Don­ald Trump’s fis­cal fol­lies

Financial Mirror (Cyprus) - - FRONT PAGE -

Of course, any as­sess­ment of Trump’s de­clared po­si­tions risks be­ing ren­dered mean­ing­less within a few hours. He changes his po­si­tions with head-spin­ning fre­quency, re­peat­edly dis­avow­ing state­ments soon af­ter mak­ing them.

Af­ter two days of in­sist­ing, ab­surdly, that Pres­i­dent Barack Obama “founded” the Is­lamic State, he fi­nally tried to play the whole thing off as mere sar­casm.

Even for a more typ­i­cal can­di­date, prom­ises made dur­ing a cam­paign rarely match ac­tions taken once in of­fice. Dur­ing his pres­i­den­tial cam­paign in 2000, Ge­orge W. Bush promised to re­nounce na­tion­build­ing ad­ven­tures abroad, to main­tain fis­cal dis­ci­pline, and to treat green­houses gases as pol­lu­tants un­der the Clean Air Act. Once in of­fice, he did pre­cisely the op­po­site.

None­the­less, we can­not sim­ply ig­nore can­di­dates’ pol­icy prom­ises. Oth­er­wise, the na­tional dis­cus­sion would fo­cus en­tirely on the cur­rent week’s poll re­sults, which is not par­tic­u­larly valu­able for help­ing vot­ers make in­formed de­ci­sions.

This is why it is im­por­tant to ex­am­ine Trump’s re­cent tax pro­posal, which has four salient fea­tures – all of which amount to tax cuts for the rich.

First, Trump pro­poses to abol­ish the es­tate tax – a long-cher­ished Repub­li­can goal. Trump, like his pre­de­ces­sors, tries to hide the fact that only the very wealthy would ben­e­fit from this change, be­cause the tax does not ap­ply to es­tates worth less than $5.45 mil­lion for an in­di­vid­ual and $10.9 mil­lion for a mar­ried cou­ple.

Sec­ond, Trump wants to cut Amer­ica’s cor­po­rate tax rate sharply, to 15%. In the­ory, there is some merit to re­duc­ing the rate, which, at 35%, is one of the world’s high­est (and prob­a­bly spurs com­pa­nies to keep prof­its over­seas). But, as most tax pol­icy ex­perts will tell you, a re­duc­tion in the over­all rate should be ac­com­pa­nied by moves to broaden the base. In par­tic­u­lar, the US should abol­ish de­duc­tions, such as those de­signed to en­cour­age cor­po­rate debt and oil drilling.

Third, Trump would re­duce the high­est rate for per­sonal in­come tax from 39.6% to 33%. This is sig­nif­i­cant, but not nearly as large as the pre­vi­ous pro­posal to cut the rate to 25% – which, ac­cord­ing to in­de­pen­dent an­a­lysts, would have led to about $10 tril­lion in rev­enue losses over the course of just one decade.

Fi­nally, Trump has pro­posed tax de­duc­tions for av­er­age child­care costs. That might seem widely ben­e­fi­cial, but it would help only those in high enough tax brack­ets to itemise de­duc­tions – mostly house­holds with an­nual in­come above $75,000 (me­dian US house­hold 2015).

The ques­tion of whether Trump’s tax poli­cies would ben­e­fit him di­rectly re­mains unan­swered, be­cause, un­like all other pres­i­den­tial can­di­dates since Richard Nixon, he has re­fused to re­lease his in­come-tax records. What is cer­tain is that Trump’s tax poli­cies are fis­cally ir­re­spon­si­ble. In­deed, there is no in­di­ca­tion how any of his tax poli­cies would be fi­nanced, and ev­ery in­di­ca­tion that they would sharply ex­pand the bud­get deficit.

The bud­get bal­ance equals gov­ern­ment out­lays mi­nus rev­enues. It’s a sim­ple equa­tion, but one that Repub­li­can pres­i­den­tial can­di­dates, in­clud­ing Trump, have seem­ingly had trou­ble un­der­stand­ing since 1980. They pro­pose large spe­cific tax cuts, with­out spe­cific spend­ing cuts, and yet claim they will re­duce the deficit. In­stead, they have pro­duced record in­creases in bud­get deficits, par­tic­u­larly dur­ing the terms of Ron­ald Rea­gan and Ge­orge W. Bush.

To be sure, Trump’s bud­get plans are still too vague – par­tic­u­larly with re­spect to dis­cre­tionary spend­ing, So­cial Se­cu­rity, and Medi­care – to ar­rive at an in­formed es­ti­mate of their ac­tual im­pact on the fed­eral deficit and na­tional debt. But he may face pres­sure to be­come more spe­cific as the elec­tion ap­proaches. And, judg­ing by his ten­dency to of­fer pie-in-the-sky ideas, rather than realistic poli­cies, it seems likely that he will re­spond to that pres­sure with more ma­nip­u­la­tion.

For­tu­nately for Trump, the self­pro­claimed “fis­cal con­ser­va­tives” who pre­ceded him have al­ready es­tab­lished four magic tricks to use when mak­ing im­pos­si­ble fis­cal prom­ises – tricks that he is likely to im­i­tate.

in­come was

· The “Magic As­ter­isk.”

· The “Rosy Sce­nario.”



The can­di­date prom­ises to cut taxes while balanc­ing the bud­get with as-yet-uniden­ti­fied spend­ing cuts. (This is ba­si­cally what Trump is al­ready do­ing, as he has spec­i­fied no spend­ing cuts.)

The can­di­date (or in­cum­bent) fore­casts an in­crease in tax re­ceipts, based on fore­casts that na­tional in­come will grow faster. One of the three economists who have signed on as ad­vis­ers to the Trump cam­paign has sug­gested that, with Trump in the White House, the rate of GDP growth will some­how dou­ble.

· The

“Laffer Propo­si­tion.”

Rea­gan, Bush, and oth­ers de­clared that their tax cuts would spur so much eco­nomic ac­tiv­ity that to­tal tax rev­enue would ac­tu­ally in­crease. This propo­si­tion has been dis­proved many times, and the eco­nomic ad­vis­ers to those pres­i­dents have dis­avowed it. Still, the temp­ta­tion to square the bud­getary cir­cle with this claim may prove too strong for Trump to re­sist.

· “Starve



Af­ter the other jus­ti­fi­ca­tions for big tax cuts were proved wrong, Rea­gan and Bush fell back on the the­ory that the de­cline in tax rev­enue was ac­tu­ally a good thing, be­cause it would force Congress to ap­prove spend­ing cuts. Again, the key to this gam­bit is that the pres­i­dent never ac­tu­ally gets around to propos­ing the cuts that Congress is sup­posed to ap­prove.

Per­haps it is in­evitable for can­di­dates to ig­nore the real-world con­straints of do­mes­tic pol­i­tics or in­ter­na­tional cir­cum­stances as they try to sell them­selves to vot­ers. But they shouldn’t be able to ig­nore the con­straints of arith­metic, es­pe­cially not when the same sleight of hand has been tried be­fore – with pro­foundly ad­verse con­se­quences.

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