The Macroeconomic Consequences Of Donald Trump’s Economic Policies by Moody’s Analytics – a “tad” different than Jeff Gundlach’s views but for what its worth below is an analysis by the rating agencies on Donald Trump’s economic plans and what would be the impact if they were implemented.
Introduction
This paper assesses the macroeconomic consequences of presidential candidate Donald Trump’s proposed economic policies. These include his policies on taxes and government spending, immigration, and international trade. A similar analysis of candidate Hillary Clinton’s proposed economic policies will be forthcoming.
The Macroeconomic Consequences of Donald Trump’s Economic Policies
by Mark Zandi, Chris Lafakis, Dan White and Adam Ozimek
This paper assesses the macroeconomic consequences of presidential candidate Donald Trump’s proposed economic policies. These include his policies on taxes and government spending, immigration, and international trade. A similar analysis of candidate Hillary Clinton’s proposed economic policies will be forthcoming.
Three scenarios are considered. First, we take Donald Trump’s proposals at face value as outlined on his campaign’s web site and in his speeches and interviews. The second scenario assumes that Mr. Trump’s policies are fully adopted, but on a smaller scale than he has proposed. The third scenario assumes a President Trump will need to negotiate with a somewhat skeptical Congress, resulting in his policies being scaled back and adjusted in response to political realities. This final scenario would be a reasonable baseline, or most likely scenario, were Mr. Trump to win the election.
Donald Trump has brought up other potentially relevant economic policies that are not included here since either their macroeconomic impact is too small or they are at this point not sufficiently developed to quantify. These include, for example, his recent energy policy proposals, his seeming support for higher state-level minimum wages, and his ruminations on negotiating with investors in U.S. Treasury bonds and on bringing back the gold standard.
We use the Moody’s Analytics4 model of the U.S. economy for this analysis.5 The model is similar to that of the Federal Reserve Board and Congressional Budget Office for forecasting, budgeting and policy analysis. The Moody’s Analytics model has been used to evaluate the plethora of fiscal and monetary policies implemented during the financial crisis and many of the economic policies proposed by presidential candidates in other elections.
Quantifying Donald Trump’s economic policies is complicated by their lack of specificity. The publicly available information is not sufficient to fully quantify all of his proposals. Thus, a number of assumptions are laid out in the paper. The assumptions are our own, but they are based on discussions with some of those working on economic policy for the Trump campaign.
To determine the long-term economic impact of the candidate’s policy proposals, the Moody’s Analytics model is simulated over the decade through 2026. This is also consistent with the Congressional Budget Office’s horizon for the federal government’s budget and policy analysis. The assumption is that Mr. Trump’s policies are implemented during his first term and not changed through the remainder of the decade, and no other significant fiscal policy changes are legislated. Federal Reserve policy is determined by the model in response to job market conditions, inflation, and financial market conditions, which will be impacted by Mr. Trump’s policies.
Broadly, Mr. Trump’s economic proposals will result in a more isolated U.S. economy. Cross-border trade and immigration will be significantly diminished, and with less trade and immigration, foreign direct investment will also be reduced. While globalization has created winners and losers in the U.S. economy in recent decades, it contributes substantially to the ongoing growth of the U.S. economy. Pulling back from globalization, as Donald Trump is proposing, will thus diminish the nation’s growth prospects. Mr. Trump’s economic proposals will also result in larger federal government deficits and a heavier debt load. His personal and corporate tax cuts are massive and his proposals to expand spending on veterans and the military are significant. Given his stated opposition to changing entitlement programs such as Social Security and Medicare, this mix of much lower tax revenues and few cuts in spending can only be financed by substantially more government borrowing.
Driven largely by these factors, the economy will be significantly weaker if Mr. Trump’s economic proposals are adopted. Under the scenario in which all his stated policies become law in the manner proposed, the economy suffers a lengthy recession and is smaller at the end of his four-year term than when he took office (see Chart). By the end of his presidency, there are close to 3.5 million fewer jobs and the unemployment rate rises to as high as 7%, compared with below 5% today. During Mr. Trump’s presidency, the average American household’s after-inflation income will stagnate, and stock prices and real house values will decline.
Under the scenarios in which Congress significantly waters down his policy proposals, the economy will not suffer as much, but would still be diminished compared with what it would have been with no change in economic policies.
