Good Thursday evening! It’s too hot out for us to think of anything clever to draw you into the newsletter, but we’ve got plenty of fascinating fiscal content to share. So let's get to it.
A Trump Win Would Mean Higher Inflation, Recession Risk: Moody’s
A clean sweep for Donald Trump and Republicans in this fall’s elections would result in higher inflation and weaker economic growth over the next four years relative to a baseline that maintains the status quo, according to economists at Moody’s Analytics.
Exploring the economic implications of the upcoming election, the researchers give a GOP clean sweep scenario — in which Trump wins the White House, the Senate flips to Republican control, and the House remains under Republican majority — a 35% chance of occurring. Under those conditions, Trump is expected to raise tariffs sharply on virtually all imported goods. Higher tariffs would raise costs for businesses and consumers, slowing growth while adding inflationary pressure throughout the economy. The odds of a recession would rise.
Trump is also expected to push for restrictions on immigration and efforts to deport millions of undocumented workers already in the U.S. That would tighten conditions in the labor market, raising wages while causing worker shortages in key industries including food production and housing construction.
Trump’s promised corporate tax cuts would add another inflationary factor. Reducing the top corporate tax rate would provide fiscal stimulus to an economy already at full employment. It would also increase the deficit and national debt, putting upward pressure on interest rates.
With both prices and wages rising, the Federal Reserve would likely feel pressure to raise its key interest rate, or at least delay cutting it, applying a brake to economic growth while raising the odds of a recession.
A Biden win: If Joe Biden holds the White House and Congress remains divided, with Republicans gaining control of the Senate and Democrats gaining control of the House — the scenario the researchers say is most likely, with a 40% probability — the researchers estimate that the economy remains close to the status quo baseline.
Under those conditions, lawmakers strike a last-minute deal to raise the debt ceiling and avoid a default in 2025; some of the 2017 tax cuts for individuals are allowed to expire, but those earning less than $400,000 a year maintain them; and Biden is unable to raise the corporate tax rate. The researchers also assume that Democrats win an increase in the Child Tax Credit and an extension of subsidies for Affordable Care Act, while Republicans successfully defend some business tax cuts, including more generous depreciation allowances.
Immigration would still be an issue, and Biden takes moderate steps to reduce the number of entries at the southern border, though he is unable pass any significant legislation. Biden deploys targeted tariffs against China, focused on electric vehicles and solar power, and his administration continues to push for cleaner energy.
Overall, a second Biden administration helps keep the economy near its potential growth rate, while maintaining the unemployment rate close its current low level of 4%. Inflation continues on its downward path, falling to 2% in the summer of 2025, prompting the Fed to reduce its benchmark rate to 3% by the end of 2026.
Other scenarios: The analysts note that other scenarios are possible. They give a clean Democratic sweep a 10% chance, while Trump with a divided Congress gets a 15% chance. To see how those unlikely — but not impossible — eventualities could play out, read the full Moody’s analysis.
Supreme Court Rejects a Business-Backed Challenge to 2017 Tax Law
The Supreme Court on Thursday upheld an obscure tax on foreign income imposed under the 2017 tax law, rejecting a challenge by business interests that legal observers warned would have had massive repercussions for the tax code.
In a 7-2 decision in the case, Moore v. U.S., the court left in place the 2017 provision that imposed a one-time tax on the undistributed profits of some American investors in American-controlled foreign businesses. The Mandatory Repatriation Tax, as it is called, was meant to address trillions of dollars in profits parked in foreign countries to shield them from U.S. taxes, offsetting other benefits of the new law. It was reportedly expected to raise $340 billion in revenue over 10 years.
The provision was challenged by Charles and Kathleen Moore of Redmond, Washington, who said they got hit with a tax bill of nearly $15,000 resulting from their pro-rated share of income generated by a company based in India that they invested in, KisanKraft. Their lawsuit argued that the tax violates the Constitution — though analysts also suggested it was an attempt to preemptively prohibit Congress from introducing a wealth tax.
The ruling, written by Justice Brett Kavanaugh, holds that the tax does not violate Congress’s constitutional authority. Kavanaugh wrote that the tax the Moores were challenging was similar to others on partnerships and S corporations. He echoed the Biden administration’s argument that striking down the tax “could render vast swaths of the Internal Revenue Code unconstitutional” and potentially “deprive the U. S. Government and the American people of trillions in lost tax revenue.”
