OPINION:
Billionaires are flocking to support former President Donald Trump’s campaign. Perhaps they believe the benefits of lower taxes and less aggressive regulation outweigh his behavioral transgressions.
President Biden wants to erase Mr. Trump’s corporate tax cuts, let the individual tax cuts in the 2017 Tax Cuts and Jobs Act, or TCJA, expire at the end of 2025 for wealthier households and raise taxes on corporate stock buybacks. Mr. Trump wants to cut corporate taxes and perhaps rely on tariffs to replace personal income taxes.
Unfortunately, the world has changed since Mr. Trump first ran for president in 2016, and a MAGA 2.0 could prove a disaster.
First, in 2016, the federal deficit was only 3.1% of gross domestic product; without any policy changes, the Congressional Budget Office estimates it will reach 6.5% in 2025.
Just extending the expiring provisions of the TCJA would likely raise the budget gap much further.
Second, China’s competitive challenges are tougher. It has achieved leadership in electric vehicles and battery technology and formidable prowess in green energy technologies such as solar panels that are critical to achieving a low-carbon economy.
Slapping tariffs on Chinese-made EVs won’t insulate American automakers. Chinese manufacturers are establishing plants in Europe and Mexico that could export to U.S. markets.
China is seeking to build a fully independent advanced semiconductor supply chain. Restrictions on access to U.S., Japanese and Dutch chipmaking technology may make Beijing’s ambitions more expensive, but Western policymakers would be foolish to assume they are impossible.
Third, Russia, China, Iran and North Korea have coalesced into an Axis of Upheaval that cooperates to mitigate Western sanctions, produce arms and share intelligence. Together, they seek to undermine the liberal international order established by the United States and its allies after World War II.
Given the sad state of preparedness among our NATO allies, a defeat or appeasement in Ukraine threatens a wider war in Europe.
China’s navy is larger than ours and poses territorial threats to its neighbors in the East and South China seas and U.S. access to the foundries in Taiwan that produce the most advanced chips.
Through terrorist surrogates like the Houthis in Yemen, Iran has denied our European and Asian allies safe access to the Suez Canal.
Mr. Biden has mustered a broad Western response to support Ukraine and created a lattice of alliances from Asia through the Middle East and Europe to supplement U.S. resources.
Those will only prove effective, however, if the U.S. military is adequately resourced. Doing so would add another 2 percentage points of GDP to the deficit.
If Mr. Trump were reelected and Republicans controlled Congress, the expiring provisions of the TCJA would likely be extended and perhaps enhanced with lower corporate and personal income taxes.
Republicans in Congress would be inclined to boost defense spending, too. If isolationists on the hard right balked and forced moderate Republicans to negotiate with Democrats, the horse trading could result in more entitlement spending.
It may be possible to finance the extension of the TCJA with Mr. Trump’s proposed 10% across-the-board tariffs and a 60% levy on Chinese imports, but those are hardly enough to finance more defense spending, either.
Mr. Trump’s 10% tariff would undermine security cooperation with European and Asian allies. On economic issues, it may push them toward China, isolate the United States and significantly impair the overall competitive benefit of a 60% tariff on China for U.S. manufacturers.
The only way to find money to lower taxes and increase defense spending is by cutting entitlements. Those include Social Security and Medicare, exceeding 60% of federal spending, but Mr. Trump indicates little interest in such solutions.
Even on the current fiscal pathway, the 10-year Treasury rate that won’t accelerate inflation or dampen growth after the Federal Reserve brings inflation down to whatever floor above 2% is attainable is likely in the 4% to 6% range.
That’s much higher than the 2.3% average from the end of the financial crisis through COVID.
Ultimately, outsized federal borrowing could instigate a run on U.S. Treasurys in international financial markets and compel much higher taxes.
Billionaires would emerge as the target.
In any case, outsized deficits would push up the neutral rate of interest even further.
Adding one or a few more percentage points to the bellwether 10-year Treasury rate might be good for fixed income investors. But I doubt that would bode well for startups, entrepreneurs and corporate investments in new technologies like artificial intelligence, advanced chip design and manufacturing, new drug development, electric vehicles, battery technology and the like.
None of that would benefit capital formation, economic growth, business profits, equity investors or ordinary Americans’ retirement accounts.
If you have concluded that Mr. Trump’s campaign fiscal ruminations are reckless and irresponsible, this professor awards you a gold star.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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