we balance the price tag versus the outcome?

[A]

Well, I think the main constraint here to consider is that Republicans have a very slim majority in the House of Representatives, in the Senate, and they're unlikely to get Democratic representatives crossing the aisle to vote with them on a tax package this large. So they'll really need complete consensus on whatever tax items they extend and the deficit impact that it causes. This is the type of thing that ultimately will constrain the package to be smaller than perhaps some of the president's stated ambitions. So, for example, items like making the interest payments on auto loans tax deductible, we think there might not be sufficient support for that and the budget costs that it would create. So ultimately, we think you get back to a package that's mostly about extending current cuts, adding in a couple more items like that domestic manufacturing tax credit, which is also very closely tied to Republicans larger trade ambitions. And you might also see Republicans do some things to reduce the price tag, like for example, only extend the tax cuts for a few years as opposed to five or 10 years.

[B]

Right.

[A]

Todd, thanks for taking the time to talk.

[B]

Great speaking with you, Mike.

[A]

Thanks for listening. If you enjoy the podcast, help us make it even more valuable for you. Share your feedback on the [e-mail] podcast survey or head to the episode notes for the survey link.

[C]

The preceding content is informational only and based on information available when created. It is not an offer or solicitation, but nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for.