1. Short term boost to consumer spending
Cuts to personal Federal income tax are expected to strengthen overall consumer spending in 2026/2027. Lower personal income taxes will increase disposable income, leading to a boost in consumer spending. Despite the potential increase in prices due to higher tariffs on imported goods, our modelling shows that the positive effects of tax cuts are likely to outweigh the negative impact of tariffs, which under our current forecast assumptions would be more limited than the most extreme tariffs suggested in the election campaign.
2. Discretionary spending will see the largest benefit
President Trump’s policies are, however, regressive, and would largely benefit higher income households. By lowering Federal income tax, higher earners will see a larger increase in after-tax income, while increased tariffs will raise prices for all consumers. Discretionary consumer spending, which is driven by higher-income households, is therefore likely to benefit more from the tax cuts. We can see some early signs of this in how markets have reacted to the election.
3. Higher tariffs would weigh further on consumer spending
There is a risk that President Trump may implement higher tariffs than currently assumed in our forecast. Under this scenario, consumer spending could weaken significantly due to a greater inflationary shock and a reduction in real household incomes. This would lead to a decrease in overall consumer spending levels and prompt consumers to be more price-conscious in their spending.
While the Trump tax cuts are expected to provide a boost to consumer spending, the potential impact of higher tariffs remains a key concern. Understanding the balance between tax cuts and tariffs will be crucial in determining the overall effect on the US consumer.
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By Alex Mackle / Oxford Economics
