Trump's Fiscal Strategy: A Throwback to the 19th Century

Trump's Tax Cuts and Proposed Exemptions

Donald Trump, in the final stages of his campaign, has proposed significant changes to the Federal income tax. His plans include extending the lower rates, family tax credits, and investment incentives of the 2017 Tax Act beyond their 2025 expiration date. He also proposes to exempt tips, Social Security benefits, and overtime wages from the Federal income tax. Together, these changes would result in a revenue loss of $9 trillion over the next decade. Additionally, Trump has proposed to exempt firefighters, police officers, military personnel, and veterans from the Federal income tax, which would result in a further $2.5 trillion in revenue loss over 10 years.

Trump's Proposed Tariffs

Trump has suggested replacing the income tax with consumption taxes on imported goods and merchandise. He has praised the 19th-century American fiscal approach of relying on tariffs to fund the government. Trump has proposed a 20% universal tariff on all imports from all countries and a specific 60% rate for Chinese imports. These tariffs would generate approximately $900 billion of receipts per year.

Implications of Trump's Fiscal Policy

Under Trump's proposed policy, the Federal government would be funded through taxation on current citizens, rather than borrowing and increasing the debt burden on future generations. This approach would place the tax burden on consumption, not production, income, and investment. However, even with these proposed changes, Trump's budget plan would still result in $25 trillion of deficit over the next decade.

Challenges in Implementing Trump's Fiscal Policy

Trump has promised to reduce government waste and inefficiency. However, he has also promised to protect 82% of the budget from any cuts. Even if non-exempt programs and agencies could be reduced by one-third, deficits would still exceed $20 trillion over the next decade. Moreover, financing the large deficits and tariffs proposed by Trump would be a significant challenge. If the Federal Reserve were to print money to compensate for lost household purchasing power due to the tariffs, it could trigger severe inflation. If the Federal Reserve refused to accommodate the deficits and tariffs, bond yields and interest rates would rise, potentially leading to a recession and a financial market meltdown.

Bottom Line

While Trump's proposed fiscal policy represents a significant departure from the status quo, it also presents considerable challenges. The policy's focus on consumption taxes and tariffs may help to reduce the burden on income and investment, but the resulting deficits and potential for inflation or recession pose significant risks. What are your thoughts on Trump's proposed fiscal policy? Do you think it represents a viable solution to America's fiscal challenges? Share this article with your friends and join the conversation. Don't forget to sign up for the Daily Briefing, delivered every day at 6pm.