Former President Donald Trump’s tax and tariff proposals have been a topic of intense debate. While Trump has not released a fully detailed tax plan as part of his current bid for reelection, he has floated several tax policy ideas. Among these, he seeks to extend the expiring 2017 Tax Cuts and Jobs Act (TCJA) changes, further reduce the corporate income tax rate, impose a 10 percent or higher universal baseline tariff on all imports, and lift current tariffs on China to at least 60 percent. He has also discussed a host of other tariff increases and additional tax cuts, which we do not model due to lack of detail.
According to an analysis by the Tax Foundation, if the two major tariff increases are implemented and met with in-kind retaliation from all trading partners, it would more than offset the entire benefit of the major tax cuts for economic output and jobs, resulting in a net loss for the US economy. The analysis estimates that the five major tax changes proposed by Trump would reduce US output by 0.1 percent, employment by 121,000 full-time equivalent jobs, and federal revenue by $1.7 trillion on a conventional basis and by $1.6 trillion on a dynamic basis.
While the major tax provisions would be pro-growth, a global trade war would threaten to undermine all the potential growth from better tax policy. Making the TCJA permanent and further reducing the corporate income tax rate would be pro-growth, boosting long-run GDP by 1.2 percent, the capital stock by 1.1 percent, wages by 0.4 percent, and employment by 926,000 full-time equivalent jobs. However, the tax cuts would decrease federal tax revenue by $4.3 trillion on a conventional basis and by $3.6 on a dynamic basis over a decade when the federal government is already projected to run deficits totaling $22 trillion.
Trump’s proposals, while cutting taxes overall, would raise revenue in a more distortive way, resulting in a smaller economy with fewer jobs. The increase in the budget deficit would lead to higher interest payments made to foreigners, resulting in a reduction in American income (GNP) of 0.4 percent. The major policies outlined by Trump would reduce distortions in one part of the tax system only to replace them with new distortions in another part of the tax system, which risks shrinking the economy and growing the debt.
It is crucial to understand the potential implications of these proposals on the US economy. As responsible financial citizens, we must stay informed about these matters and make informed decisions that contribute to the well-being of our communities.