During his “thank you” tour visit to Des Moines, Iowa, Thursday, President-elect Donald Trump talked about his focus on keeping companies in the United States:
“My Administration will follow two simple rules: Buy American, and hire American. Remember years ago, we used to proudly display ‘Made in the USA’…We don’t see it. I don’t see it anymore. We ought to start doing that. Any of the manufacturers that were doing a lot of talking to a lot of companies that were thinking about leaving, and I tell ya, I don’t think they’re going to be leaving so fast anymore…
The American worker built this country and now it’s time for American workers to have a government for the first time in decades answers to them.”
Trump’s is a noble sentiment. The desire to keep Americans employed is a good one, and one that can be accomplished in several ways. However, despite the president-elect offering some sound policy regarding corporate taxes, his threats of 35% tariffs on imported goods could lead to a perilous trade war that would lead to rising prices for the American consumer.
Due in no small part to our outrageously high taxes, the United States is currently one of the most prohibitive nations for business growth. According to Donald Trump’s official website, the president-elect’s tax plan “will lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business.”
Cutting business tax rates by more than half would be a major incentive for capital investment in the United States. Aparna Mathur of Forbes writes:
Over the past several decades, countries around the world have dramatically cut their marginal corporate tax rates in an effort to attract investment and global capital. Over a similar time period, the U.S. has only enacted two significant changes to its marginal corporate tax rate. The first was in 1986 when President Reagan cut the headline corporate tax rate to 34 percent, and the second was in 1993 when President Clinton increased the top rate to 35 percent. Twenty-three years later, our headline marginal corporate tax rate stands at 35 percent, notably higher than the average of 23 percent for other OECD countries.
This is true not just when we consider the headline federal rate, but even when we consider effective tax rates. Effective tax rates account for the various deductions and credits that firms use to lower their tax liability. As per my own analysis for the year 2010, the U.S. had higher effective tax rates than almost every other OECD country. A more recent 2013 study from the Tax Foundation finds that the U.S. has the highest marginal effective tax rate in the developed world.
Mathur further writes that the U.S. tax code has led to corporate inversions, when companies shift the majority of their business overseas (or across the border) in order to benefit from lower tax rates. Moreover, she notes that high corporate taxes aren’t simply bad for businesses, but for consumers, onto whom costs are shifted, and workers, whose salaries are often affected by burdensome taxes.
Trump’s plan to lower the tax rate to 15% is a good start. However, threats of tariffs could offset any benefit to American consumers. According to CNN Money: “A new tariff–and therefore, a higher import cost–would simply push U.S. companies to raise prices in order to keep turning a profit. That means the average shopper in the U.S. would be forced to pay more.”
That’s just the most basic cost-benefit analysis. Dealing in massive tariffs can lead to incredible economic crises. A quick Google search of the “Smoot-Hawley” tariff offers a disturbing glimpse into the negative impact tariffs can have, especially when imposed at the wrong time.
Trump’s plans are, at best, a mixed bag because while tax decreases would incentivize investment in the United States, simultaneous tariffs would create tremors in the world of manufacturing, which could lead to American consumers paying a higher price for goods.
More than ever, it’s critical that supporters of the president-elect understand the ramifications of his various economic initiatives so that they can push back when such initiatives would be detrimental to the American economy. As an ideologically unmoored ship, Donald Trump is liable to move wherever the current takes him, and it’s up to those around him to keep him in docked in reality.