Those who would benefit most from Donald Trump’s economic proposals are highincome households. Everyone receives a tax cut under his proposals, but the bulk of the cuts would go to those at the very top of the income distribution, and the job losses resulting from his other policies would likely hit lower- and middle-income households the hardest. The decline in wealth caused by weaker stock prices and housing values would be felt by all households.
Even allowing for some variability in the accuracy of the economic modeling and underlying assumptions that drive the analysis, four basic conclusions regarding the impact of Mr. Trump’s economic proposals can be reached: 1) they will result in a less global U.S. economy; 2) they will lead to larger government deficits and more debt; 3) they will largely benefit very high-income households; and 4) they will result in a weaker U.S. economy, with fewer jobs and higher unemployment.
On taxes and spending
Donald Trump has proposed a complete overhaul of the tax code and a massive reduction in the taxes paid by both individuals and corporations. Broadly, his tax plan would significantly lower marginal rates, make the tax code flatter and less progressive, and scale back deductions and other tax breaks. More specifically, the most significant proposed tax changes for individuals include:
- Replacing the current seven personal income tax brackets with three and reducing the top marginal rate from 39.6% to 25%.
- Increasing the standard deduction to $25,000 for single filers and $50,000 for joint filers, and indexing to inflation thereafter.
- Taxing capital gains and dividends at a 20% maximum rate.
- Eliminating federal estate and gift taxes.
- Eliminating the tax on investment income of high-income households to help pay for the Affordable Care Act.
- Taxing carried interest as ordinary business income.
- Limiting the value of itemized deductions, except for charitable contributions and mortgage interest payments.
On the corporate side of the tax code, the biggest changes include:
- Reducing the corporate tax rate to 15% from its current 35%.
- Pass-through businesses such as Scorporations and partnerships also only pay no more than 15%.
- One-time repatriation tax of 10% of corporate profits held overseas.
- Foreign subsidiaries of U.S. companies pay taxes on profits in the year they are earned.
- Repealing most tax breaks for businesses and the corporate minimum tax.
Donald Trump’s tax plan is similar to other recent tax reform proposals put forward by the Republican Congress and the Obama administration, in that all these plans lower tax rates, close loopholes, and scale back deductions and breaks in the code. However, the scale of the changes Mr. Trump is proposing is many times larger. According to an analysis by the Tax Policy Center, the static cost of his tax proposals—not accounting for the impact of the proposals on the economy and what that means for government tax revenue and spending—is $9.5 trillion over the next decade compared with current law. Tax revenues as a percent of GDP will fall to their lowest point on a sustained basis since World War II.
How or whether the Trump tax cuts will be paid for is also unclear. To fully pay for the cuts and not add to the federal budget deficit, government spending must be reduced by 20%. However, except for his references to eliminating waste in government and blockgranting Medicaid, the candidate has not proposed any other spending reductions. Instead, he has proposed more spending on veterans’ healthcare, suggested that spending on the military should increase, and intimated that there should be no changes to Social Security and Medicare spending. Mr. Trump’s stance on immigration, including building a wall between the U.S. and Mexico and significantly increasing outlays on immigration officers, may also be very costly to the government.
Mr. Trump’s tax plan will make the tax code simpler than the status quo, but creates complications. Fewer deductions and breaks in the code will simplify things substantially, as will eliminating alternative minimum taxes. However, allowing pass-through businesses, which are currently taxed at personal tax rates, to instead be taxed at a lower corporate tax rate will complicate things. Without additional rules, enterprising individual taxpayers would be able to become passthrough entities to take advantage of the lower rates. Mr. Trump’s tax plan also does not tackle the thorny question of whether U.S. multinationals should be taxed on a territorial basis, instead of on a worldwide basis as they are now.
All taxpayers receive a tax cut under Donald Trump’s plan, but most of the cuts go to those with the highest income. Highincome and wealthy households will benefit substantially from the lower marginal rates on income, dividends and capital gains. The alternative minimum tax and estate and gift taxes will be eliminated. Carried interest, which accrues to wealthy investment managers, will be taxed at the plan’s low business tax rates. And the surcharge on investment income that high-income households currently pay to help fund Obamacare will be repealed.
The tax code under Mr. Trump’s plan will thus be much less progressive than the current tax code. More than one-third of the proposed tax cuts on personal income will go to the top 1% of income earners, with the average taxpayer in this group receiving a reduction in their tax bill of $275,000. Taxpayers in the bottom 99% of income earners will receive a tax cut of less than $2,500.
See full PDF below.
