Post-Election Analysis

From his demeanor, Donald Trump probably seems like one of the most belligerent presidents to ever occupy the White House.

But he’s not necessarily a fan of war. He represented an explicit break from the era of George W. Bush Republicans, castigating the former president for the Iraq War and promising to retreat from the world. He’s also blasted current President Joe Biden for supposedly escalating the war in Ukraine, claiming he’d have made a peace deal from day one. He often derides his opponents as warmongers and war hawks.

Trump’s preferred method of warfare is economic. He won a surprisingly strong victory in this week's presidential election promising to escalate the tariff policies he put into place during his first term. Rather than targeting economic sanctions on a few disfavored countries, he’s vowing to raise them on most of America’s economic competitors. He’s even suggested that the United States could primarily fund itself through tariffs, as it did throughout the 19th century. Who needs income taxes if you have import taxes?

In a sense, it’s “Mexico will pay for the wall,” writ large. In 2016 he claimed he could force Mexico to pay for a new border wall by threatening to cut them off financially if they refuse. Now, he thinks we can use the power of our market to fund our entire government. Producers will pay up rather than lose access to the biggest collection of consumers on the planet, allowing U.S. citizens to live blissfully tax-free.

This is Trump’s worldview–that through the bare-knuckled, zero-sum aggressive use of power that only he has the fortitude to do, the U.S. can reap unlimited benefits from the rest of the world.

Of course, Mexico didn’t pay for the wall, and Trump’s notion of paying for everything through tariffs (without seeing prices rise) runs so counter to the arithmetic, it’s hard to take seriously. The business world is optimistic that Trump’s promised trade wars will be more posturing than real, and that we won’t see the astronomical price increases which virtually all economists believe would happen if Trump enacted his drastic tariffs.

I’m not sure how much voters believe that Trump will carry out these plans as well. But as a former reporter in the American Rust Belt, I absolutely believe that Trump’s protectionism plays a big role in his popularity in the Midwest. It’s hard to overstate how betrayed by globalization people feel in these areas where the manufacturing base has been decimated, and how much loyalty they feel to someone who sides with them over global economic forces. Trump knows this too, and his protectionism seems to be one of the few things he has real convictions about. (He’s been talking about it for decades.) So it’s hard for me to believe he won’t try this for real.

Amid all of these escalating economic tensions lies the Organization for Economic Cooperation and Development’s Pillar Two 15% global minimum tax–something that Biden touted as a major accomplishment of his term, a blow against corporate tax competition and avoidance. What future does Pillar Two face, with the U.S. uncooperative–even opposed? Will Trump retaliate against countries which use Pillar Two taxes like the undertaxed profits rule to tax American companies–so much that countries retreat from the whole system? Or will this just get lost in the noise?

Biden looked at Pillar Two as a way to push for a key part of Bidenomics, to make the tax code fairer and to ensure that rich companies pay their “fair share.” Trump’s new brand of conservatism isn’t necessarily always in favor of what will benefit corporations, but he hasn’t been one to blame companies for trying to reduce their taxes. (If he was so inclined, he could point out the ways that the TCJA, his signature tax law, actually reduced profit-shifting. But for whatever reason, he’s never been prone to highlight this.)

Current trade laws give the president wide latitude to enact tariffs unilaterally on countries which he deems are discriminating against U.S. businesses. It’s unclear if he could use these laws to enact universal tariffs, but he could certainly use them as much as possible. Republican lawmakers have proposed legislation to enable the president to retaliate against Pillar Two specifically, but he probably doesn’t even need it. Aside from the president’s tariff powers, provisions like Section 891 allow the U.S. Treasury Department to raise the income taxes of those from discriminatory countries. It’s a 90-year-old law that seems almost designed to go after the minimum tax.

It’s ironic because the whole Two-Pillar project began under the Trump administration. Since Pillar Two is modeled after the tax on global intangible low-taxed income, enacted by the 2017 Tax Cuts and Jobs Act, his Treasury saw it as a chance to expand U.S. tax principles to the world. But as negotiations over the deal stretched into the Biden term, his officials expanded the concept and pushed for a higher rate, claiming it was a chance to stem the “race to the bottom” in corporate tax competition. Pillar Two was ultimately designed in a way that could potentially tax U.S. businesses, raising howls of protest from Republicans. They're sure to want to oppose it with full strength now that they're back in power.

As I wrote over the summer, this could perhaps be a chance to make some progress on negotiations over the policy’s details at the OECD. If the other participants make concessions to the U.S. now–over the stickier issues like treatment of the U.S. R&D credit–then that might give them less to fight over. Trump has a notoriously short attention span, and may not end up giving this much thought. (And don't forget, there's another, separate trade war brewing over digital services taxes.) Pillar Two could survive by staying off his radar entirely.

Trump’s election victory probably ends any hope that the U.S. would pass implementation legislation for Pillar Two itself. As of this writing, Republicans seem poised to claim full control of Congress. They’ll need to extend much of the TCJA in 2025, and they’ll likely try to do that without any help from Democrats–although their majority in the House of Representatives is so tiny, I wonder if they’ll be able to muster the votes for it. Tax policy creates a lot of polarizing divisions, on issues like deficit reduction and the deduction for state and local taxes.

It’s possible that Republicans could look at Pillar Two as a potential source of revenue to help pay for the TCJA extension–or they could offer it to Democrats as deal to get the package through. But it probably wouldn’t raise that much anyways, and the parties don’t seem likely to work together at the moment.

You never know, however.

Pillar Two is out there, and it seems like even Trump at his most blustery could not bully it back to the drawing board. But with U.S. opposition escalating to a new level, the policy could take an entirely different shape. Time will tell.

Contact the author at amparkerdc@gmail.com.