Interview with Rick Harper about the Presidential Tax Plans

Business Climate spoke with economist Rick Harper of UWF’s Haas Center about each major candidate’s tax plan.

What do you think of each candidate’s plan?

Well Trump has proposed a streamlining of tax rates, as well as a cut of the corporate tax rate from 35 to 15 percent. Contrast that to the Clinton plan, which proposes higher rates for higher incomes. She has proposed a new tax of 43.6 percent for those making more than $5 million a year, as well as a minimum of 30 percent for people earning more than a million year. Whenever we look at these things, it all depends on the lens you look at them through. Streamlining tax bracketing to 12, 15 and 33 percent doesn’t in and of itself raise or lower revenue. What is worrisome, however, is that Trump’s plan, as of today, doesn’t outline ways in which we can reduce the longer-term deficit.

Tell me about the recent Congressional Budget Office report.

There are certain things about the economy that can’t be altered, which includes the overall aging of population. The median age is going up. As we get older, the growth in government expenditures is going to increase as people qualify for Medicare.  There’s going to be healthcare costs associated with that. Neither candidate is talking about reducing spending on older Americans, and why would they? Older Americans comprise the largest single voting block. You also have rising interest rates coming eventually. Once you net out the debt held by the Federal Reserve or the Social Security Trust Fund, you get the federal debt held by the public, where the public includes American citizens, foreign governments, and other owners. Right now, debt held by the public is 77 percent of the GDP. The GDP is about $17 trillion. Right now, interest rates are very low and the federal budget is only about 21 percent of GDP. You can manage the interest on that debt because of the low interest rates: it’s about $250 billion. But if debt becomes $20 trillion and the interest rate increases to 3 percent, interest on the debt alone becomes $600 billion. When you combine rising interest expenses on the debt with increased Medicare eligibility, and throw in healthcare inflation that has resumed at 4 to 5 percent, government spending goes up. What is called for today is fiscal conservatism.

I know Clinton intends to raise taxes. Will that help?

Yes, but it’ll be tough to get a proposal like through Congress. We will likely retain a Republican majority in Congress, and they would block that. If Trump wins, I think both Senate and House would be Republican, due to strong support from the right, and he would implement his tax cuts. So we will likely get a tax cut if Trump is elected. However, it is unlikely that any sort of economic growth as a result of those cuts would offset the revenue lost by those cuts.

Clinton has proposed big infrastructure spending. Is that a good idea?

It is a great time to do infrastructure, because it lowers the cost of doing business down the road, and the interest rates are low, making those infrastructure investments more affordable. An investment in infrastructure also boosts productivity. The tax cuts that Trump is proposing are going to be difficult for our kids, because they will inherit the increased debt burden that funded today’s tax break. The best idea of his is to lower the corporate tax rate. It’s more attractive than personal income tax breaks. If we could provide a lower tax rate on income generally but broaden the base so that more forms of income are subject to taxation, that would be beneficial to business. Besides, the government gets a relatively small share of its revenue from corporate taxes. Payroll taxes and personal income taxes are seven times as large as corporate tax. The federal government spends 21 percent of GDP, but corporate taxes only fund about 7 percent of that spending.

So what do we need out of the next four years?

We have to be fiscally conservative, with some combination of increasing revenue and cutting taxes. Overall, the Clinton program comes closer to increasing revenue and holding a cap on spending. It would balance the budget better than the Trump plan, but I’d rather pick and choose. For example, both of the candidates are against the hedge fund manager tax break. Clinton wants to keep the estate tax, also known as the death tax; Trump wants to eliminate it. But the estate tax only applies to the small percentage of American households with $11 million estates. But everybody pays payroll taxes.

So Clinton holds the line by proposing tax increases for higher income people. That is likely necessary to get federal debt under control. On the other hand, the tax break being proposed by Trump isn’t being paid for by any spending cuts. When you propose to lower personal income taxes and the estate tax, when you want to make childcare deductible, you have to cut spending somewhere else. In a nutshell, everybody loves a tax cut, but because of demographics it is time for national politicians to look seriously at longer term fiscal responsibility.

Is there a point at which debt as a percentage of GDP becomes too much?

This Time is Different: A Panoramic View of Eight Centuries of Financial Crises by Reinhart and Rogoff famously covers that. There isn’t an exact tipping point, but the area around 90 percent debt to GDP ratio seems to be a good indicator of when a nation begins to face real financial challenges. Ninety percent isn’t the magic number, but a debt to GDP ratio in excess of that tends to be associated with trouble servicing that debt. In the extreme, nations go into default or hyperinflation. Debt can’t continue to increase indefinitely. If our debt becomes too large, the rest of the world will no longer be willing to lend money to the U.S. government. To borrow that amount of money from U.S. savers, interest rates would have to rise dramatically. But the value of borrowing depends on what you spend it on. Student loans have historically been good debt, since the payoff exceeds the cost. But if we are just giving tax cuts to wealthy individuals, people who are going to go out and buy a TV or a more expensive vacation, we might not fundamentally increase American productivity. If we spend our borrowed money on things like infrastructure investment, that’s good. If you’re just giving it to people so they can eat more meals away from home, that probably won’t be a good investment.