NYU Law Professor David Kamin, a tax and budget expert who served in the Obama and Biden administrations, wrote in a social media post: “The Supreme Court today avoided undermining the income tax and rightly ruled against the Moores and a radical legal theory that could have handed corporations and high-income Americans a giant tax cut that Congress never legislated.”
What the court did not address: “[T]he larger significance of the ruling is what it didn’t do,” writes Mark Sherman of the Associated Press. “The case attracted outsize attention because some groups allied with the Washington couple who brought the case argued that the challenged provision is similar to a wealth tax, which would apply not to the incomes of the very richest Americans but to their assets, like stock holdings. Such assets now get taxed only when they are sold.”
Kavanaugh’s ruling made clear that it was only addressing the narrow question before the court and that “nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity.”
Some analysts say that the court’s decision, and the details of the justices’ opinions, cast further doubt on the idea of a wealth tax and could open the door to further legal challenges to tax laws. “Kavanaugh’s opinion left the issue of realization open and there are now four justices, one shy of a majority, who have declared their opposition to taxes, like a wealth tax, that don’t require realization,” Sherman writes.
Poll of the Day: Biden Gets a Boost on the Economy
President Joe Biden leads former President Donald Trump 50-48 in a new Fox News national survey of registered voters — the first time Biden has led in that poll since October 2023. Trump led Biden 50-45 in Fox’s March poll, and 49-48 in May. “The key is that Independents favor Biden by 9 points, a shift from May when they preferred Trump by 2 points,” Fox’s Dana Blanton writes.
The latest result is within the margin of error, but the survey also offered some other reasons for optimism for Biden’s team. It found, for example, that voters have increasingly positive views of the economy, with 32% saying it is in good (24%) or excellent (8%) shape — a dismally low total that is nonetheless the highest of Biden’s presidency. The previous high under Biden was 30%, reached last month. The poll also found that 41% say they approve of Biden’s handling of the economy, the highest since January 2022, and 37% say they approve of how he’s handling inflation, higher than any point since early 2022.
Overall, Biden has a 45% approval rating, the same as Fox’s pollsters found last month and the president’s best result since January 2023. More than a third of voters, 34%, say they are satisfied with the way things are going in the country, the highest percentage to say that since December 2021. Forty-four percent of voters say they are optimistic about the U.S. economy, up nine points from a year ago, and 59% say they are getting ahead or holding steady financially, up 5 percentage points since June 2023 — though a majority of voters still say they trust Trump to do a better job on the economy, by a 51-46 margin.
Trump blasted the poll in a social media post, dismissing it as “TRASH!”
The poll of 1,095 registered voters was conducted from June 14 to 17 and the results have a margin of error of plus or minus 3 percentage points.
Fiscal News Roundup
- Supreme Court Upholds Trump-Era Tax on Foreign Earnings, Skirting Disruptive Ruling – CBS News
- Supreme Court Dodges Definitive Answer on Legality of a ‘Wealth Tax’ – Roll Call
- Supreme Court Rejects Bid to Preempt Wealth Tax – Politico
- IRS Says ‘Vast Majority’ of 1 Million Pandemic-Era Credit Claims Show a Risk of Being Improper – Associated Press
- Firestorm Erupts Over Requiring Women to Sign Up for Military Draft – The Hill
- Mike Pence’s Foundation Launches a $10 Million Election-Year Campaign to Preserve Trump-Era Tax Cuts – Associated Press
- Senate Finance Democrats Look to Raise Revenue for 2025 Tax Cliff – Roll Call
- Fox News Poll: Three-Point Shift in Biden-Trump Matchup Since May – Fox News
- Pittsburgh Passes Bill to Help Its Lone Plumber Fix Water Fountains – Washington Post
Views and Analysis
- On the National Debt, the U.S. Has a Leadership Deficit, Too – Washington Post Editorial Board
- Trump Has Plans to Fix the Government. There Are Smarter Ideas – Bloomberg Editorial Board
- Five Things to Know About Trump’s Tariff and Income Tax Proposals – Erica York, Tax Foundation
- Biden Is Giving Red Districts an Inconvenient Gift: Green Jobs – Liam Denning at al, Bloomberg
- Soaring U.S. Debt Is a Spending Problem – Wall Street Journal Editorial Board
- Capital Won’t Love You Back, Mr. President – Max Moran, Revolving Door Project
- How Two States Reveal a Deeper Divide on Insuring Kids’ Health – Daniel Chang and McKenzie Beard, Washington Post