Trump Adviser Bullish in Wake of Tax, Trade Critiques

(Rob Kunzig/Morning Consult)

The new tax plan detailed last week by Republican presidential nominee Donald Trump would reduce federal revenue by as much as $5.9 trillion over a decade, according to an analysis by the center-right Tax Foundation.

A Trump economic adviser says the Tax Foundation’s estimates generally square with the campaign’s analysis, noting that other non-tax policy proposals are designed to make up for the projected losses.

Trade also could contribute to a Trump-led economic downfall, according to a separate report from the centrist Peterson Institute for International Economics. Peter Navarro, a professor at the University of California-Irvine who is advising Trump on economic issues, rejected all of the Peterson Institute’s projections.

“These people are the pimps of globalization,” Navarro told Morning Consult in an interview. “They have no moral ethics. Shame on them.”

The real estate mogul’s plans for steep tariffs on imports from major trading partners such as Mexico and China could incur a recession and lead to major private-sector job losses, according to the Peterson paper.

The revised tax plan that Trump released last week marked a major change from the previous pitch that he rolled out during the GOP primary season in 2015. The new plan adopts many GOP tax priorities, such as whittling down the number of tax brackets from seven to three, with a top individual rate of 33 percent. Trump also wants to lower the top corporate tax rate from 35 percent to 15 percent.

Trump’s 2015 plan set up four brackets for individual income at rates of 0 percent, 10 percent, 20 percent and 25 percent, which was more ambitious than previous GOP proposals in Congress. But the new plan diverges from traditional Republican ideas by including a massive tax deduction for child-care expenses.

The analysis by Tax Foundation economist Alan Cole found that Trump’s new plan would shrink federal revenue by between $2.6 trillion and $3.9 trillion over a decade. Those losses are incurred using a dynamic model, often favored by fiscal hawks, that takes into account a broadened tax base and economic growth.

Using a static analysis model that doesn’t take economic growth into account makes the picture even worse. Revenue would decrease between $4.4 trillion and $5.9 trillion, according to the analysis.

Cole’s revenue projections vary depending on whether “pass-through” business income is taxed using the top individual rate or the top corporate rate. That is a crucial distinction about which Trump’s campaign has not provided definitive details.

“Tax Foundation’s best understanding of the Trump proposal, after examining the totality of all statements made by the campaign, is that pass-throughs are not eligible for a single 15-percent tax rate on the individual income that their owners report; at best, they may be allowed to adopt some kind of tax status similar to that of C-corporations, either on a temporary or permanent basis,” Cole wrote. “In other words, our guess is that there is no means by which a business could get a single layer of taxation at a rate of 15 percent. However, we also acknowledge the arguments of those who perceive things differently.”

Assuming a higher pass-through rate, Cole projected that the Trump plan would lead to long-term growth in gross domestic product of 6.9 percent, with an added 1.8 million jobs and 5.4 percent long-term wage growth. Using the lower rate would lead to 8.2 percent GDP growth with 2.15 million added jobs and 6.3 percent wage growth.

But even with these growth assumptions, the cost of the plan is still in the trillions.

Navarro said Trump’s advisers are generally satisfied with the Tax Foundation’s score. The campaign itself expects a $2.6 trillion loss in revenue over 10 years, but Trump officials say those losses would be offset by major reforms to energy, trade and regulatory policy.

That would help stimulate GDP growth to Trump’s goal of 3.5 percent annually, Navarro said. “When we score the trade, energy, and regulatory aspects of the plan, we pick up a couple trillion in revenue as an offset, and we pick up the rest of the growth to get us to 3.5 percent,” Navarro said.

Tax Foundation’s analysis does not account for these separate economic proposals that could impact growth outside of Trump’s tax policy proposal. It does note briefly that trade policy could impact revenue because of Trump’s stated desire to shake up the way the U.S. imposes tariffs.

The Peterson Institute paper dove into Trump’s trade proposals and those of his rival, Democratic nominee Hillary Clinton. Clinton and Trump have stated their opposition to the Trans-Pacific Partnership that President Obama has championed. They have both offered their own prescriptions for how to change U.S. tariff and trade policy.

The Peterson Institute, whose economists generally favor open trade policies, criticized both nominees on this point. Trump got the much bigger critique. The analysis, authored by economists Marcus Noland, Gary Hufbauer, Sherman Robinson and Tyler Moran, slammed Trump’s plan to raise tariffs on major U.S. trading partners such as China and Mexico.

“His stated approach to the global economy of waging trade war and protecting uncompetitive special interests would be disastrous for American economic well-being and national security,” Peterson Institute President Adam Posen wrote in a preface to the report.

Posen said that Clinton’s “stated trade policy would be harmful,” but “Trump’s stated trade policy would be horribly destructive.”

The Peterson analysis says that if elected, Trump would have the legal basis to impose dramatic hallmark proposals like a 35 percent charge on imports from Mexico and a 45 percent charge on imports from China. Trump’s actions would not violate U.S. law because of the wide economic latitude that Congress grants to the president for emergency circumstances.

“[A] President Trump would have the stronger legal hand and his actions would very likely survive challenges in the U.S. courts and Congress,” Hufbauer wrote in his legal analysis. “U.S. citizens and firms should not rely on the U.S. courts or Congress to shield them from the consequences of Trump’s threats, should he carry them out.”

Trump could face economic pains from those tariffs that would cause political difficulty, a recession and a crisis in the availability of consumer goods within two years of  implementation, the report said.

Assuming that China and Mexico retaliate to Trump’s plan with high tariffs on U.S. goods, the Peterson paper projects that the United States would lose 4.8 million private-sector jobs by 2019. If those countries decide to impose an “asymmetric” strategy that relies on foot-dragging on trade rules and targeting export-oriented U.S. industries, the results could also hurt U.S. employment.

For example, Beijing could send a signal to Chinese airlines that they should purchase Airbus instead of Boeing aircraft, which would impact not just Boeing manufacturers but downstream makers of parts such as turbofan engines and avionics equipment. An act of retaliation like that could lead to the loss of 179,000 U.S. jobs, according to the report.

The authors also say it’s possible that China’s state-owned enterprises could refuse to procure U.S. services as an act of retaliation that could hurt employment in the United States.

Trade-sensitive coastal states such as Washington and California would be particularly affected by both symmetric and asymmetric retaliation, the Peterson paper stated.

Navarro resisted Peterson’s characterization of Trump’s plan. He cited the group’s previous support for deals such as the North American Free Trade Agreement, and he called Monday’s paper “idea laundering.”

Rather than actually implement the import charges on countries such as China and Mexico, Navarro said they would be used as a negotiating tool to deter unfair trade practices that Trump and his advisers believe have led to ballooning bilateral trade deficits with those countries.

“They start with the false premise of some trade war rhetoric,” Navarro said. “They weave a false narrative and they come up with some phony numbers.”

Trump, he said, wants to use the threat of tariffs “as a negotiating tool to bring our trading partners to the table to renegotiate deals” that are not working.

“The most important thing is that America is the world’s largest market,” he said. “And if you look at all of the countries that we’re going to have to renegotiate deals with, they run very large trade surpluses with the U.S. And they need us more than we need them.”