President Donald Trump checked a number of items off his to-do list over the past two years: a renegotiated North American Free Trade Agreement, a new set of tariffs on imports from China, and an overhaul of the federal tax code, to name a few. Much of that was accomplished because Republicans held control of both houses of Congress.
But in U.S. politics, the party that prevails in the presidential election often loses seats in off-year voting, such as the midterms on Nov. 6. Polls show that Democrats are ahead in enough races to win the House of Representatives, and they are closer than expected in certain key Senate races.
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If Democrats gain a majority, they could thwart White House efforts to make permanent the reductions in individual tax rates, or they could try to repeal provisions of the 2017 tax bill that are unpopular in Democratic states. The power of the executive branch to impose tariffs is granted by Congress; presumably, it could also be taken away or limited. In addition, Democrats have their own legislative priorities, including increased public spending on infrastructure.
Trade disputes
Trump and his advisers upended traditional political alignments on trade by proclaiming that U.S. industries should be protected. And Trump has several arrows in his trade quiver that give him the ability to push a protectionist agenda through treaty negotiations and tariffs. One is fast track authority, the other is national security interests.
Those are not open-ended, however. Congress still has to approve treaties negotiated under fast track authority, and they need only a simple majority. Agreements sometimes require enabling legislation, which was another reason that the newly negotiated North American Free Trade Agreement — now called the U.S-Mexico-Canada Agreement, or USMCA — was pushed through quickly. The administration preferred that the current Congress take up the matter, rather than a new Congress that may be controlled by Democrats.
Some Republicans concede that the USMCA is unlikely to be ratified during the current Congress. "My trade advisers say you can't possibly do it under the various steps that we have to go through. I had not heard that it might be possible to address it this year," Senate Majority Leader Mitch McConnell told Bloomberg News in an Oct. 16 interview.
In addition, Congress, which gave the executive branch the power to make judgments about national security when it comes to imposing tariffs — something the Trump administration has used to significant effect to protect the domestic steel and aluminum industries — potentially has the right to curb or even take away that power.
"After midterms, we may see a movement afoot by Congress to take back some control over trade agreements and tariffs," Kristina Hooper, chief global market strategist at Invesco, said.
Yet the problem with trade issues is that, even if congressional power shifts, Trump is delivering on what many Democratic leaders, such as Sens. Sherrod Brown of Ohio and Charles Schumer of New York, have long wanted, said Marc Busch, professor of business and diplomacy at Georgetown University.
"The question is whether Trump is about to call their bluff on this, and how they will respond," he added.
Tax and spend
The 2017 tax bill brought relief to the business community that had argued that the top corporate tax rate of 35% was damaging U.S. companies' competitive strength. The 2017 tax law lowered the top corporate rate to 21%.
Now, the concern from companies is that should congressional control shift, "tax reform will be chipped away," said Caroline Harris, chief tax policy counsel for the U.S. Chamber of Commerce, in an interview.
Still, Harris said she hopes that some of what the Chamber considers "pro-growth reforms" will be bolstered, no matter which party comes out ahead after the midterms.
"There were some parts of tax reform that affect small businesses, research and development, expensing rules, that were temporary; it would be good to make them permanent," Harris said.
But there is little pressure on politicians to work on those issues in the near term because they expire after several years, said Alex Thornton, senior tax director for the Center for American Progress, a left-leaning think tank.
And making bigger changes, such as raising the corporate tax rate, would require the Democrats to control both houses of Congress — a less likely occurrence — unless the bill can be altered through reconciliation, Harris noted.
Deficits are expected to grow. Republicans have argued that tax reform would support economic growth that, in turn, would bring down deficits. So far, that has not proved to be the case. The U.S. deficit for fiscal year 2018 was $782 billion, or 3.8% of GDP, according to an Oct. 5 Congressional Budget Office report. And the CBO has projected the deficit to hit $1 trillion over the next two years.
"The problem is that as debt grows and debt servicing costs grow, it puts downward pressure on growth," Invesco's Hooper said.
But when it comes to deciding which programs should be cut, "I don't expect fiscal discipline from either side of the aisle," she said, adding that she included the administration in that assessment.
One place where Trump has common cause with Democrats is an increase in infrastructure spending. Recently, Sen. Schumer called for the corporate tax rate to increase to 25% from 21%, in part to help support a $1 trillion infrastructure spending package.
But Daniel Shaviro, a tax law and policy professor at New York University Law School, said he does not see Democrats working with the Trump administration.
"I don't think that Trump wants to strike bargains with the Democrats, or that they see the point to striking bargains with him, even though particular leadership figures such as Schumer might want to do so," he said.
By contrast, if Republicans retain control of both houses, "it's plausible we'll see permanent extension of the tax cuts without funding," Shaviro added.

