Candidate Donald Trump’s policy proposals ranged from the bizarre to the truly frightening.
Remember his “secret plan” to defeat ISIS? Turns out it consists of working with our Middle Eastern allies and tightening border security. What about his rhetorical (we hope) question about why the US can’t use nuclear weapons? That and other foreign policy pronouncements may explain why a group of fifty senior Republican defense and foreign policy experts signed a letter repudiating his candidacy.
Candidate Trump’s economic policy pronouncements were similarly worrisome. Candidate Trump suggested renegotiating (i.e., defaulting on) interest payments on the federal government’s debt and initiating trade wars with China and Mexico. And non-partisan experts argued that adopting the candidate’s tax plan would result in an explosion of the government’s debt.
Now that the election is over, a number of pundits predict that Candidate Trump’s extremism will give way to a more moderate, pragmatic President Trump. We can only hope.
At the time of this writing, neither detailed proposals nor the names of personnel who will fill the top economic jobs (aside from Treasury secretary Steven Mnuchin) are available, so forecasting the Trump Administration’s priorities—and their chances of success—is speculative at best. Nonetheless, here is a first pass.
Candidate Trump proposed turning the current seven income tax brackets into three and reducing the rate paid by those in the top bracket, giving a tax cut to those earning more than $413,350 (see table). His proposed repeal of the estate tax, which currently affects less than 1% of all estates, would similarly benefit the most affluent families. The exact effects of these proposals on lower income families is less clear. The Trump campaign argues that a higher child care allowance and standard deduction will reduce the tax burden on low-income families. Other experts argue that by eliminating personal exemptions and repealing the head of household filing status, Trump’s plan will cause lower-income, single parent households to face an increased tax burden. Given Republican majorities in both houses of Congress, the repeal of the estate tax seems almost certain. Similarly, some lowering of top tax rates is likely.
|Comparison between current tax rates and Trump plan|
|Tax rate||Current policy||Tax rate||Trump proposal|
|10%||Up to $18,550||12%||Up to $75,000|
|15%||$18,551 to $75,300||25%||$75,001 to $225,000|
|25%||$75,301 to $151,900||33%||$225,001 or more|
|28%||$151,901 to $231,450|
|33%||$231,451 to $413,350|
|35%||$413,351 to $466,950|
|39.60%||$466,951 or more|
According to the Tax Foundation, US corporations are subject to a top marginal tax rate of 38.92%, the third highest in the world. This encourages US firms to undertake all sorts of costly tax-avoidance strategies. One such tactic is “corporate inversion,” which occurs when a US firm is “taken over” by a smaller firm based in a country with lower corporate taxes and changes its tax home to the new jurisdiction. Hence, a US company facing a 38% US corporate tax might be “acquired” by an Irish company paying 12.5%. The Treasury has taken aim at these corporate inversions, but both Democrats and Republicans recognize that some sort of corporate tax reform (including a lower corporate tax rate) will be necessary to stem this tide. It seems likely that President Trump and the Republicans will push through a lower corporate tax rate. This too, will likely benefit wealthier Americans.
Candidate Trump proposed increased government spending to repair our crumbling infrastructure. This is one proposal which may garner more support from Democrats than Republicans. Larry Summers, a former Treasury secretary presidential economic advisor, argues forcefully that such investment will make the country more productive, keep the burden of repairs from falling entirely on future generations, and provide the economy with a much needed fiscal stimulus. The main obstacle to enacting infrastructure spending will be Congressional Republicans, who are far from sympathetic. It is unclear how this conflict will play out.
A signature theme of Trump’s campaign was a proposed about-face in US trade policy. Candidate Trump argued that lowering trade barriers—a policy pursued by Republican and Democratic administrations for decades—has harmed the US manufacturing sector and cost American jobs. He said that the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States was the worst trade deal ever signed by the United States, and that it would have to be renegotiated or scrapped entirely. He promised to sink the proposed Trans-Pacific Partnership (TPP) trade deal (according to the Senate Republican leadership after the election, the TPP is now officially sunk) and to slap punitive tariffs on China and Mexico for trade practices that hurt American workers. The election results, particularly those in Pennsylvania, Ohio, Wisconsin, and Michigan, suggest that this argument did not fall on deaf ears.
What can President Trump do about trade? According to the Peterson Institute for International Economics, the president has the authority to take the United States out of NAFTA with six months’ notice. The threat to withdraw may already have produced some results. Mexican President Enrique Peña Nieto signaled that he is open to “modernizing” NAFTA, suggesting that he is concerned about getting into a trade war with the United States. Canadian manufacturers have made it clear to their government that retaining access to the US market is a priority and Canadian Prime Minister Justin Trudeau said he was “more than happy to talk about NAFTA.” It is, however, unclear exactly what concessions President Trump will demand and what concessions Canada and Mexico will be willing to give to avoid a trade war. Given the integration of supply chains across borders (e.g., many of the components of US-made automobiles are manufactured in Mexico), tearing up NAFTA may be very costly for US manufacturers.
Starting a trade war with China could easily backfire. The Chinese are likely to retaliate—as they have done in the past—against US sanctions. US companies operating in China—and there are quite a few that have made big bets there—could suffer from such tit-for-tat behavior. And, of course, China holds more than a $1 trillion of US government debt. A decision to start selling these holdings could roil the value of the dollar on financial markets and have serious repercussions for domestic and world stock and bond markets.
Perhaps the most unsettling part of Candidate Trump’s trade policy is that it is not going to revitalize American manufacturing. The jobs Trump believes “made America great” are not going to come back—at least in enough quantities to make a difference—unless trade barriers are so high that they bankrupt American business and consumers. There are things we can—and should—do for the many Americans who have been harmed by trade. Starting a trade war is not one of them.
Featured image credit: Taxes by pictures of money. CC-BY-2.0 via Flickr.