For the rich, not the poor

Some of Don­ald Trump’s plans for the US econ­omy look good on pa­per, but in re­al­ity they will not be easy to im­ple­ment.

Finweek English Edition - - THE PESSIMIST’S GUIDE: TRUMP - By Mariam Isa ed­i­to­rial@fin­week.co.za

hefty­tax cuts and gen­er­ous in­cen­tives to en­cour­age pri­vate spend­ing on in­fras­truc­ture is likely to boost eco­nomic growth in the US over the next few years, but the pace will fall short of the 3% to 4% pre­dicted by pres­i­dent-elect Don­ald Trump’s tran­si­tion team and will not main­tain its mo­men­tum, an­a­lysts warn.

Some economists pre­dict that the US growth rate could ac­cel­er­ate to be­tween 2% and 2.7% in 2017 from an es­ti­mated 1.6% this year, be­fore slow­ing in 2018 as the one-off ef­fect of an­tic­i­pated per­sonal tax cuts drops out of the equa­tion. The pickup in growth will spark more in­ter­est rate in­creases, which will also curb the ex­pan­sion.

The prob­lem with those mea­sures is that – de­spite prom­ises to the con­trary to Trump’s mid­dle-class sup­port­ers – they will benefit the rich far more than the poor, who would spend much more of any ad­di­tional dis­pos­able in­come than their wealthy coun­ter­parts.

Trump wants to sim­plify the tax sys­tem by re­duc­ing the num­ber of tax brack­ets to three from seven, cut­ting the top rate from 40% to 33% and rais­ing the bot­tom rate from 10% to 12%, al­beit over a wider in­come range. The the­ory, of course, is that rich peo­ple in­vest more, cre­at­ing jobs and growth which benefit every­one – classic “trick­le­down eco­nomics”, which was slammed by the In­ter­na­tional Mon­e­tary Fund in a 2015 study.

Re­search from the US Tax Pol­icy Cen­tre, an in­de­pen­dent think tank, shows that the top 0.1% of Amer­i­can in­come earn­ers mak­ing more than $3.7m would get a tax cut of nearly $1.1m, while the poor­est fifth of Amer­i­cans would get a tax break of just $110 a year, or 0.8% of their in­come. The mas­sive cost of the tax re­duc­tions are sup­posed to be off­set by elim­i­nat­ing loop­holes and waste, but de­tails of this strategy are scant so far, and the tax cen­tre warns that it would add about $1tr a year to US Fed­eral debt. This would push the gov­ern­ment’s debt--to-GDP ra­tio up to more than 100% from 77% now – a dan­ger­ous level.

Trump’s trea­sury sec­re­tary nom­i­nee, Steven Mnuchin, un­doubt­edly knows bet­ter, but the business mogul has dis­played his com­plete lack of un­der­stand­ing of ba­sic eco­nomics by say­ing he would “bor­row know­ing that if the econ­omy col­lapses you could make a deal”. He was also quoted as say­ing that the US gov­ern­ment would “never have to de­fault be­cause you print the money”. Ac­cord­ing to Kim­berly Amadeo, pres­i­dent of World Money Watch, these are the most dan­ger­ous state­ments Trump has ever made. If the US econ­omy col­lapses, so would the dol­lar, and the en­tire world would plunge into a deep re­ces­sion. Print­ing money – as his­tory has shown re­peat­edly – would ig­nite inflation, send in­ter­est rates soar­ing, and also cre­ate a re­ces­sion.

Trump’s pro­posal to slash the max­i­mum small business and cor­po­rate tax rate from 38% to 15% looks good on pa­per, but the catch is that the ef­fec­tive rate is al­ready much lower be­cause nearly half of US cor­po­ra­tions have fig­ured out how to avoid it and pay no taxes at all.

His team’s plan to trig­ger $1tr in in­fras­truc­ture spend­ing with $140bn in tax cred­its for com­pa­nies will­ing to do the work is un­likely to suc­ceed on the scale re­quired as the projects which the coun­try most needs – like bridges, roads and ports – would not yield com­mer­cial returns quickly enough to in­ter­est pri­vate in­vestors. But the big­gest and most widely ac­knowl­edged risk posed by Trump’s pop­ulist brand of eco­nomics is that his plans to with­draw from global trade agree­ments and slap tar­iffs of 45% on im­ports from China and 35% on goods from Mex­ico – the two big­gest trade part­ners of the US – will trig­ger a dam­ag­ing trade war.

Tar­iffs of that mag­ni­tude would hurt US man­u­fac­tur­ing com­pa­nies as about 35% of their in­puts are im­ported – re­plac­ing them with lo­cal prod­ucts would raise costs and lead to higher prices for Amer­i­can con­sumers, hit­ting spend­ing, jobs and ul­ti­mately eco­nomic growth.

China would be likely to re­tal­i­ate, clos­ing its large and lu­cra­tive mar­ket for high-value prod­ucts from cor­po­rate giants like Boe­ing, Ap­ple and Ford. China has warned it would re­tal­i­ate by halt­ing US soy­bean and maize im­ports. China could also limit the num­ber of Chi­nese stu­dents study­ing in the US – who ac­count for nearly a third of the to­tal, in a mar­ket worth $30.5bn.

Hopes that Trump will not fol­low through on his pro­tec­tion­ist threats are fad­ing as he has an­nounced that dur­ing his first 100 days in of­fice he will with­draw the US from the Trans-Pa­cific Trade Part­ner­ship, a re­gional trade agree­ment which would elim­i­nate 98% of tar­iffs in 12 coun­tries – ex­clud­ing China – with 800m peo­ple.

Ja­panese Prime Min­is­ter Shinzo Abe has warned that the trade deal, which was signed in Fe­bru­ary 2016, would be “mean­ing­less” with­out the US. And there could be worse to come – Trump has de­scribed the North Amer­i­can Free Trade Agree­ment group­ing the US, Canada and Mex­ico, as the “worst trade deal ever” and even threat­ened to with­draw from the World Trade Or­ga­ni­za­tion, which he de­scribes as a “dis­as­ter”. Pres­i­dent-elect of the US Prime Min­is­ter of Ja­pan

Don­ald Trump

Shinzo Abe

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