Trump’s trillion-dollar tax cuts are spiralling out of control
His zany promises would blow up the deficit
For American policy wonks, the final stretch of the presidential election has given rise to a new parlour game. What is the next tax that Donald Trump will promise to cut? The Republican candidate has trotted out a range of pledges, from no taxes on overtime work to no taxes on retirement benefits. Last week alone he proposed three new exemptions, including making interest on car loans tax-deductible. It is easy to figure out what Mr Trump hopes to gain. Yet the economic implications are dispiriting: not just a bigger fiscal deficit but a much messier tax code.
Set against the federal government’s $4trn in annual tax revenue, some of Mr Trump’s most attention-grabbing ideas are inexpensive. For instance, exempting tips from taxes would cost about $118bn over the next decade, according to the Tax Foundation, a think-tank. Others would be much bigger. He has proposed reinstating a rule to let Americans fully deduct taxes paid to state and local governments from their federal tax bills. That could cost $1trn over the next decade, the Tax Foundation says. And these all come on top of Mr Trump’s baseline pledge to extend the income-tax cuts that he made in 2017, which are due to expire at the end of next year.
One obvious concern is that these various cuts would push up an already bloated federal deficit. In an estimate published on October 7th, the Committee for a Responsible Federal Budget, a non-partisan group, projected that the deficit would climb to as much as 12% of GDP by 2035 under Mr Trump, up from about 7% last year. As a result, the national debt would soar to vertiginous heights (see chart).
Taken together, the proposals also represent a shift from Mr Trump’s approach to taxes during his first term. The Tax Cuts and Jobs Act of 2017—his biggest legislative accomplishment—simplified the tax system and broadened the base of taxpayers in order to clear the way for cuts. What he is proposing now, however, is the creation of a dizzying array of loopholes. Philosophically, it is hard to defend many: why, for instance, should wage workers pay taxes on their entire income, whereas workers who receive tips avoid taxes on some of their income? Moreover, practically it will be a mess: individuals will have to spend more time itemising their tax returns, and the Internal Revenue Service, already overwhelmed, will struggle to monitor all the claimed exemptions.
The saving grace is that many of Mr Trump’s proposed tax cuts are probably empty promises. Fiscal legislation must make it through Congress to become law. Even if Republicans end up controlling both the Senate and the House, moderates in the party would surely push back against Mr Trump’s zanier proposals. Douglas Holtz-Eakin, a long-time Republican economic adviser, argues they are mostly transactional—cheap pledges made to win an election that are easily discarded afterwards. “They don’t come from a place of deep, personal belief,” he says.
But Erica York of the Tax Foundation says Mr Trump could still complicate the debate about how to handle the expiration of the tax cuts of 2017 by throwing unhelpful ideas into the mix. “That’s just going to add to the pressures that Congress faces next year,” she says. And there is one type of tax Mr Trump really does care about: tariffs. Here, too, his promises are inflationary. At the start of his campaign he vowed to place levies of 60% on Chinese products; on October 15th he upped his threat to 2,000% tariffs on Chinese cars. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Blue-sky thinking”
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