Economic Revival, Trump‐​Style

This article appeared on National Review (Online) on August 10, 2016.

After one of the most disastrous couple of weeks in recent American political history, Donald Trump has attempted to relaunch his campaign. His speech on Monday laying out his vision for reviving the economy certainly represented an improvement over insulting gold‐​star mothers and encouraging Russian espionage, but for anyone who seriously believes in free markets and limited government, Trump 2.0 still leaves a lot to be desired.

Unsurprisingly, there was a paucity of details in Trump’s speech, delivered symbolically at the Detroit Economic Club. But even so, it was possible to discern some good ideas in the mix.

In particular, Trump reiterated his proposal to reduce the corporate tax rate to 15 percent, which would bring us in line with our major European competitors. Lowering the corporate rate, currently the highest of any major industrialized nation, would go a long way toward making American businesses more competitive internationally. If you are worried about corporate “inversions” and businesses relocating to other countries, this is a big step in the right direction.

He also proposes a one‐​time 10 percent “repatriation” rate for companies that bring back part of the estimated $2 trillion currently parked overseas to avoid high U.S. tax rates. However, he doesn’t appear willing to switch from a global tax system to a territorial one (that is, a system where business income is taxed only in the country where it is earned), which would make the fix permanent.

Trump would also reduce personal income tax rates. He has revised his earlier tax cut, widely considered unrealistic, and now calls for three tax brackets — 12, 25, and 33 percent — although he didn’t say what incomes those brackets would apply to. Trump promised that, with deductions and exemptions, “for many American workers, their tax rate will be zero.”

In a special bit of pandering — someone must have told him that he was running 23 points behind Clinton with women — Trump also proposed making all child‐​care expenses fully deductible. The cost of child care is indeed a problem, especially for low‐​income women, but Trump’s plan seems unlikely to benefit those who need help the most. For example, it would not actually reduce the cost of child care, but would simply create an illusion of low cost because of the tax subsidy. In fact, by shielding consumers from the cost of their child‐​care decisions, it could encourage providers to raise prices. The corporate child‐​care industry would benefit at the expense of smaller, local providers. We’ve seen the same thing happen with health‐​care costs and college tuition because of tax distortions.

Moreover, Trump’s proposal would primarily benefit wealthier families, who have larger tax bills. But those are the families already best able to afford child care. At the same time, the tax deduction provides no benefit to the poorest Americans, whose income is so low that they already don’t pay any income taxes. In fact, by driving up the cost of child care, Trump’s proposal could make their situation worse.

Finally, Trump proposes eliminating the “death tax” on estates. That’s not a bad idea, although its benefits are frequently exaggerated. But it does seem curiously at odds with his populist image.

Trump’s advisors told reporters that the tax plan would reduce federal revenues by roughly $2 trillion over the next ten years, once economic growth is factored in. I’m a big believer in dynamic scoring, but the Trump people offered no details about how they arrived at this number.

Revenue reductions wouldn’t be a problem if Trump was willing to reduce federal spending commensurately. But there was nothing in his speech Monday to suggest that he had any intention of reducing federal spending. Entitlements, for example, which make up half of all federal spending, went unmentioned.

Worse, Trump embraced one of Hillary Clinton’s worst ideas, a massive federal jobs program built around infrastructure spending. The speech itself contained no details about how Trump’s embrace of Keynesian economics would work, but he had earlier told Fox News that he envisioned spending twice as much as Hillary on such programs, perhaps as much as $500 billion.

By cutting taxes while increasing spending, Trump would guarantee that our $19 trillion national debt would grow worse. That would likely mean slower economic growth, lower wages, and fewer jobs. Already, the Congressional Budget Office estimates that our children will be $2,000 to $4,000 poorer per year by midcentury because of the debt. Trump doesn’t even offer a rhetorical nod to the problem.

And, he remains wedded to his disastrous idea for starting trade wars with half a dozen countries or more. Having just talked about cutting taxes, he now proposes slapping taxes (tariffs) on consumer goods. Independent economists have suggested that his trade proposals could cost the average U.S. household $2,200 annually, and harm the poorest households the most. His proposals would also lead to the loss of as many as 3.5 million jobs. As Trump himself might say: “Bad!”

Trump’s recent behavior has set a pretty low bar, but his economic speech probably represents an improvement over shooting himself in the foot. It may even represent a modest improvement over Clinton’s call for higher taxes and more spending. But taken strictly on the merits, it falls far short of what we need.