Source: Fox News.
Of the nearly two-dozen announced presidential candidates (counting both parties), arguably none has caught the attention of the American public, and media, more than business mogul and billionaire Donald Trump. Trump's uninhibited commentary since declaring for the presidency has placed him squarely in the limelight. But, what's more important is whether or not Trump's economic proposals would actually work if he were to reach the oval office.
Today, we'll cast aside the politics behind this upcoming presidential election and look at this from the viewpoint of an economist and American consumer: Will Donald Trump's economic policies work?
Source: Donald J. Trump.
The key points of Donald Trump's economic plan
Before we can dive into the feasibility of "The Donald's" economic reforms, we first have to understand what he's proposed.
When it comes to taxes, Trump is promising a major departure from what we're used under the current U.S. tax code. According to Trump's 2012 book Time to Get Tough, he would throw out the current tax bracket in favor of one where the highest income earners ($1 million-plus) pay 15%, and those making $30,000 or less would pay just 1%. Where things really get "interesting" is Trump's proposal to completely eliminate corporate taxes, the estate tax, and dramatically lower the capital gains tax.
In terms of Social Security and Medicare Donald Trump doesn't want much to change, if anything, although his position here isn't entirely laid out just yet. Whereas many of his peers are in favor of raising the retirement age for Social Security, means-testing Social Security, or privatizing Medicare, Trump is of the belief that Americans who paid into the system their entire lives deserve those benefits come retirement. In fact, in his book The America We Deserve, which came out in 2000, Trump proposed letting American workers invest a portion of their Social Security benefits in stocks and bonds of their choosing.
Trade is another area where Trump is looking to really differentiate himself from his peers. According to MSNBC, in Time to Get Tough he calls for a 20% tax on imported goods and a 15% tax on U.S. companies that outsource. More recently, in June Trump vowed to institute a 35% tax on imported cars, with a specific aim at Canada and Mexico.
Potential benefits of Trump's economic proposal
Now that you have a better idea of what Trump plans to do once reaching The White House, let's take a closer look at what benefits and risks his proposal offers. Keep in mind that these benefits and risks are open to some interpretation.
First the potential positives.
Source: Donald J. Trump.
Substantially lower taxes on upper-income earners and an end to corporate taxes could provide a huge domestic investment boost. Currently the United States has the second-highest corporate marginal tax rate in the world. This tax rate disincentivizes some companies from investing in the U.S., and it's kept more than $2 trillion in foreign earnings from being repatriated back into the country. No corporate taxes and low individual tax rates could spur upper-income earners and businesses to innovate at home rather than overseas.
Trump's proposal to leave the nation's entitlement programs – Social Security and Medicare – relatively untouched could garner a lot of support from retirees and Americans nearing retirement. With the prospect of Social Security benefit cuts very much on the table for most candidates, Trump's proposal would appear to offer the most security that their benefits wouldn't be cut.
Lastly, Trump's trade proposal is what affords him the ability to cut corporate and individual taxes. Taxing imported goods could help put U.S.-made goods on a more level playing field with emerging market economies where low labor costs provide an inherent advantage.
Risks behind Trump's economic proposal
With the possible benefits on the table, let's take a gander at some of the plausible risks of Trump's economic proposal.
Source: Donald J. Trump.
When it comes to taxes, lowering individual tax rates provides a substantial boost to the upper-class but doesn't do much for the middle-class or lower-income earners. Furthermore, eliminating corporate taxes and estate taxes, and lowering capital gains taxes and individual tax rates, means that Trump's aggressive trade plan would need to be flawless in generating additional revenue, otherwise the federal budget deficit could soar.
Trump's proposal to leave Social Security and Medicare relatively untouched looks harmless on the surface, but it doesn't address the changing dynamics of either program. Baby boomers are retiring in greater numbers and causing the worker-to-beneficiary ratio to fall, while longer life expectancies are causing a greater lifetime drawdown on Social Security and Medicare. It's possible Trump's proposal does nothing more than sweep the problem under the rug for the next president after him.
Trump's trade policies is really where his economic proposal could fall to shambles. While taxing imported goods is designed to promote the quality of U.S. brands and save American jobs, it could set the U.S. up for failure if foreign countries impose retaliatory tariffs on the goods that we export. If a trade war were to ensue, it could be disastrous to the U.S. and global economy. And, as noted earlier, if substantial revenue isn't generated from Trump's trade clause, his tax-cutting proposals would likely result in a substantial deficit.
Source: Social Security Administration.
Would Trump's economic plan actually work?
Now for the $64,000 question -- no wait, this is Donald Trump ... the $64 million question: Would Trump's economic policies actually work?
While there are clear positives to his plan, my personal opinion is that its risks outweigh the rewards. Trump has a keen sense for business (there is a reason his net worth is $10 billion), but I suspect his aggressive trade tactics would put the U.S. in a bad position with its current trade partners, and I don't believe the revenue generated from his plan to tax imported goods would even come close to replacing the revenue generated from higher individual tax rates and the current corporate tax rates. There is a very slim margin for error for Trump's plan to succeed, whereas the potential for failure is actually quite large.
It's important to keep in mind that it's not uncommon for candidates to modify their policies during an election campaign to draw in additional voters, so don't be surprised if Trump's economic proposals adjust a bit as the election season rolls forward. But, as it stands now, I don't believe Trump's plan would benefit American consumers or investors over the long run.
