Trump: For the rich, not the poor

Hefty tax cuts and generous incentives to encourage private spending on infrastructure is likely to boost economic growth in the US over the next few years, but the pace will fall short of the 3% to 4% predicted by president-elect Donald Trump’s transition team and will not maintain its momentum, analysts warn.  

Some economists predict that the US growth rate could accelerate to between 2% and 2.7% in 2017 from an estimated 1.6% this year, before slowing in 2018 as the one-off effect of anticipated personal tax cuts drops out of the equation. The pickup in growth will spark more interest rate increases, which will also curb the expansion.  

The problem with those measures is that – despite promises to the contrary to Trump’s middle-class supporters – they will benefit the rich far more than the poor, who would spend much more of any additional disposable income than their wealthy counterparts.  

Trump wants to simplify the tax system by reducing the number of tax brackets to three from seven, cutting the top rate from 40% to 33% and raising the bottom rate from 10% to 12%, albeit over a wider income range. The theory, of course, is that rich people invest more, creating jobs and growth which benefit everyone – classic “trickle-down economics”, which was slammed by the International Monetary Fund in a 2015 study.  

Research from the US Tax Policy Centre, an independent think tank, shows that the top 0.1% of American income earners making more than $3.7m would get a tax cut of nearly $1.1m, while the poorest fifth of Americans would get a tax break of just $110 a year, or 0.8% of their income.  

The massive cost of the tax reductions are supposed to be offset by eliminating loopholes and waste, but details of this strategy are scant so far, and the tax centre warns that it would add about $1tr a year to US Federal debt. This would push the government’s debt-to-GDP ratio up to more than 100% from 77% now – a dangerous level.  

Trump’s treasury secretary nominee, Steven Mnuchin, undoubtedly knows better, but the business mogul has displayed his complete lack of understanding of basic economics by saying he would “borrow knowing that if the economy collapses you could make a deal”. He was also quoted as saying that the US government would “never have to default because you print the money”.

According to Kimberly Amadeo, president of World Money Watch, these are the most dangerous statements Trump has ever made. If the US economy collapses, so would the dollar, and the entire world would plunge into a deep recession. Printing money – as history has shown repeatedly – would ignite inflation, send interest rates soaring, and also create a recession.  

Trump’s proposal to slash the maximum small business and corporate tax rate from 38% to 15% looks good on paper, but the catch is that the effective rate is already much lower because nearly half of US corporations have figured out how to avoid it and pay no taxes at all.  

His team’s plan to trigger $1tr in infrastructure spending with $140bn in tax credits for companies willing to do the work is unlikely to succeed on the scale required as the projects which the country most needs – like bridges, roads and ports – would not yield commercial returns quickly enough to interest private investors.   

But the biggest and most widely acknowledged risk posed by Trump’s populist brand of economics is that his plans to withdraw from global trade agreements and slap tariffs of 45% on imports from China and 35% on goods from Mexico – the two biggest trade partners of the US – will trigger a damaging trade war.  

Tariffs of that magnitude would hurt US manufacturing companies as about 35% of their inputs are imported – replacing them with local products would raise costs and lead to higher prices for American consumers, hitting spending, jobs and ultimately economic growth.  

China would be likely to retaliate, closing its large and lucrative market for high-value products from corporate giants like Boeing, Apple and Ford. China has warned it would retaliate by halting US soybean and maize imports. China could also limit the number of Chinese students studying in the US – who account for nearly a third of the total, in a market worth $30.5bn.  

Hopes that Trump will not follow through on his protectionist threats are fading as he has announced that during his first 100 days in office he will withdraw the US from the Trans-Pacific Trade Partnership, a regional trade agreement which would eliminate 98% of tariffs in 12 countries – excluding China – with 800m people.  

Japanese Prime Minister Shinzo Abe has warned that the trade deal, which was signed in February 2016, would be “meaningless” without the US. And there could be worse to come – Trump has described the North American Free Trade Agreement grouping the US, Canada and Mexico, as the “worst trade deal ever” and even threatened to withdraw from the World Trade Organization, which he describes as a “disaster”. 

This article originally appeared in the 29 December edition of finweek. Buy and download the magazine here.