Is Trump’s Tax Plan Really Serious?

Trump’s policies are boosting inflationTrump Tower at Chicago
Is Donald Trump’s tax plan really serious? I bet the answer you’re waiting for is NO? Well you’re right, the reply is an outright negative. The best analysis I have seen on this issue is by Krugman, a “delicatessen” for its “subtlety”…
Let’s take it step by step. Trump’s plan, which is now being debated in the Senate, states very seriously that its effect will be to multiply investment and jobs. That’s up for discussion, given that the US has probably reached its maximum potential, namely in terms of GDP without inflation (this is questionable, but taking into account that the unemployment rate is at 4%…).
Specifically, Trump’s tax plan promises an increase in capital stock in 10 years, as can be seen in the table below:

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In other words, a 9.9% rise in accumulated capital, which will create 925,000 jobs and fuel GDP growth of 3.7%.

Who is going to finance this rise in investment, asks Krugman? Because we are talking about an increase in capital of $6.4 trillion. And savings are not going to rise but decline, due to the increase in the public deficit as a result of tax cuts. So it will have to be financed by external savings, namely, via capital inflows. Meanwhile, there is an accounting element here: surplus/capital deficit = deficit/current account surplus. Therefore, there will be an increase in the external deficit, thus less output of exportable goods, so a fall in the production of these goods and a rise in unemployment.

The complete opposite of what Trump’s plan is promising. Of course this is in the long-term. In the short-term, it’s expected that the increase in spending is added on to current spending. And if interest rates don’t spike upwards, there will be a GDP orgy, surpassing its potential, along with fresh stock market rises during a period of time. In the long-term, however, the plan will undoubtedly bring with it less growth, a bigger fiscal and external deficit, and a rise in the jobless rate.

Other writers, like Bill Mcbride from “Calculated Risk”, say quite rightly that what’s happening is that the time for stimulating the economy, close to GDP potential, has past, and the plan should be the opposite: reduce the fiscal deficit.

When the unemployment rate is at 4% and the FED is planning rate hikes, increasing the deficit doesn’t seem to be ideal. This plan was optimum 9 or 1o years ago, “but that’s over.”

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://http://www.miguelnavascues.com/