Former President Donald Trump’s tax policy ideas, though not fully detailed, have sparked significant discussion and analysis. Among his proposals, Trump has expressed interest in extending the 2017 Tax Cuts and Jobs Act (TCJA) changes, further reducing the corporate income tax rate, imposing a universal baseline tariff on all imports, and increasing current tariffs on China to at least 60 percent. However, these proposals come with their own set of challenges and potential consequences.(source)
According to the Tax Foundation’s Taxes and Growth model, the five major tax changes proposed by Trump could potentially 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. The capital stock and wages would be slightly larger, as the lower tax burden on business investment would not be entirely offset by tariffs. American incomes, as measured by GNP, would be 0.4 percent lower, as the increased budget deficit and national debt would require higher interest payments to foreigners.(source)
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.(source)
Trump’s proposed tariffs would reduce long-run GDP by 0.8 percent, the capital stock by 0.6 percent, and hours worked by 685,000 full-time equivalent jobs. The new tariffs alone—absent foreign retaliation—would threaten more than two-thirds of the increased output from the tax cuts (69 percent), while covering less than two-thirds of the cost (60 percent).(source)
In conclusion, while Trump’s proposals would cut taxes overall, they 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.(source)