The two likely Presidential candidates have radically different visions on how to restore America’s finances — and both pose grave dangers
Speaker Paul Ryan: The next president’s tax plans must get past him (Office of Speaker Paul Ryan)
One virtue of the Clash of the Pygmies that constituted the late, unlamented battle for the presidential nominations of America’s two major parties was that it reminded us that tax policy is less about merely minimising the hissing of the plucked geese than it is about the macroeconomic performance of the economy and what is called “fairness”, or “equity”.
Indeed, tax policy is probably the most consequential weapon available to policymakers to address three major problems facing the US. First, the American economy continues to limp through a painfully slow recovery, with first-quarter growth measured at an anaemic annual rate of 0.5 per cent. But, second, monetary policy is more or less exhausted: zero interest rates and printing money have helped to avoid disaster, and the negative interest rates adopted by other central banks are proving themselves a damp squib. Third, the debate about the distribution of the proceeds of the American market-capitalist system has reached fever pitch and is calling into question the ability of the system to treat the citizenry fairly. A sensible tax policy could contribute to the solution of those problems: by developing an acceptable balance between achieving growth that will sustain full employment without triggering an unacceptable inflation rate, and by sharing the burden in a way that maintains citizens’ support for market capitalism.
Over the years the US tax code that candidates propose to “reform”, i.e. to amend to suit their broader purposes and those of their constituents, has become a Christmas tree, festooned with tiny baubles that appeal to small groups of voters, and under which lie large parcels: gifts to hedge fund operators (treatment of some of their income as if it were lower-taxed capital gains); to corporate donors (the oil depletion allowance, write-off of R&D, deductibility of interest payments); and to significant voting blocs such as homeowners and charitable givers (mortgage and gift deductibility, respectively). The appetites of recipients of these gifts are increased by what they feed on, as anyone who has tried to end the passing of the cost of exemptions onto other taxpayers has found out. Recipients of special favours know who they are and will fight to hold onto them, while the ordinary taxpayers who have to make up for the cost of favours won by others are diffuse, each with an insufficient stake to make a serious fight for fairer treatment.
Hillary Clinton, barring and perhaps even despite an indictment for her casual attitude towards the national security secrets with which she was entrusted as Secretary of State, will carry the Democratic, progressive banner. She has seen off socialist Bernie Sanders, in part by lurching left to accommodate the young, affluent student backers whose deep study of history has led them to conclude that a socialist “revolution” — Sanders’s term — will somehow benefit them. Her proposal is best characterised as keeping with the progressive tradition of tax-and-spend and government enlargement.
Donald Trump, who has in effect engineered a hostile takeover of the Republican Party to the amazement and chagrin of the corporate interests and “true” conservatives who were the previous owners, will counter Clinton’s enlargement of government with his promise to make America great again by deploying his negotiating skills against foreign trading partners and anyone else who has benefited from dealing with the “incompetents” who now occupy seats of power and influence.
Both have firm ideas about the direction of tax policy, with Clinton long on specifics and Trump willing to fill in the blanks in negotiations with congress. In part, those ideas represent a longstanding Left-Right split. The Left sees tax revenues as a means of financing and expanding the entitlement state, with the burden of such financing to be borne to the greatest extent possible by the wealthiest members of society, squeaking pips notwithstanding. The Right views tax policy as a means of stimulating more rapid economic growth, achieved by minimising taxes, especially marginal rates, in order to maximise incentives to hard work and risk-taking. It is not painting with too broad a brush to say that conservatives believe, or once did, that the rising tide will lift all boats, dinghies and yachts alike. Or, to put it as the Left prefers, the benefits of economic growth will trickle down from the rich to the less well-off.
For Clinton, the tax code has two major objectives. The first is to raise additional revenue to fund an expansion of the welfare state, the second is to redistribute income from rich to poor. For Trump, like many members of the Republican Party and the conservatives who abhor him and all his works, the goal of tax policy is to stimulate economic growth and job creation by reducing disincentives to risk-taking and hard work in order to “Make America Great Again”. (Caps bearing that slogan available from Trump for $25, or on eBay for $6.95.) The “again” is crucial: our once-great country, Donald argues, has been reduced to second-rate status by Barack Obama, a view shared and in unguarded moments clearly expressed by none other than Bill Clinton, due to become First Gentleman to a candidate running for what many are calling Obama’s third term. Pillow talk to follow. But Trump’s specific tax policy has already proved to be a sometime thing, to borrow from Jake’s description of a woman in Porgy and Bess. The billionaire now says he would concentrate more of his cuts on the middle class — while leaving it to the states to raise the applicable minimum wage to assist the lowest-paid. Huey Long, the 1930s Louisiana populist, when asked by reporters if he had a firm commitment from Franklin Roosevelt, is said to have asked, “Have you ever nailed a custard pie to a wall?” That is the task in which Trump analysts are now engaged. But one thing about his tax policy is certain: it will continue to favour some tax relief for wealthy taxpayers (Friday) unless Trump decides they should pay more (which he did the following Monday) or less (the next Thursday) while negotiating with congress. Everything, it seems, is negotiable — unless it isn’t.
