A Trump Boom?
Project Syndicate, Nov 19, 2024
With his remarkable electoral comeback, Donald Trump has defined an era in American political history. But his legacy will depend on whether his policies advance long-term American prosperity by cutting taxes and boosting investment, or undermine it with trade wars and mass deportations.
WASHINGTON, DC – Donald Trump’s stunning and decisive return to power makes it official: We live in the Age of Trump. The 2008 global financial crisis was a turning point in history, and it is now clear that Trump is the dominant political figure of the post-crisis period.
Trump began his rise to power in 2015 and has towered over the current decade. Vice President-elect J.D. Vance will work to extend his legacy into the 2030s. Like Andrew Jackson in the nineteenth century and Franklin D. Roosevelt in the twentieth, Trump has created and defined an era in American political history.
But the strength and endurance of Trump’s legacy will depend on whether his policies advance long-term prosperity. As the saying goes, nothing succeeds like success. His first big opportunity will come immediately. With key provisions of Trump’s 2017 Tax Cuts and Jobs Act (TCJA) – including lower individual tax rates and expansion of the child tax credit – set to expire at the end of 2025, Congress and the new administration will spend a considerable portion of the next year passing a new tax package.
Much of the focus will be on avoiding tax increases on households. But given that Republicans will control both the House of Representatives and Senate for the next two years, Trump also has an opportunity to extend tax cuts for businesses. Under an expiring TCJA provision, businesses are allowed to deduct the full cost of certain investments in the year the spending occurs, rather than over time. Such “full expensing” encourages more investment by increasing returns. The 2017 business tax cuts are already boosting investment and workers’ wages, as well as supporting multinational corporations’ domestic operations.
During next year’s tax negotiations, Trump should make full expensing a permanent part of the tax code, as he did with the corporate-rate reduction in 2017. He should aim to reduce the corporate rate further and to strengthen businesses’ incentive to engage in research and development.
Of course, additional tax cuts will increase deficits and debt, which, over the longer term, will reduce investment and weaken the positive economic effects of the tax cuts. There are three sources of revenue that Trump and Congress can tap to offset the revenue losses from reducing business taxes.
First, the Inflation Reduction Act of 2022 (IRA) created around two dozen tax credits to encourage domestic clean-energy innovation and manufacturing, and provides a $7,500 credit for individual purchases of new battery-powered or hydrogen fuel-cell electric vehicles. The law will likely cost more than $1 trillion in its first decade, and trillions more after that. Congress and Trump should repeal the IRA and use part of the revenue to cut business taxes. Even partial repeal of the IRA – such as the subsidies for vehicle purchases – would provide ample revenue to offset the cost of tax cuts.
The second option is to raise revenue from households. Congress could allow some of the individual income tax cuts from 2017 to expire, and it could fully eliminate certain itemized deductions, including those for mortgage interest and state and local tax payments.
Finally, US lawmakers can pursue more fundamental tax reforms. The US income tax system is broken. Its maddening complexity introduces substantial economic distortions that slow growth and reduce wages. By taxing income, it discourages work, savings, and investment. The US political system has long been unable to change the tax code so that it can raise the revenue required to finance government spending.
Congress and Trump have a big opportunity to overhaul this system. Rather than taxing corporate income, they could implement a national consumption tax and a tax on business cash flows. With full expensing for investment, the latter would accelerate productivity and wage growth. On the household side, wages would be taxed but capital gains would not be, thus encouraging savings and investment. The tax on wages could match the progressivity of the current income tax system.
Because some consumption goods are imported and some are exported (and not consumed domestically), this system would require a border-adjustment provision. Imports would be taxed, and exports would not be. The border adjustment is not a tariff; but since it resembles one, Trump could sell it as delivering on his promise to support domestic production.
Beyond fixing US tax policies, Trump can also secure his pro-prosperity legacy through deregulation. To that end, he should replace Lina Khan, the controversial head of the US Federal Trade Commission who has chilled dealmaking throughout Joe Biden’s presidency. For good reason, Trump’s victory this month was met with a collective sigh of relief from business leaders, investors, and dealmakers, who have had to put mergers and acquisitions on hold.
Similarly, Trump is expected to rescind Biden’s executive order on AI regulation, which would have subordinated innovation, growth, and long-term prosperity to concerns about racial equity and minimizing job disruption. Biden’s approach is deeply misguided. As I explain in a recent paper, we should be grateful that policymakers of the past did not try to hold back or shape new technologies, and our children and grandchildren will be grateful to us if we continue this tradition. Trump has a chance to become the president who is remembered for ushering in the AI era.
But if nothing succeeds like success, nothing fails like failure. The trade war that Trump launched during his first term did not meet its goal of weakening economic ties between the United States and China, reduced US manufacturing employment, and rendered domestic manufacturing less competitive. A second trade war would threaten Trump’s legacy as one of the great pro-prosperity presidents.
Similarly, deporting several million undocumented immigrants – especially those who have not committed crimes – would disrupt business operations and require law enforcement to intrude into private businesses and communities in harmful ways.
Does Trump want to be remembered as a great champion of prosperity? Or as a president who blew out the deficit, chilled private-sector investment, and harmed businesses? After his astonishing political comeback, we will soon find out.
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