Interrogating Trump’s Taxes

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Written by Matt Ehret

Following the astonishing election of Donald Trump, stock market panic ensued. As the dust has settled, markets have reacted more calmly, with a number of Wall Street stocks opening higher despite disastrous market predictions. Trumps appeasing victory speech, which avoided the contentious and misogynist tone which was a fundamental basis of his campaign, instilled confidence in traders. His speech indicated the potential for a more subdued presidency than first assumed, suggesting he won’t immediately embark on implementing some of his most radical ideas. However, it seems likely a large number of his policies will be implemented.

Throughout the election campaign, the new president outlined a series of economic policies that would be harmful to long term economic growth. Trumps wishes to dismantle trade agreements and implement high tariffs as a form of barrier to trade. His infrastructure plan is disastrously expensive, that, coupled with plans on reducing corporation and income tax could spiral America into debt. Furthermore his conservative immigration policies could also see the size of the US labour force reduced by up to 5%, as he plans on deporting many of America’s 11m illegal immigrants.

The worrying issue is the vast extent to which Trump can implement these policies. Due to rule changes in the latest budget deal, Republicans are able to pass even unfunded policies with a simple majority. Whereas they would have previously been susceptible to Democratic opposition in the Senate. Worrying as this is, House and Congressional Republicans may moderate many of Trumps policies.

Paul Ryan, Speaker of the House of Representatives, wants more reasonable tax cuts in contrary to Trump, however both are massively expensive. Trumps wants corporate tax cut to just 15% (from 35% at the moment), however due to Ryan’s influence this may end up at his proposed 20%.  The two men do agree on having only 3 tax rates for individuals, set at 12%, 25% and 33%. These tax plans are estimated to cost $7.2trn over a decade, or about half of America’s current debt.

Even when moderated, Trumps new taxation policies are expensive, together with his pledge to invest $550bn in infrastructure and to further ramp up defence spending, debt will rise significantly. More borrowing will boost the economy in the short term, and helps explain why markets rallied the day after the election. The new president has not yet specified how he plans focus this investment, however infrastructure projects usually take time, so it is unclear how quickly growth effects will come. Nevertheless, questions still remain the effects this will have on US long term fiscal health.

Trumps protectionist policies are much less likely to be moderated by Congress. As he noted several times throughout his campaign, existing laws give the president the ability to impose tariffs fairly reluctantly. Plans for a 35% and 45% tariff on Mexican and Chinese goods respectively are only going to cause international contention and undoubtedly lead to high taxation on US goods in around the world.

Trump capitalised on the huge discontent over trade deals in the US. Anger at stagnated wages and job losses throughout much of the working class, blaming globalisation and past trade agreements. This was reflected by a hostile anti-trade Republican campaign, in which Trump threatened to withdraw from a number of trade agreements including the North American Free Trade Agreement (NAFTA), between the US and Canada. The president claims to be willing to renegotiate with the goal to ‘win for America’. Trump claims threats of imposing tariffs and withdrawing from trade agreements, will be made in order to achieve better deals for America. However, no one knows how countries will react to this.

America is also set to drop out of the Trans-Pacific partnership as a result of Trumps victory. The largest regional trade agreement in history, is likely to be rejected by Congress. Labelled as a ‘terrible deal’ by Trump, it would of phased out 18,000 tariffs on US goods in 11 different countries, along with establishing a number of precedence for international trade such as environmental protection and human rights. Abandonment of the deal not only risks America’s stance as a trade policy leader but also has huge geopolitical implications. In the fast growing Asia-Pacific region, the US risk undercutting their standing as opposition to an expansive China, both economically and militarily, for America’s allies in the region.

Another cause for concern is monetary policy. Trump claims the Federal Reserve’s policies have led to unequal consequences for different sectors of society. He has also been extremely critical of Janet Yellen, chairman of the Fed, for the low interest rate policies, stating she ‘should be ashamed of herself’. She is expected to depart when her term expires in 2018, with Trump likely to nominate someone who reflects his stance on stricter monetary rules and overall Republican hawkishness. High interest rates could be necessary to keep inflation down, due to large fiscal stimulus. However, this would be detrimental to American manufactures, as the dollar would rise, and consequently increase the already prominent lure of protectionism.     

The economic implications of Trumps presidency are still speculative. Running policies of protectionism threatens to alienate business, and overall long term growth. However, it was these policies which appealed to his core constituents and got him elected. How the new president prioritises these policies and to what extent he implements them will give us a much clearer indication of how Trump will affect the economy.

Ramone Bedi

Deputy Editor for the City