Clearly Donald Trump must be doing something right. Winning the Republican Presidential Nomination, Trump has surprised and charmed many in his ascendency. What is not so clear, however, is the soundness of his proposed Economic Policies. As Paul Krugman pointed out on ABC, Trump is "completely incoherent on economic policy".
In Part I on this series, let us look at some of the major tax changes Trump has proposed:
1. Reducing the corporate tax rate from 35% to 15%
The obvious impact would be an increase in the I component of AD as companies 1) have more profits to invest 2) be more inclined to invest due to higher profitability. This would help America bring jobs and businesses back home by increasing national output and employment as AD rises. Thus this can be viewed as an expansionary Fiscal stance. Considering that actual growth in the US has been weak, this could actually be a good idea.
While Economists disagree on corporate tax being progressive, it is evident that a fall in corporate tax would benefit corporate (business) shareholders as well as business owners.
2. Reducing the number of tax brackets from 7 to 4 with a large zero bracket for low income groups
Trump proposes removing the 4 highest tax brackets of 28%, 33%, 35% and 39.6%, effectively cutting the highest tax rate from 39.6% to 2%. He is also proposing the introduction of a large zero tax bracket for low income groups, where they will be tax exempt up to USD25,000 in annual income. Again, the obvious impact here would be a rise in the C component of AD as consumers have greater disposable income and would be more able to willing to purchase goods and services on aggregate, lifting actual growth and reducing unemployment. Once again an economically sound Fiscal policy on these grounds.
What is of greater concern would be the highly regressive nature of these changes. High income households would receive a massive discount on their tax bill if these policies come to fore. While it can be argued that the low income groups get a simultaneous tax cut through a more generous tax exemption up to USD25,000 of income, it is not difficult to see that the reduction in marginal taxes paid would save the rich a lot more than it would for the poor, potentially widening income inequality.
3. Abolishment of Death Taxes
A death tax is sometimes also known as an inherence tax where taxes are paid on inheritance (assets, property, bonds, money etc.). This is a wealth tax and so would alter the C component of AD as it increases the wealth of households that receive inheritances.
It is also not hard to see that this tax change is regressive since we expect the wealthier households to have a greater inheritance to leave behind and hence ordinarily bear a greater tax bill. Again we would expect this to cause greater income inequality. If we further consider the benefits of intergenerational wealth transfer, this could perpetuate future income inequality as well.
Its is estimated that Trump's tax plans would cost America a USD10-12 Billion increase in deficit. Considering that the US annual budget deficit is already expected to rise to USD616 Billion by the end of this Fiscal year from USD438 Billion the year before, such an increase should not be taken lightly. Continued fiscal deficits into the future would require the government to take on increasing amounts of debt which will eventually limit their ability for Fiscal expansion and compromise on standard of living due to debt repayment requirements.
There is a disturbing pattern across policies that points to a certain bias towards wealthy households. Even if we could justify the generous tax cuts on the grounds of economic weakness, it is evident that the benefits would not be shared equally throughout the economy across households. Moreover, given the high fiscal deficit of the US government, such promises reeks of fiscal imprudence.
Brilliant? Maybe not.