A Trump plan that doesn’t (entirely) tax credulity.
Analyzing Donald Trump’s utterances is always something of a challenge. His policies are often, er, unconventional and backed up by off-hand innuendo and “common-sense” assumptions. He has no clear ideology. And it’s often unclear whether he even means what he says — are his more outrageous statements just there for effect?
In other words, with Trump, there’s the challenge of the substance, and then there’s the challenge of the sizzle.
And so we turn to Trump’s economic vision, which he laid out in a speech in Detroit on Monday. Leading up to the speech, and trailing Democratic rival Hillary Clinton badly in post- convention polls, Trump needed to shift the conversation away from his foibles and towards his credibility as a potential POTUS, while building bridges with an increasingly alienated Republican establishment.
All in all, for Trump, it was a pretty good speech. For one thing, we saw a more restrained Donald. He largely stuck to script, only veering into hyperbole when lashing out at Clinton and President Barack Obama ( and when talking about how he saved New York City). Protesters interrupted him several times, but he managed to bite his tongue.
So the sizzle was OK, from a “l ooking presidential” point-of-view. A good chunk of the substance, meanwhile, was torn out of conventional Republican thought: sharp tax reductions and less regulation, particularly around energy. That should help satisfy the party base, if they believe him. Trump continued to make an exception to the Republican song sheet when it came to free trade. While declaring that he is “totally in favour of trade,” he said he would back out of the Trans Pacific Partnership, get tough with China and renegotiate the North American free-trade agreement — or rip it up altogether.
Does any of this make sense? Well, I’ ll leave aside trade and regulation for now, and just look at taxes. In my view, it’s where Trump’s platform is most firmly grounded in rationality. Key to his proposals is simplification. Trump would reduce the number of personal income tax brackets from seven to three. He would also lower tax rates to 12, 25 and 33 per cent respectively. That’s a comedown from his previous promise of a top tax rate of 25 per cent, but it would still represent a massive cut in personal income taxes.
On business taxes, he’s even more revolutionary, promising a 15- per- cent tax on corporate i ncome. In Trump’s view, the need for lower business taxes is clear: the United States, he says, now has the highest corporate tax rate among developed countries, approaching 40 per cent. His 15-per-cent solution would make America’s corporate rate even below that of Hong Kong, and certainly Canada. It would also, according to Trump, create a wave of investment in America, as corporations from all over the world would look to set up shop in the new lowtax U.S. regime.
Who knows if that’s the case or not. But it’s true that the U. S. has one of the highest official corporate tax rates in the world. On the other hand, few companies pay the marginal rate of 40 per cent. The effective corporate tax rate — what corporations actually pay on income — has been estimated at around 27.5 per cent. That is still high by global standards. But it’s not clear that companies are unwilling to pay it, given that it’s the price of entry to the world’s largest economy.
No doubt, as well, the corporate tax code in the States is perhaps hopelessly complicated, and simplifying it would certainly reduce costs to businesses and government. On the other hand, there’s politics at play here, too, and unravelling the Gordian knot of U. S. tax policy might be harder than Trump imagines.
For one thing, not every sector in the States pays the same tax rate, a function in part because of government tax incentives for certain industries. According to Prof. Aswath Damodaran at the Stern School of Business at New York University, moneymaking coal producers, automotive and trucking companies, entertainment software companies and green energy producers all pay less than 15- per- cent corporate tax. Among very small companies (less than US$4-million market cap), the aggregate effective tax rate, which includes companies that don’t make money, is already below five per cent.
There is also the thorny problem of paying for these tax cuts. Trump says that combined with other reforms, his tax cuts will spur economic growth and thereby double the government’s coffers, adding US$6 trillion to federal, state and local tax revenue. Of course, he also said that windfall will occur over the next 40 years, which is certainly thinking long term.
Against that, we have a shorter-term estimate of the impact from Moody’s Analytics. It recently pegged the direct cost of Trump’s tax reforms at US$9.5 trillion over the next decade. Assuming both Trump and Moody’s are right ( I know that’s a dicey assumption), then the U. S. economy will really take off thanks to President Trump, starting in about 2026.
Of course, all of this only means something if Trump can continue to stick to script and get elected. If he does, who knows what will happen? There are some sensible ideas in Trump’s economic plan. But if he becomes president, whether they will be sensibly applied — or even get applied at all — remains an open question.