Note that neither of the candidates proposes a more radical shift to a consumption tax. Texas senator Ted Cruz was the principal advocate for such a move. Cruz’s proposed substitution of a VAT-style tax on consumption for many existing taxes on incomes is a long-sought goal of conservatives, who believe its adoption would enable them to eliminate the Internal Revenue Service, the home of hated tax collectors. Which it won’t: the details of the VAT exemptions make this consumption tax every bit as complex as the current, income-based tax code, and a likely source of new revenues for sophists, economists and calculators — lawyers must be in there somewhere.
There is one goal on which both Hillary and The Donald agree: something must be done to stop American companies from fleeing to more welcoming tax venues — “havens” is the more derogatory word. Clinton wants some sort of payment at the exit gate. She would impose an exit tax on companies transferring their tax homes abroad, to compensate the US for the nation’s contribution to the departing firm’s success. President Obama set the stage for such a tax in 2012 when he declared: “If you’ve got a business, you didn’t build that.” Not very different from Adam Smith’s notion that “the subjects of every state” prosper because they “enjoy . . . the protection of the state”. Clinton would also retain and strengthen the new Treasury regulations that forced Pfizer to cancel its plans for a $160 billion merger with Botox-maker Allergan, and transfer of the combined companies’ headquarters to low-tax Ireland.
Trump would reduce the incentive to flee by cutting the corporate tax rate from 35 per cent to 15 per cent, or from about ten percentage points above the 24.1 per cent average of the 34 OECD industrialised countries to ten percentage points below it. But he would levy that tax on the foreign earnings of America’s international companies: those earning are currently exempt from taxation until repatriated, which is why some $2 trillion of profits of our companies are left overseas. Trump would also impose swingeing tariffs on imports made in runaway factories, such as those being established in Mexico by Ford and Carrier to replace US facilities and $23-per-hour American workers with Mexicans earning $3 per hour.
This goal of using the tax code to stem the flow of jobs to foreign countries is about the only major objective Clinton and Trump share. Clinton has in mind new, expanded benefits that would take many Americans from their cradles to their graves, from early childhood daycare, through free or subsidised college tuition, and on to taxpayer-funded medical care, a caregiver tax credit and better retirement benefits. The cost is put at $1.2 trillion-$2.2 trillion over the next decade, to be funded by raising taxes, with 95 per cent of new revenues to be extracted from the 1 per cent of earners who now pay almost half of all income taxes. Up would go taxes on the wealthiest (higher estate and capital gains taxes) and highest earners (4 per cent surcharge on incomes over $5 million), with no millionaire to pay less than 30 per cent of his or her income to the taxman. Since the cost of the expanded welfare state is to be borne by the richest, but the bulk of the benefits consumed by lower earners, Clinton achieves two of her major goals: a larger entitlement state, and income redistribution beyond that already built into the progressive tax structure.
But by socking it to upper earners and risk-takers she will reduce the rate of economic growth, trading higher economic growth for a more redistributive — she and her supporters would say “more progressive” and “fairer” — tax structure. The question of whether the lower earners who are the intended beneficiaries of the Clinton largesse will benefit more from enhanced benefits than they lose from slower growth will be fought out during the campaign by rival economic model builders, drawing on the skills that enabled them to predict that the pre-2008 housing bubble was sustainable.
The likely outcome of Trump’s tax plan is more easily predictable. Everyone gets a tax cut, with the wealthiest benefitting the most. The best guess is that this will reduce the tax take by about $12 trillion over a decade, perhaps $10 trillion if the cuts stimulate growth, which they would do initially if financed with borrowing, the cost of which will be borne by the next generation and generations yet unborn. Whereas Clinton would sacrifice growth for fairness, Trump would sacrifice progressivity for growth. Neither can act like a Chancellor of the Exchequer and simply impose a budget on the nation. All money bills must originate in the House of Representatives, where the admirable Speaker, Paul Ryan, has his own views on the direction of tax policy. Then on to the Senate, which must agree on appropriating the funds needed to make flesh of whatever budget plan is agreed. But these representatives of the people are politicians after all, and as such will be attentive to the tax-policy debate and reactions to the reforms proposed by Clinton and Trump. And, unfortunately, to the lawyers and others who inhabit Gucci Gulch — as the K Street area in which lobbyists make their offices is known — and in which something known as the national interest is unrepresented.
So much for the wish lists of the two candidates. My work with reform groups and others suggests (1) broad agreement that the corporate tax rate must be reduced to a level more in line with the OECD average; (2) that Democrats will not agree to such a corporate tax cut unless personal income tax rates are raised on high earners to generate funds for entitlement expansion; which (3) Republicans might agree to if some of the new revenue is devoted to rebuilding our shrunken military. Those are the ingredients of the “grand bargain” that has eluded a paralysed government for years. It is one thing to agree to such a deal, quite another to cope with a post-bargain economy in which higher tax rates fail to increase the taxman’s total take, but actually reduce it, increasing a deficit already ballooning the national debt to dangerous levels.