Trumpenomics
The incoming Trump administration has announced plans to extend the individual and corporate income cuts it enacted in 2017 in an effort purported to continue our nation’s economic growth. It also plans to impose tariffs on goods imported from all of our nation’s trading partners. These undertakings, however, do not appear likely to continue, much less enhance, our nation’s economic growth. The former will undoubtedly further aggravate income and wealth inequality that is currently poisoning our nation; and the latter is likely to sow dissention among our allies and trading partners and could lead to a multitude of trade wars. Indeed, most economists view the actual impact of these proposals as being highly detrimental to the economic progress that has been achieved in recent years.
Tax Cuts
Cutting income taxes has long been a high priority of Republican administrations and their tax cuts have all been designed to primarily benefit wealthy individuals who regularly contribute to the campaigns of Republican politicians. They seek to justify tilting our nation’s tax laws in favor of the wealthy with claims that placing more monies into the hands of the wealthy tends to spur job growth enabling all Americans to benefit. They even assert that such tax cuts have such a positive impact on growing the nation’s economy that they generate more tax revenues than are lost as a result of the lower tax rates.
Unfortunately, their miraculous tax-cut plans have been tried by the administrations of three of the last four Republican presidents and each time they have failed to produce the promised results (see, “The Myth of Republican Economic Managerial Superiority”). The reality is that tax cuts that favor the wealthy do exactually what their name implies—they make the rich richer. Fool me once, shame on you; fool me twice shame on me, but fool American voters and there’s no telling how many times you can get away with it.
Specifically, Trump announced that he plans to extend the Tax Cuts and Jobs Act of 2017 (TCJA) which is scheduled to expire at the end of next year. That Act not only cut the individual federal tax rate of those in the highest income tax bracket from 39.6% to 37%, but it also reduced the maximum long-term capital gains rate from 28% to 20%. Perhaps more significantly, the TCJA cut the highest corporate income tax rate from 35% to 21% and allowed corporations to fully expense short-lived assets. Still another corporation friendly provision eliminated the alternative minimum corporate tax with the result that many of our nation’s largest corporations have been able to pay no taxes at all. Lastly, the TCJA doubled the threshold amount for the application of the estate tax from $11.2 million to $22.4 million. Not surprisingly, this tax cut only affects the wealthiest 1% of Americans.
It’s not that the individual tax rates for lower income Americans were not reduced by the TCJA; it’s just that the amounts of those reductions were relatively miniscule compared with the reductions in the tax burdens imposed upon wealthy individuals. As a result, the TCJA has had little impact on the financial well-being of working class Americans. In short, the TCJA was literally a gift to the nation’s wealthiest citizens that Trump wants to keep on giving.
But wait, you say, “Aren’t the corporate tax savings going to be used to increase investments that will help grow our nation’s economy. The short answer is “not really.” A recent article published by the Tax Foundation concluded that the TCJA would increase domestic corporate investment by an aggregate of 7.4% over a ten-year period. Indeed, in the three years following the enactment of the TCJA the U.S. economy grew at an average annual rate of 2.7% which was only slightly higher than the economic growth experienced in the final three years of the Obama administration and nowhere near the 4% annual growth predicted by Trump. Perhaps more significantly during that same ten year period the Tax Foundation article reported that the increase in real wages of working class Americans would only grow at an annual rate of 0.9%.
Another problem with the TCJA is that over two-thirds of the tax savings which it heaped upon the nation’s corporations were not even invested in new production facilities, but rather were used to increase shareholder dividends and stock buy-backs. Moreover, much of those investments were made in labor-saving equipment which actually eliminated jobs.
One sure thing is that extending the TCJA will continue the transfer of wealth that has taken place over the past 40 years from the 90% of the nation’s poorest citizens to the 10% of its wealthiest citizens. Those transfers add up to a staggering $50 trillion (yes, $50 trillion). This legislation will also have the effect of further increasing the nation’s deficit and that increase is estimated to be $4 trillion over the next ten years. This will put great pressure on the federal government to cut its expenditures unless it can find additional ways of raising revenues. Ultimately, this means that the federal government may not be able to continue to maintain, much less improve, its infrastructure or many of the services it currently provides its citizens.
In proposing to extend the TCJA, Trump is no longer claiming that the extension will have no impact on our national debt. Now he’s claiming that he will address the problem of nation’s $35 trillion indebtedness by cutting wasteful spending and by generating additional revenues through the imposition of a wide range of tariffs on goods being imported into our country. Unfortunately, this is the same kind of economic fairy tale that we have come to expect from Donald Trump. Lest you forget, he’s the man who enticed his shareholder and creditors to invest $1.5 billion in his casino empire before he ran it into bankruptcy.
His plan to cut fraud, waste and inefficiency, discussed in my last article, may never take place because significant cuts in the federal budget tend to be politically unfeasible. The difficulties facing that initiative are spelled out in a recent article. In addition, as discussed below, he plans to raise additional monies by imposing tariffs is also a pipe dream. A more prudent course would be to forget about extending the TCJA and raise the federal corporate tax rate back up from 21% to 28% where it was before Trump took office in 2017. That alone could offset roughly $800 billion in annual federal spending. The new Trump administration should also consider cutting the nation’s annual defense budget which currently stands at $842 billion and is almost twice the combined defense budgets of China, Russia, Iran and North Korea. Another fruitful area for raising money is by actually enforcing the nation’s tax laws which are now being evaded by wealthy individuals actually refusing to file tax returns.
Tariffs
While import tariffs do represent monies received by the federal government, those monies essentially come out of the pockets of Americans who purchase imported items and not out of the treasuries of the counties exporting those items or even out of the bank accounts of the manufacturers who produce those goods. Moreover, tariffs are essentially a regressive form of taxation having a much greater impact on low-income individuals than the wealthy. This is basic economics; and it’s beyond belief that a man who imposed roughly $100 billion in tariffs during his first term in office and who has a cadre of economic advisors does not comprehend that its U.S. citizens who really pay the tariffs on imported goods.
