Trump’s Economics – What We Know So Far
We are early into the Trump Presidency, but it is not too early to ask how he will pay for the initiatives he is promoting. Of course, much of this has to be speculative inasmuch as we have no idea how Congress will “treat” his proposals. Nevertheless, the question is too important to ignore.
Initially, the Congressional Budget Office projected that the President’s (or more accurately House Speaker Ryan’s) health care bill would save $337 billion over the 2017-2026 period. In an effort to win over House Republicans, Trump and Ryan made changes that reduced the savings to $150 billion. And then it failed to pass so there are no savings from health care (to date).
We do not yet have a budget from the White House. Instead, I quote from the White House’s “Budget Blueprint”:
“…the urgent needs of the Departments of Defense (DOD) and Homeland Security (DHS) in Fiscal Year (FY) 2017. An additional $24.9 billion is included to address immediate warfighting readiness needs at DOD. An additional $5.1 billion, to be designated for Overseas Contingency
Operations (OCO), is included for DOD to accelerate the campaign to defeat the Islamic State of Iraq and Syria (ISIS) and continue support for Operation Freedom’s Sentinel (OFS) in Afghanistan. An additional $3 billion is requested for DHS to address urgent border protection activities. This request for additional appropriations reflects the Administration’s commitment to strengthen our national security by rebuilding the U.S. Armed Forces and protecting our borders.
As the following chart illustrates, together with a recommended reduction of $18 billion in non-defense discretionary amounts in FY 2017, total funding would increase by $15 billion.”
Table 1. – Proposed Budget Changes (bil. US$)
Source: White House
The White House is calling for reductions in non-defense spending of $15 billion. As with health care, significant resistance from both Republicans and Democrats to the proposed non-defense cuts is likely.
My last piece was on Eisenhower’s quite accurate warning on the military-industrial complex.
I quote further from the “Blueprint”, a true reminder that the military-industrial complex has been at work:
- $977 million for military personnel costs, which supports the pay and allowances associated with higher military end-strength levels and the increase to a 2.1 percent military pay raise in 2017, funding for denied healthcare reforms, and adjustments based on execution.
- $7.2 billion for operations and maintenance to address urgent readiness shortfalls across the joint force, including by funding additional training and facility investment and supporting critical weapons systems. These funds will also improve cyber and intelligence capabilities.
- $13.5 billion for procurement and modernization, including additional Army Apache and Blackhawk helicopters, F-35 and F/A-18 fighter aircraft, tactical missiles, unmanned aircraft systems, and Terminal High Altitude Area Defense interceptors, and the DDG-51 destroyer that the Congress partially funded in FY 2016.
- $2.1 billion to accelerate priority research and development efforts, including ballistic missile and air defense, missile defeat, unmanned aircraft systems, next generation fighter aircraft, electronic warfare, anti-ship and land attack missiles, cyber operations technology, and targeting and strike support for special operations forces.
- $962 million for the costs of increased supply stocks and critical facility repair and a technical correction to transfer funds from the Operation and Maintenance, Navy account to the Navy’s revolving funds account to support national defense sealift vessels and the National Defense Reserve Fleet.
- $236 million for military construction to complete previously authorized but unfinished projects, such as a weapons storage facility, and for planning and design for critical future projects.
- $1.4 billion to support urgent operational needs associated with the acceleration of Operation Inherent Resolve, DO D’s campaign to defeat ISIS. The request includes funding for force protection, precision-guided munitions, intelligence collection, targeting and surveillance, defensive weapons systems, and countermeasures against ISIS’s lethal drone program.
- $2 billion for a flexible fund that would enable DOD to allocate resources in support of the new counter-ISIS strategy to maximize the impact of U.S. counterterrorism activities and operations.
- $626 million for a new Counter-ISIS Train and Equip Fund, which consolidates DO D’s counter-ISIS-related train and equip efforts. The request increases funding for assistance to partners in Iraq and Syria, while also providing the authority for DOD to work with forces fighting ISIS in areas outside Iraq and Syria. The enclosures accompanying this memorandum include proposed legislative language for this fund.
- $1.1 billion for ongoing U.S. operations in Afghanistan and support to global counterterrorism activities, including resources and equipment to better enable and protect our service members in their fight against terrorist groups such as the Taliban, al Qaeda, its affiliates, and the Islamic State of Iraq and Syria – Khorasan. The request also includes planning and design of construction projects in support of Detention Operations at Guantanamo Bay, Cuba.
Ah, yes. More detention operations at Guantanamo.
The President is on record as wanting to simplify and reduce both corporate and income tax rates. I summarize:
The President’s tax plan:
- Cut taxes and simplify the tax structure by condensing the seven tax brackets into three.
The income thresholds for single taxpayers will be exactly half of those for married joint filers, thereby eliminating the marriage penalty.
Source: Trump Website
- Increase standard deduction to $15,000 (single) and $30,000 (married), from the current levels of $6,350 and $12,700, respectively.
- Eliminate personal exemption.
- Eliminate the estate tax, now only applied to estates worth more than $5.45 million.
- Trim the top corporate tax rate from 35% to 15%, as well as allow companies with massive overseas stockpiles of cash to repatriate that money at a one-time discounted tax rate.
The Tax Policy Research Center is a joint operation of Brookings and the Urban Institute. It concludes that as a result of Trumps tax proposals, the federal debt would rise by at least $3 trillion over the first decade and by least $6.6 trillion over the second ten years. With conservative Republicans opposing Trump’s health care proposals, one can imagine just how upset they will be with a tax plan increasing the national debt by trillions.
Trump wants to build a wall to keep out illegal immigrants coming over the Mexican border. The costs range up to $20 billion.
Trump talks of a trillion dollar infrastructure program.
How Does Trump Plan to Pay for All This?
Table 2 totals the costs enumerated above.
Table 2. – The Costs of Trump’s Initiatives (bil. US$)
To date, two ideas have been put forth by Trump and his associates to pay for his initiatives. The first is a “border adjustment tax” – all goods coming into the US would have to pay it. Aside from in being in violation of World Trade Organization (WTO) rules, many market-oriented Republicans do not like it. Even Trump’s Secretary of Commerce Ross is cool on the idea.
The other idea as expressed by both Trump and his Treasury Secretary Mnuchin: stronger growth would produce enough tax revenue to offset the revenue losses from lower tax rates. Trump says he will get growth up to 4%.
Let’s look at this growth notion in a little more detail. Table 3 provides GDP growth rates since 1990. In only four years (the last being 2000), have real GDP growth rates been 4% or more.
Table 3. – US GDP Growth Rates
Source: US Bureau of Economic Analysis
Let’s now look at how taxes and GDP are related. In the last few years, the relationship has been pretty linear ranging from 10% in 2011 to 11.5% in 2015. That means a one percent increase in GDP will generate an approximate 1% increase in tax revenues. Federal tax collections in 2016 were $2.1 trillion. A one percent increase would generate only $21 billion.
As mentioned at the outset, it is far too soon to make any realistic projections of what will happen. But it is clear that major adjustments will have to be made in what Trump wants to do before his budget numbers make any sense.