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The economic program of candidate Trump

By Michael Knox - posted Thursday, 10 November 2016


We thought that it would be a more than useful exercise to look at the economic policies which Donald J Trump billionaire has proposed within his economic platform. It is worth noting that the policies that he has carried to the election as nominee are significantly different to the policies with which he competed for in the lead up to the Republican nomination.

Trump's current policies show the significant influence of Speaker of the House, Paul Ryan. Paul Ryan is known as "a policy wonk". In Australian English we might say he is a policy "nerd". Ryan rose to prominence as Chairman of the Budget Committee of the House of Representatives. Economic management is his specialist area. The central part of Paul Ryan's program is to reduce corporate taxation to a rate of 15%. The purpose of this reduction is to make sure that US multinational companies bring their funds back to the US and reinvest it domestically in the US economy.

Figure 1: Change in 10-Year Estimates of Trump's Policies

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SOURCE: US Committee for Responsible Federal Budget

In a hard fought election, it is difficult to find non-partisan commentary about the economic programs of the different candidates. However such sources exist. We have taken as our base commentary the publication by the Committee for a Responsible Federal Budget. This is a non-partisan research organisation based in Washington DC.

Trump's Corporate Tax Plan

Donald Trump's economic plan will reduce the corporate tax rate from 35% to 15%, eliminate most tax breaks. The plan will tax carried interest as ordinary income, impose a one-time deemed repatriation tax on profits held abroad, repeal the estate tax and eliminate the corporate and individual alternative minimum tax.

The Trump plan will also: reduce individual tax rates to a simple three tier level of 12%, 25% and 33%. The top level of 33% is reduced from the previous top US level of 39.6%. He would expand the standard private income tax deduction from US$12,600 per couple to US$30,000 while eliminating personal tax exemptions. He would cap the amount of itemised deductions a couple could take to US$200,000.

Trump would offer US manufacturers the option of fully expensing, instead of depreciating, their equipment in exchange for giving up the deductibility of interest. Trump would impose a capital gains tax on personal assets beyond US$10 million at the time of death in place of the estate tax.

The Committee for Responsible Federal Budget says there are ambiguous results in their analysis of "pass through businesses". These are like trusts under Australian tax law. As such, we think that income would be taxed at the rate of the individual who is finally receiving their income. For this reason, we assumed this would be taxed at the new maximum of 33%. This reduces the cost of the Trump plan by in total US$750 billion (compared to the cost shown by the Committee for Responsible Federal Budget).

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In addition to enacting comprehensive tax reform, Trump plans to:

Reduce other non-defence spending (reducing overmanning by allowing the natural wastage of public sector employment through retirement). This reduces spending by US$250 billion.

  • Expand tax breaks for childcare and other caregiving at a cost of US$550 billion;
  • Offer partially paid maternity leave through unemployment insurance at a cost of US$50 billion;
  • Increase military spending by repealing the Defence Sequester at a cost of US$450 billion;
    • Trump proposes to increase the number active army troops from 475,000 to 540,000;
    • The number of Marine battalions from 24 to 36;
    • The number of navy ships from 280 to 350;
    • The number of fighter aircraft to at least 1,200; and
    • To modernise missile defence and cyber security.
  • Reduce non-defence spending through a "penny plan" (this is a 1% efficiency dividend). This reduces spending by US$750 billion.
  • Reduce other non-defence spending (reducing overmanning by allowing the natural wastage of public sector employment through retirement). This reduces spending by US$250 billion.
  • Spending on school vouchers, improved immigration enforcement and infrastructure spending at a cost of US$20 billion per annum.
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References:

Promises and Price Tags: An Update, Committee for a Responsible Federal Budget, 22 September 2016.

Economic Strategy: Australian Corporate Tax Cuts and GDP Growth, 27 June 2016.

Disclaimer

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.



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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

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All articles by Michael Knox

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