The general public, however, has little understanding of tariffs and their likely impact which can be considerable. In most cases tariffs can be unilaterally instituted by the president which means neither the Congress nor American voters have any control over the imposition of tariffs. Significantly, no individual making a living offering economic advice views tariffs as an appropriate means of raising revenues even though assessed tariff do flow into a country’s national treasury. Instead, tariffs are essentially intended to enable domestic companies to better compete with foreign manufacturers. Indeed, tariffs are most frequently employed to help a nation to develop the ability to manufacture goods that they regularly import. Thus, you can think of tariffs as being a form of training wheels for nascent industries.
The simple fact is that tariffs have a number of detrimental side effects. First and foremost, tariffs are not always helpful in creating new manufacturing capabilities. That’s because a country’s citizens buy imported products because their own country cannot produce them as inexpensively as the country or countries from which they’re being imported. In most cases that’s usually because the exporting countries have lower labor costs. Therefore, for a nascent industry to actually establish the ability to compete against foreign producers, it must find a way to reduce its own production costs which usually requires investing in machinery or technology. For the most part, this is only advisable in situations in which it would be unwise to remain dependent on foreign sources to obtain those items.
For example, the Covid pandemic interrupted international supply chains greatly reducing our nation’s ability to secure electronic microprocessors (or computer chips) required to produce a wide variety of products. To remedy this potentially dangerous situation, the Biden administration embarked upon a program to impose tariffs on semiconductors being imported from China and Taiwan. That action was coupled with a $53 billion program to entice foreign companies to construct semiconductor factories in the U.S. In this way, the U.S. economy will no longer be placed at risk in the event foreign sources of microprocessors should suddenly become unavailable.
One of the dangers of imposing tariffs on imported goods is that the exporting country might retaliate with tariffs on goods it imports from the U.S. This is what happened when the first Trump administration imposed tariffs on a broad range of Chinese goods in an effort to coerce China to cease a variety of its unfair trade practices. That effort was wholly unsuccessful because China retaliated by imposing tariffs on agricultural products that it was importing from the U.S. Ultimately, the Trump administration was compelled to subsidize U.S. farmers for their lost sales and the costs of those subsidies actually exceeded the tariffs the U.S. government had received from the import of Chinese goods. The result was that the U.S. neither benefitted from the revenues generated by the tariffs or caused China to amend its unfair trade practices.
In a tariff war both sides not only lose export sales but their citizens also end up paying higher prices for the goods they import. In that respect, tariff wars tend to be lose/lose propositions as reduced exports also result in job losses and imported goods become more expensive which frequently leads to inflation. Moreover, rising inflation gives rise to higher interest rates that are imposed to prevent an inflationary cycle. That’s when sellers of goods and services start to raise their prices in anticipation that their costs will rise. The moral is that imposing tariffs on imported goods can be like playing with fire. If you are not careful a resulting tariff war can get out of control and devastate a country’s economy, just like an out-of-control forest fire can devastate a countryside.
In addition to his announced intention to impose tariffs on goods imported from all of our trading partners, Trump has also threatened to impose a 25% tariff on all good imported from Canada and Mexico “until such time” as those countries put an end the influx of immigrants and fentanyl flowing in across our borders with them. This rather unusual announcement appears to be an effort by Trump to demonstrate to American voters that he will be a strong President who knows how to get things done. This effort to intimidate our two leading trading partners, however, does not seem to be achieving the intended effect.
Although Canada’s Prime Minister, Justin Trudeau, rushed to Mar-a-Lago to discuss Trump’s proposed tariff, Claudia Sheinbaum, Mexico’s newly elected President, was neither amused nor intimidated by Trump’s announcement. She stated that Mexico would simply respond with its own tariffs on U.S. goods should Trump carry out his threat. She also pointed out that both the influx of immigrants and fentanyl into the U.S. were because the U.S. attracts them and not because Mexico sends them. Accordingly, only the U.S. can ultimately prevent them from coming. She went on to add that fentanyl is primarily being transported into the U.S. by U.S. citizens and not by Mexicans. She concluded her response to Trump by criticizing the U.S.’s spending on weapons, saying that money should instead be spent regionally to address the migration problem and “if a percentage of what the United States spends on war were dedicated to peace and development, that would address the underlying causes of migration.” Having been so rebuked, Trump then placed a telephone call to Sheinbaum and later reported that she had agreed to help, a characterization of their conversation that Sheinbaum also rejected. This exchange reminded me of that Great Wall that Trump was going to build and that Mexico was going to pay for.
Mexico and Canada are the U.S.’s two most important trading partners. During the last year of Trump’s first term he updated and renewed the U.S.’s free trade agreement with Canada and Mexico. What Trump is now proposing is hardly the way a country should deal with its most important trading partners. If Trump really wants to address the influx of immigrants and fentanyl he should be working with the Congress to resurrect the comprehensive border security legislation that he derailed earlier this year and not by trying to demonstrate how tough he is by attempting to intimidate important allies.
The principal problem with Trump’s threat is that efforts to curtail the flow of goods from Mexico into the U.S. would significantly harm U.S. auto manufacturers who are dependent on certain car, trucks and auto parts produced in Mexico. This poses the danger that a 25% tariff could cause U.S. auto manufacturers to become priced out of the world car and truck markets. In addition, it could ignite a costly trade war. Just because the U.S. has the world’s strongest economy doesn’t mean that it’s destined to prevail in such a trade war. Indeed, it didn’t seem to help Trump in the trade war he started with China in his first term as President.