Hey, big spenders: The most profligate election campaign in US history

Hardly a day goes by without Donald Trump and Kamala Harris announcing new proposals that would increase spending or reduce US government revenues in what appears to be, particularly on the Trump side, one of the most profligate election campaigns in US history.

At almost every campaign stop Trump has thrown out a new tax proposal, most of which seem to have caught his advisers by surprise.

Whether it’s the abolition of taxes on tips, overtime and social welfare payments, the cap on deductions for state taxes (which would cost about $US1.2 trillion ($1.8 trillion) over a decade), a $US2 trillion sovereign wealth fund or incentives for US manufacturers, Trump is adding almost daily to his core pledge of extending and increasing the tax cuts he gave companies and, mainly, wealthy households during his last term.

All would be paid for – or at least partly paid for – by his planned 10 to 20 per cent baseline tariff on all imports, and his 60 per cent tariff on imports from China. This week, he threatened yet another tranche of tariffs – a 200 per cent duty on imports from companies that move their plants from the US to Mexico.

Harris provided her most detailed economic plan yet in a speech in Pittsburgh on Wednesday.

Apart from her previously announced increase in the corporate tax rate from 21 per cent to 28 per cent and a range of tax increases on high-income earners, she would provide $US100 billion of tax credits for biotech, aerospace, artificial intelligence, semiconductor, blockchain and nuclear energy companies.

There’d be incentives to reduce emissions in steel and iron production, money to encourage data centres to support AI and a national stockpile of critical minerals.

Harris has previously foreshadowed expansion of the child tax credit, an increased tax deduction for small business startups, the abolition of taxes on social welfare payments and tax credits for first home buyers. She also (oddly) supports the removal of taxes on tips, one among several of Trump’s peculiar thought bubbles.

Her platform would be paid for by not extending Trump’s 2017 tax cuts, increasing tax rates on companies and individuals, imposing a new minimum tax rate on those who are earning more than $US1 million a year and denying companies deductions for employees earning more than that amount, increasing the capital gains tax rate, quadrupling the tax on share buybacks, and imposing a minimum 21 per cent tax on companies’ offshore earnings.

Harris’ plans fit a “tax and spend” model. Given that she would raise roughly $US5 trillion of new tax revenues, the self-described pro-labour capitalist was able to position her economic agenda as fiscally responsible and one that would enable her to reduce America’s burgeoning budget deficits, which are currently running at around $US2 trillion.

The problem with Maganomics is that it is based on a false premise.

Trump, who refers to his economic agenda as “Maganomics,” is relying on revenue from his tariffs and “trillions of dollars of spending cuts” from a commission that he says will be led by Tesla billionaire Elon Musk, even though there probably isn’t $U2 trillion of cuts available unless Musk attacks the sacrosanct defence, health and social welfare budgets.

The problem with Maganomics is that it is based on a false premise. Trump and his advisers insist that tariffs are paid by exporters and that any notion to the contrary is “a lie pushed by outsourcers and the Chinese Communist Party”.

In reality, as almost every mainstream economist agrees and experience has demonstrated, they are paid by importers, who then largely pass on the cost to consumers. They are a crude consumption tax.

In any event, with Trump’s planned tax cuts and spending proposals costed at up to $US11 trillion over the next decade – the tax cuts alone would amount to about $US7 trillion – it’s difficult to balance the numbers and produce the deficit reductions that Trump says he can achieve. (He said the same thing when he was last in the White House, and US government debt blew out by almost $US8 trillion).

Trump’s higher tariffs/lower taxes plan is – every time he adds to either side of the income statement – edging towards the idea he floated earlier this year: the abolition of all US income taxes, with the government funded by just tariff revenues. It’s an interesting but long discredited 19th century mercantilist financing model.

Unfortunately, the numbers don’t add up. US individual and corporate tax revenue amounts to about $US3 trillion a year – almost the same as the revenue from tariffs – before Trump’s proposed massive tax cuts, increased spending and the likely impact of the tariffs themselves on the flow of imports is taken into account. It would probably reduce them.

Even 100 per cent tariffs on all imports wouldn’t cover the loss of tax revenues. Nor is the potential for retaliation from exporting countries subjected to the tariffs factored in, whether it’s the 10 to 20 per cent baseline tariff, China’s 60 per cent or something multiples higher.

When Trump initiated the trade war with China in 2018, China responded with targeted tariffs of its own. The Trump administration paid about $US28 billion in agricultural subsidies to farmers whose exports were harmed by that response. There are secondary, and potentially expensive, effects from protectionist policies.

An obvious conclusion if Trump were to win office and put his tariff plan into effect is that trade between the US and the rest of the world would shrink, along with the base of imports on which tariffs could be levied.

It’s equally obvious that, where the Harris plan is aggressively progressive by favouring lower-income households (she’s targeting everyone earning less than $US400,000 a year, with a bias to the lowest-income households), Maganomics is aggressively regressive.

The combination of the big tilt towards high-income earners and companies in his tax cuts and the higher proportion of income spent by lower-income households would significantly increase income and wealth inequality in the US, which already has the greatest wealth inequality of any advanced economy.

Both Harris and Trump are pursuing protectionist policies to varying degrees, with Harris saying little about the existing tariffs on imports from China. The Biden administration, while tinkering with them, has for domestic political reasons largely left Trump’s tariffs intact.

Both are, by US standards, quite interventionist, with wide-ranging, expensive and protectionist industry policies that seek to recover the jobs lost during the decades of globalisation of trade – a process that accelerated after China’s entry to the World Trade Organisation in 2001.

Maganomics is clearly far more potentially disruptive and damaging – to the US as well as the rest of the world – than Harris’ more familiar (outside the US) progressive agenda.

Depending on the impact of what’s looming as a close-run election on the shape of the new Congress, however, it is likely that more of Trump’s agenda would be implemented than Harris’ – including the tariffs because they can probably be effected via executive order. That’s disconcerting.

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