SINCE DONALD TRUMP took office in January last year, America’s economy has continued to be the envy of the rich world. In 2025, while Britain, France and Japan eked out annual GDP growth of 1%, give or take, and Germany all but stood still, American output grew by 2.1%. In the past 15 months American stockmarkets have hit one all-time high after another. All this has happened even as the president has unleashed seemingly anti-growth policies like mass deportations of migrant workers and chaotic trade wars.
This has left observers who had predicted economic disaster scratching their heads. Perhaps, some now whisper, the policies are not as destructive as mainstream economics assumed. Others wonder what might have been. For all its strength, America’s economy could, on this interpretation, be doing even better. But how much better? Put another way: how big is the “MAGA tax” imposed on the world’s economic powerhouse?
One way to arrive at a figure is to imagine what America’s economy would look like in the levy’s absence. Mr Trump inherited an economy that was growing strongly. It has since had three boosts, which The Economist has roughly quantified.
The first is the artificial-intelligence capex boom. Capital expenditure by just four AI-cloud-computing giants—Alphabet, Amazon, Meta and Microsoft—topped $350bn in 2025 and, according to their latest earnings reports, is set to rise to roughly $700bn in 2026.
The binge has unleashed a wave of spending on data centres, chips, cooling systems and software. In 2025 real investment in information-processing equipment, software and data centres grew by more than 15%. In gross terms, this surge contributed nearly one percentage point to annualised GDP growth, accounting for nearly half of the economy’s expansion.
This figure, though, overstates the true contribution of AI spending to America’s GDP. Roughly two-thirds of data-centre spending goes towards equipment, much of it imported from Asian manufacturers, for example in South Korea and Taiwan. When American firms buy these components, most of the economic activity occurs abroad. To estimate how much of the spending actually counts towards American GDP, we net off the rise in real equipment imports from the surge in AI-related investment. By our reckoning, around $50bn of the AI-investment boom in 2025 reflected additional domestic production, contributing roughly 0.2 percentage points to annualised GDP growth (see chart 2).
The AI frenzy has also provided rocket fuel for America’s stockmarket, the source of the second boost to growth. Between Mr Trump’s election win and the end of 2025, the S&P 500 index of large American firms shot up by roughly 15% in real terms, unusually fast by historical standards. That added roughly $5trn to household wealth above what would have accrued in a typical year. Americans tend to spend a small share of such windfalls. Still, using a conservative rule of thumb that each dollar of equity wealth raises spending by around 2 cents in the first year, this probably raised consumption by roughly $100bn in 2025. Given shoppers’ central role in America’s economy, the wealth effect may have added 0.3 percentage points to growth.
The third boost to America’s economy has come from those of Mr Trump’s policies that do promote growth. His administration has eased the path for corporate mergers, ordered federal agencies to cut red tape and loosened constraints on private credit. The tax bill passed in 2025 injected trillions of dollars-worth of fiscal stimulus into the economy via tax cuts. It also probably improved the economy’s rate of long-term growth, by making existing cuts to corporate and other levies permanent, restoring firms’ ability to fully expense spending on research and development, and allowing them to depreciate assets more rapidly, all of which encourages investment. On average, independent forecasts we reviewed—including those by the Congressional Budget Office, Tax Foundation, Tax Policy Center and Yale Budget Lab—estimated that the legislation would add 0.2 percentage points to GDP growth in its first year and 0.4 percentage points to growth in 2026.
Combine the AI investment boom and Mr Trump’s growth-promoting ideas and America’s economy ought to be breaking the decibel-meter. Before the presidential election—and before economists were yet able to properly size up Mr Trump’s ideas— the consensus forecast was for about 2% growth in 2025. Adding the boost from AI investment, soaring stockmarkets and tax cuts might have got America to around 2.7% growth. That is more than a half percentage point faster than reported growth.
Another way to calculate the MAGA tax is to try to capture the economic drag directly. Economists have done this for some of Mr Trump’s policies. According to the Peterson Institute, for instance, his tariffs reduced real GDP growth by about 0.2 percentage points in 2025 by squeezing household purchasing power and compressing firms’ profit margins. The Brookings Institution, a think-tank, estimates that the president’s mass deportations and border shutdown have turned net migration in 2025 negative for the first time in at least half a century. This reduced labour supply and, since migrant workers spend money in America, consumer demand. The upshot may have been to slow growth by 0.2 percentage points.
Such figures are instructive, but they do not capture the full cost of uncertainty stemming from Mr Trump’s fitful policymaking. Tariffs are announced, delayed, revised and revived. Immigration agents are deployed, recalled and redeployed somewhere else. Wars are waged. An index of economic-policy uncertainty developed by Scott Baker of Northwestern University and his co-authors rose by more than 100 points from before Mr Trump’s election to the end of 2025. Swings of that magnitude are typically followed by growth in business investment slowing by five to ten percentage points, as firms postpone capital spending and supply-chain adjustments.
Indeed, strip out the splurge on information-processing equipment and software—the categories most closely tied to AI—and the picture looks grim. Over the past four quarters non-residential fixed investment excluding AI-related categories has contracted at an annualised rate of roughly 3%, compared with average growth of more than 5% in the previous decade (see chart 3). Investment in industrial and transport equipment has fallen by more than 2% over the past year. Manufacturing construction is down by 20%. In total, non-AI investment is running about $130bn below its trend from the last decade. This capex recession is reducing GDP growth by roughly 0.4 percentage points.
Could AI itself explain the weakness? The contraction in non-AI investment is too large and too broad to be the result of firms merely reallocating capital towards data centres and away from other sectors. The decline spans oil and gas, carmaking 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 executives planned to cut capital spending as a result of policy uncertainty.
Another potential explanation, in which strong demand or heavy government borrowing pushes up interest rates and crowds out other private investment, also looks unpersuasive. Credit remains plentiful. The spreads between investment-grade corporate bond and Treasuries have seldom been this tight since the 1990s. It is therefore a good bet that presidential policymaking has a lot to do with the sour sentiment.
Together, the squeeze from tariffs on real incomes, reduced labour supply and capex-shy companies adds up to 0.8 percentage points. That is in line with the earlier figure we arrived at by considering a counterfactual American economy (see chart 4). Looking ahead, there is little sign of relief. Tariffs remain in flux, sustaining high uncertainty for businesses and households. The war in Iran and effective closure of the Strait of Hormuz has triggered an energy shock that will further compress real incomes and corporate margins, dampening investment even more.
A natural reaction to such figures is to despair at how much damage bad policies can cause. Another, though, is to marvel at the awesome power of America’s economic engine. Despite everything Mr Trump has put in its way, GDP may grow at an annual rate of 4% in the current quarter, if you believe the latest real-time forecast by the Federal Reserve’s Atlanta branch. Without the deadweight of the MAGA tax, in other words, America might be rocketing ahead at nearly 5% annualised growth. It has notched up such performance in just nine quarters this century, and only five if you exclude the recovery after the covid-19 pandemic. If only the president let it, it could be doing so again.
