Since Donald Trump took office in January last year, the US economy has continued to be the envy of the rich world. In 2025, while Britain, France and Japan achieved annual GDP growth of 1%, give or take, and Germany remained almost flat, US output increased by 2.1%. Over the past 15 months, US stock markets have reached all-time highs one after another. All this has happened while the President has implemented anti-growth policies like mass deportations of migrant workers and a chaotic trade war.
This has left observers scratching their heads who had predicted economic disaster. Perhaps, some now whisper that the policies are not as disastrous as the mainstream economy believes. Others wonder what might have been. Despite all its strength, based on this interpretation, the US economy could perform even better. But how much better? To put it another way: How big is the “MAGA tax” imposed on the world’s economic superpowers?
One way to arrive at a figure is to imagine what the US economy would look like in the absence of the levy. Mr Trump inherited an economy that was growing strongly. Since then it has increased three times, as determined broadly by The Economist.
The first is a surge in artificial-intelligence capital spending. Capital spending by just four AI-cloud-computing giants – Alphabet, Amazon, Meta and Microsoft – topped $350bn in 2025 and, according to their latest earnings report, is expected to grow to nearly $700bn in 2026.
The binge has brought a wave of spending on data centers, chips, cooling systems and software. Real investment in information-processing equipment, software and data centers increased by more than 15% in 2025. In aggregate terms, the boom contributed about one percentage point to annual GDP growth, accounting for about half of the economy’s expansion.
However, this figure overstates the true contribution of AI spending to US GDP. About two-thirds of data-center spending is on equipment, much of it imported from Asian manufacturers, for example in South Korea and Taiwan. When American companies buy these components, most of the economic activity occurs overseas. To estimate how much of the spending actually counts towards US GDP, we subtract the increase in real equipment imports from the increase in AI-related investment. According to our calculations, a nearly $50 billion jump in AI-investment in 2025 would translate into additional domestic output, contributing about 0.2 percentage points to annual GDP growth (see Chart 2).
The AI craze has also provided rocket fuel for the US stock market, the source of a second boost to growth. Between Mr Trump’s election victory and the end of 2025, the S&P 500 index of large US companies rose about 15% in real terms, unusually fast by historical standards. This increased household wealth by about $5 trillion more than it would have in a normal year. Americans spend a small portion of such windfalls. Still, using a conservative rule that each dollar of equity wealth increases spending by about 2 cents in the first year, this would likely increase consumption by about $100 billion in 2025. Given the central role of buyers in the US economy, the wealth effect may have added 0.3 percentage points to growth.
The third boost to America’s economy has come from Mr. Trump’s policies that promote growth. His administration has eased the way for corporate mergers, ordered federal agencies to cut red tape and lowered barriers to private lending. The tax bill passed in 2025 injected trillions of dollars worth of fiscal stimulus into the economy through tax cuts. By making permanent the existing cuts in corporate and other fees, restoring companies’ ability to fully spend on research and development, and allowing them to depreciate assets more rapidly, it has potentially improved the economy’s long-term growth rate, all of which encourage investment. On average, the independent forecasts we reviewed — which also included forecasts from the Congressional Budget Office, the Tax Foundation, the Tax Policy Center, and the Yale Budget Lab — projected that the law would add 0.2 percentage points to GDP growth in its first year and 0.4 percentage points to growth in 2026.
Combine a surge in AI investment and Mr Trump’s pro-growth ideas and the US economy will shatter the decibel-meter. Before the presidential election — and before economists were yet able to properly size up Mr. Trump’s views — the consensus was forecast for growth of about 2% in 2025. The US could see growth of about 2.7%, boosted by AI investments, rising stock markets and tax cuts. This is more than half a percent faster than the reported increase.
Another way to calculate the MAGA tax is to try to capture the economic pressure directly. Economists have done this for some of Mr Trump’s policies. For example, according to the Peterson Institute, their tariffs reduced real GDP growth by about 0.2 percentage points in 2025 by reducing domestic purchasing power and reducing firms’ profit margins. The Brookings Institution, a think-tank, projects that the president’s mass deportations and border closures could turn net migration negative in 2025 for the first time in at least half a century. This reduced labor supply and as migrant workers spend money in the US, consumer demand decreased. This could result in slowing growth by up to 0.2 percentage points.
Such figures are instructive, but they do not capture the full cost of uncertainty arising from Mr. Trump’s appropriate policymaking. Tariffs are announced, delayed, revised and revived. Immigration agents are deployed, recalled and redeployed elsewhere. Wars are waged. An index of economic-policy uncertainty developed by Northwestern University’s Scott Baker and his co-authors projected a rise of more than 100 points by the end of 2025, ahead of Mr. Trump’s election. After fluctuations of that magnitude, growth in business investment typically slows by five to ten percentage points, as companies postpone capital spending and supply-chain adjustments.
In fact, remove the wasteful spending on information-processing equipment and software – these are the categories most associated with AI – and the picture looks grim. Non-residential fixed investment excluding AI-related categories has declined at an annual rate of about 3% over the past four quarters, compared with an average growth of more than 5% over the past decade (see Chart 3). Investment in industrial and transportation equipment has declined by more than 2% over the past year. Manufacturing output declined by 20%. Overall, non-AI investment is running about $130 billion below the trend over the past decade. This capital expenditure slowdown is reducing GDP growth by about 0.4 percentage points.
Can AI itself reveal weaknesses? The contraction in non-AI investment is so large and so widespread that it is the result of companies allocating capital solely toward data centers and away from other areas. The decline includes oil and gas, car manufacturing and factory construction. Trade-policy uncertainty probably played a large role. In a survey a year ago, the Federal Reserve Bank of Atlanta found that 45% of officials planned to cut capital spending as a result of policy uncertainty.
Another possible explanation, in which strong demand or heavy government borrowing drives up interest rates and crowds out other private investment, also seems ineffective. Credit remains abundant. The gap between investment-grade corporate bonds and Treasuries has rarely been this small since the 1990s. So it’s a good bet that the president’s policymaking is tied to bittersweet emotions.
Together, the pressure of tariffs on real income, lower labor supply, and firms reducing capital spending adds up to 0.8 percentage points. This is consistent with the earlier figure we arrived at by considering the counterfactual US economy (see Chart 4). Looking ahead, there are little signs of relief. Tariffs remain volatile, creating high uncertainty for businesses and households. The war in Iran and the effective closure of the Strait of Hormuz have dealt an energy blow that will further reduce real incomes and corporate margins, reducing investment even further.
A natural reaction to such statistics is despair at how much harm bad policies can do. The second, however, is to marvel at the amazing power of America’s economic engine. If you believe the latest real-time forecast from the Atlanta branch of the Federal Reserve, GDP could grow at an annual rate of 4% in the current quarter, despite everything Mr Trump does. In other words, without the burden of the MAGA tax, the US could grow at about a 5% annual growth rate. It has done so in only nine quarters this century, and only in five quarters if you exclude the recovery following the Covid-19 pandemic. This could happen again if the President allows it.
