Tag Archives: Econ 101 for Trump

Trump’s Voodoo Economics

Published / by Stephen

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Lets see: reduce taxes at all levels and for corporations; increase defense and infrastructure spending. Where is the money going to come from? According to “The only way he can square higher infrastructure and defense spending with tax cuts is voodoo economics.”

Both Reagan and George W Bush tried tax cuts without reducing spending. Neither turned out well. Trickle down economics did not work. They both blew up the deficit.

Here are the facts.

  1. We have a progressive tax system where the upper class shares a large part of the federal tax burden. Reducing tax rates will reduce tax revenues.
  2. We have few degrees of freedom for reducing spending considering that over 70 percent of federal revenue goes to defense, benefits for federal employees and veterans, social security, and Medicare and Medicaid. Much of this 70+ percent is non-discretionary.
  3. In the current economic environment lowering taxes will have little positive impact on economic growth. Further because  of 1 and 2 it surely will increase the deficit.

Our Progressive Tax System

The Tax Policy Center (Urban Institute and Brookings) provides detailed statistics the on US tax burden. The average effective tax rates of the “Expanded Cash Income Group” is very progressive with an average rate of 20 Percent for all groups and the top 1% and 0.1% paying 33 and 35 percent respectively. The Individual Income tax and Corporate Income tax are also progressive. The Payroll tax is not.

Where the Tax Money Goes

The Tax Policy Center reported that “In fiscal year (FY) 2014, about 60 percent of federal spending paid for programs not subject to regular budget review, while just over a third covered discretionary programs for which Congress must regularly appropriate funds. Less than a tenth went for interest on government debt.”

Mandatory spending covers outlays that are controlled by laws other than appropriations acts. Almost all such spending is for “entitlements,”  Discretionary spending covers programs that require appropriations by Congress.  Defense accounts for 50 percent of discretionary spending and Domestic accounts for 46 percent.

The Center on Budget and Policy Priorities provides detailed statistics on where our federal tax dollars go. A picture is worth a thousand words.

 

Government Spending, Tax Rates and Economic Growth

Here the Trump policy folks need to learn some John Menard Keynes. There are times when increased government spending and reduced taxes are good. There are times when they are bad. See Krugman for a formal model and explanation. The Great Depression and 2008 were periods where government stimulus was badly needed (lots of unemployment and lack of demand where private firms were not increasing production in response to essentially zero cost of borrowing).

2017 is no such a period. We are now near full employment. Increased spending and lowering taxes will not be offset by increased growth. Resources are already nearly fully employed. In the near term it is likely that significant government fiscal expansion might provide needed infrastructure but at a cost of increased debt and perhaps inflation.

Longer term I do not see anything in the Trump plans that invest in domestic productivity. For that we need to grow human capital. Our history teaches us that immigration and education are keys to productivity and economic growth.

In Summary

The economic outlook is not great. The inmates are running the institution. They want quick fixes, instant gratification and lower taxes for their rich friends. They want to appear to be doing something positive when in fact their actions will be negative. The deficit is going to grow and  it is likely that prices are going to rise.

All of this is going to be made worse by Trump’s move away from globalization — closing our borders and imposing tariffs and the potential resulting trade wars with our neighbors, Canada and Mexico, with China and with Western Europe.