The economic program of candidate Trump

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

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).

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.

In Figure 1, we show the total cost of the Trump program as it now stands to a total of $4.55 trillion. We estimate that this would mean an expansion to the US budget deficit to 4.5% of GDP in 2018. With accumulated debt service, this expands to 4.8% of GDP in 2020. This compares to a budget deficit under the Clinton program of 3.5% of GDP in 2018, expanding to 3.9% of GDP by 2020.

Economic Impact

There is very little comment or analysis available on the dynamic economic impacts of the changes undertaken to the US corporate tax rate as part of the Trump plan. We offer the following comments.

Although the current headline US corporate tax rate is 35%, the effective US corporate tax rate is actually only 18%. This low effective corporate tax rate is because of the many depreciation allowances and write-offs that have been negotiated by different interest groups with the US Congress over many years. The major action of this corporate tax reform is to wipe out those many depreciation allowances and write-offs. This should make the corporate tax code less complex and more effective.

The net result should be a reduction in the effective rate of taxation from 18% to 15% (or less). This would result is an increase in after tax US corporate earnings. The result would therefore logically be an increase in the reported after tax earnings of US corporations listed on the US equities market. The most plausible result in this increase in after tax earnings would be a similar increase in US equities prices. The Republican policy would therefore be positive for US equities. This means it would be positive for Australian equities.

There are other influences. In our Economic Strategy of 27 June – Australian Corporate Tax Cuts and GDP Growth, we demonstrated that there was a strong empirical relationship between increases in Australian after tax corporate earnings and Australian private fixed capital investment. We further demonstrated that there was a strong relationship between private fixed capital investment and Australian jobs growth. We believe that the same relationships would hold within the US economy.

Interestingly, we elsewhere found that there was a strong relationship between increases in US after tax corporate earnings and Australian private fixed capital investment. The US corporate tax rates proposed within the Trump program would increase US private fixed capital investment in the US economy. The US corporate tax rates proposed within the Trump program would also increase US private fixed capital investment in the Australian economy. This would also be enormously beneficial for the Australian economy.

Conclusion

The Trump Economic Program would actually be positive for both investment and employment in the US economy. Interestingly, it would also be positive for US investment and employment in the Australian economy.

Trump's economic program shows the considerable influence of the Speaker of the House Paul Ryan. As such, it may be much more thoughtfully constructed than popular media would have us believe.