The economic program of candidate Trump

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.