The effects on deficit – Trump vs Biden

National Security and Immigration

Under the Trump program, national security and immigration adds $US0.3 trillion to the budget deficit. Under the Biden program, national security and immigration reduces the budget deficit by $US0.75 trillion. Biden proposes to take down most, if not all, of the Trump immigration program of the first term. Our understanding is that the savings, under the Biden program, would be to stop "building the wall". Trump of course, would continue "building the wall".

Tax Policy

Perhaps the biggest difference between the two candidates is on tax policy. This generates a very significant difference on how each of their programs would affect long term growth in the US economy.

Under the Trump program, tax policy adds $US1.7 trillion to the budget deficit. Trump proposes to cut taxes to boost take-home pay and keep jobs in America. At a minimum, Trump would support extending the provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 beyond their 2025 expiration, as proposed in his FY 2021 budget. These extensions include a continuation of lower individual income tax rates and the Child Tax Credit (CTC).

Permanently extending TCJA provisions would cost $US1.25 trillion over ten years. Trump has also suggested repealing the worker side of the payroll tax, cutting middle class taxes by 10%, indexing capital gains taxes to inflation, reducing the capital gains tax rate to 15% and lowering the 22% individual marginal income tax rate to 15%. Our view is that the Trump policy supports investment and thereby enhances growth.

Under the Biden program, tax policy reduces the budget deficit by $US4.3 trillion. Biden would raise the corporate income tax rate from 21% to 28%. By broadening the base, he would lift total corporate taxes to above the level before 2017. This increase in corporate taxes must reduce the retained earnings that corporations have to invest. This action directly damages future growth in output, corporate earnings and individual wages. The CFRB estimates that these actions increase revenue by $US1.8 trillion over ten years.

Biden would also increase taxes on households making more than $US400,000 per year. First, he would increase the top income tax rate from 37% to 39.6%. He would also repeal the 20% deduction of pass through income (similar to Australian trust income). He would also tax long term capital gains and dividends as ordinary income at a rate of 39.6%, as opposed to the current law preferential rate of 20% for individuals and couples earning more than $US1 million. Importantly, Biden introduces an additional death duty, by increasing the capital gains tax on capital gains at death for high earners. The CFRB estimates that these increases of individual taxpayers would raise $US1.4 trillion of additional revenue.

Interest

The accumulation of debt under the Trump program worsens Federal interest rate payments leading the deficit to widen by $US0.25 trillion. The accumulation of debt under the Biden program worsens Federal interest rate payments, leading the deficit to widen by $US3 trillion.

The Deficit

The CFRB estimates a deficit under Trump of $US4.95 trillion over ten years and a deficit under Biden of $US5.6 trillion over ten years. Both have similar effects on increasing domestic demand.