After a month of political, social, and common sense gaffes, Donald Trump attempted to shake off the bad vibes by introducing a serious economic proposal. True to the Donald’s style – the plan was YUGE, but a little over-tanned.
Overall, it hasn’t received the attention that it should have, given that this is the first major policy initiative forwarded by a candidate known more for style than substance. There have been more gaffes and stumbles since he released the plan, which get more attention in the press and on social media. But there was a lot in his proposal to talk about.
The best part of Trump’s plan is that it ignores many of the poor populist missteps of the rest of his campaign messaging – like fearmongering on trade. His tax plan could create real and strong economic growth.
The most pro-growth aspect of Trump’s proposal is a 15% flat corporate tax rate. According to recent analysis by Laurence Kotlikoff, Professor of Economics at Boston University and Goodman Institute for Public Policy Expert:
“Most of the burden is not falling on shareholders. It is falling on workers. As a result, the biggest beneficiary of abolishing the corporate income tax is labor. This finding is enormously important to both political parties, where we find politicians complaining about stagnating wages, but with no idea what to do about it.”
Furthermore, Kotlikoff simulated abolishing the corporate income tax and concluded it would increase real wage growth 12-13 percent and boost the GDP 8-10 percent. Kotlikoff’s paper didn’t simulate Trump’s 15 percent proposal, but he did simulate what a 9 percent flat tax would mean, and while it creates slightly less growth, it still creates real wage growth of 9 percent in the long-run and an immediate increase of 6 percent in GDP.
Therefore, while Trump’s plan would likely create even less growth, it would still easily jump-start the economy in a way that Hillary Clinton and her supporters would never be able to sell to their base. His plan does something about currently stagnating wages and would jump-start the economy for people who’ve been left behind.
But after hitting the gas with his corporate tax plan, Trump then slams on the brakes by eliminating the carried-interest deduction. This is a popular populist message, but it ignores the way that the economy actually grows.
The excellence of Trump’s corporate flat-tax proposal makes his error on carried interest hard to swallow. It seems Trump and his policy advisers don’t quite understand the concept or the political fights around it.
First, carried interest isn’t a deduction like Trump claimed while speaking to the Detroit Economic Club. Carried interest is treated as a capital gain and taxed accordingly. His mistake is something that the left has attempted to convince and sell to voters for years: it seems like they finally found a buyer in the Trump campaign.
Worse is that the only mention of capital gains that Trump makes is to increase the tax on them. That will hurt. Investment in innovative, high-growth companies is a key part of economic growth.
Early stage start-ups account for nearly all net new job creation and companies in their first year have created an average of 1.5 million jobs per year in the last 30 years, according to a report by the Kaufmann Foundation.
But these companies need capital to grow. That initial investment often comes from friends and family, or even just by maxing out credit cards. But when business owners get serious about growing, they turn to accredited professionals, angel investors, and (when the rocket takes off) venture funding and private equity. Both venture funds and private equity firms are run by experts affected by any increases in a carried-interest tax, which (like capital gains) is a form of profit share that rewards successful managers. Harming them harms growth.
Just like much of Trump’s campaign, it is hard to read his ideas and take all of them seriously, but when he builds the anticipation with something as good and economically sound as slashing the corporate income tax and even full expensing of new investments (like the House Republicans have proposed), it starts getting my economist hopes up.
The problem is that the good in the plan is held hostage by the bad. If Trump’s corporate income tax plan would create 4 percent growth, but his carried interest proposal brings that down to 3 percent or 2 percent growth then we would still be stuck with an Obama-like economy while we should be experiencing runaway growth that would be yuuuge.
Charles Sauer, an economist, is the president of the Market Institute. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
