Details So Far Point to Return of Trickle-Down Economics
One of Donald Trump’s defining campaign promises was to reform the tax code if elected. He repeatedly characterized the code as too complicated and too onerous on businesses. For the most part, people cheered. Now that he’s president of the United States, the Donald Trump tax plan is becoming a spotlight issue as Republicans look to legislate changes through Congress.
But, as the details become increasingly clear to the public, it’s looking more like a rerun of trickle-down “Reaganomics” economic doctrine. And that’s not necessarily positive for “Joe American.”
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Reality Check: Trump’s Tax Cuts Are Pro-Establishment
For those old enough to recall, Reaganomics worked on four pillar principles: reduction of government spending, reduction of federal income and capital gains taxes, reduction of government regulations, and a reduction of the money supply in order to reduce inflation. While inflation is no longer a concern in today’s world, Trump’s proposed policies are looking to mirror the other Reagonomics principles of years’ past.
Let’s take one of the staple principles of Trump’s plan: a reduction of income and corporate taxes. Just like in 1982 when Ronald Reagan rolled back both of these taxes, Trump plans on doing the same.
Trump’s plan calls for a reduction of the top tax bracket from 39.6% to 33%, which would be a 16.66% decrease. The proposed corporate tax rate would be slashed from 35% down to 15%, a massive stimulatory decrease from today’s levels. The plan would also lead to a reduction in the cost of capital, leading to higher gross domestic product (GDP), higher wages, and more full-time-equivalent jobs in the long run. (Source: “Details and Analysis of Donald Trump’s Tax Plan,” Tax Foundation, September 19, 2016.)
If this strategy sounds familiar to boomers and Generation X alike, it should. The core part of Trump’s plan is essentially trickle-down economics 2.0, with the hope that lower corporate taxes and capital will stimulate job growth and capital expenditure growth. While most economic historians credit Reagan’s policies for helping boost the economy and end the recession at the time, the economic climate of today is much different.
For one, economic growth is positive today and the need for stimulatory measures is less pressing. Early in Reagan’s first term, a serious economic slowdown led to rare back-to-back recessions. This was characterized by double-digit inflation, forcing then-Federal Reserve Chairperson Paul Volcker to aggressively raise interest rates.
Unemployment was stubbornly high and the energy crisis stemming from the Iranian Revolution of 1979 was leading to historically high oil prices. With the extremely low debt-to-GDP ratios, most will agree that the government had much more leeway to stop the hemorrhaging by taking on extra debt.
Secondly, Reagan’s U.S. tax cuts were delivered from much higher thresholds than the Donald Trump tax plan proposes today. Back in 1980, the top tax rate was 70% for high-income earners, and the corporate tax rate was 46%.
Of course, tax rates are significantly lower nowadays, resting at 39.6% and 35% respectively. Aggressively reducing tax rates further in an expanding economy, as proposed, is raising serious questions about how the government will be able to finance it all.
According to some experts, additional treasury debt will need to be issued to accommodate the shortfalls in tax revenue. The Tax Foundation’s “Taxes and Growth” model forecasts that the plan would cut federal revenue by between $4.4 trillion and $5.9 trillion on a static basis. Even if we account for stimulatory effects to the larger economy, the Tax Foundation still forecasts that revenues would decrease on aggregate between $2.6 trillion and $3.9 trillion. That’s a lot of money. (Source: Ibid).
Consider as well that when Reagan slashed taxes, the federal deficit was only $997.0 billion and the debt-to-GDP was only about 32%. Today, the federal deficit is almost $20.0 trillion and the debt-to-GDP is 104%.
Although the ability to service the debt is more favorable in today’s lower interest-rate environment, it would be dangerous to think that rates can remain this low forever. Donald Trump policies are essentially signaling that the federal government has no qualms about taking on much higher long-term deficits to stimulate growth today.
But what happens if they’re actually pushing on a string?
As we can see, the Trump tax plan details so far favor the upper classes and corporations, much like Reaganomics did in the early 1980s. But what about Trump’s core group of constituents, the middle class? By some accounts, Trump’s tax reforms may actually end up being quite damaging to them.
Those currently in the upper portion of the 28% tax bracket would be forced into the reshuffled 33% simplified tax bracket that Trump is proposing. This would mean workers currently paying 28% tax on income up to $190,000 would pay 33% on earnings over $112,500 under the new plan. This amounts to $3,500 in extra taxes yearly in this bracket. (Source: “How the Trump Tax Plan Will Affect You,” MoneyTalksNews, January 21, 2017.)
Low-wage earners, unarguably the most in need of relief, would see their rates rise as well. Workers on the low end of the wage scale would see federal tax rates rise from 10% to 12% under the new plan. (Source: Ibid).
While this doesn’t seem onerous, the lower classes are already struggling to service debt payments and make ends meet. This change in rates, coupled with expected higher inflation, could be the nudge that sends them over the financial cliff.
The net result from all these changes on a personal level is mixed. In a rerun of past policies, the wealthiest Americans stand to benefit most from the proposed changes. Not only will personal tax levels be slashed drastically, corporate taxes could be more than halved. For most middle-class earners, however, the changes range from neutral to quite detrimental in some cases. This could be disappointing to “flyover state” Americans who longed for a reduction in income disparity between classes and more discretionary income in their pockets.
Individual Income Tax Brackets Under Donald Trump’s Tax Plan
| Ordinary Income | Capital Gains | Single Filers | Married Joint Filers |
| 12% | 0% | $0 to $37,500 | $0 to $75,000 |
| 25% | 15% | $37,500 to $112,500 | $75,000 to $225,000 |
| 33% | 20% | $112,500+ | $225,000+ |
(Source: Tax Foundation, op cit.)
The silver lining in the Donald Trump tax plan is that it should have a stimulatory effect on the economy, even if its effects are muted. The economic impact from corporate tax reductions from 35% to 15% alone could the long-run level of GDP by 4.1%, while lowering income taxes would have a similar, but less pronounced effect. (Source: Tax Foundation, op cit.)
Global growth would also be a winner under such a plan, specifically international corporations with U.S. subsidiaries earning profits in America. If Donald Trump ends up imposing import tariffs on international goods, this may force corporations to manufacture more of their products inside the U.S., while duly taking advantage of the lower tax rate.
This could lead to an expansion of production facilities and a boon to the construction and service sectors. A fresh wave of capital could flood America, sending the U.S. dollar higher.
But does this Donald Trump tax plan address the key issue of out-of-control debt spending? Unfortunately, quite the opposite; it makes it much worse. We’ve already watched this movie before in the 1980s but, unlike the past, we’re paying for it with a thrice-maxed-out credit card. This is unlikely to end well in the long term.
Effect of Trump’s Tax Plan on U.S. and Global Economic Growth
But for now, it appears that the new boss is the same as the old boss; on tax reform anyways. While the middle classes did fairly well in the 1980s, the American manufacturing landscape was much more robust than it is today. It looks very much like the Donald Trump tax plan is attempting to emulate the success that Reagan achieved a generation ago, when a rising tide raised most boats. We must all hope he succeeds, because should manufacturing fail to materialize at hoped-for levels, the economic hangover will be severe.
And, as always, the middle class will get stuck with the bill.
