income tax cuts

Perhaps Trump’s signature piece of legislation has been the Tax Cuts and Jobs Act, passed in 2017.

TCJA has two elements:

–a reduction in the top federal tax bracket for corporations from 35% to 21%. This brought highest-in-the-developed-world tax rate down to around average. This was necessary to stop the bleeding from full-rate taxpayers, like big pharma leaving for other countries–a move that would up their after-tax profits (and presumably the stock price) by about a quarter.

The lost tax income was supposed to be made back by elimination of sweetheart tax breaks, none of which happened.

–a big tax cut for the ultra-wealthy.

Estimates are that TCJA will add about $1.5 trillion to the national debt over its first ten years.

GDP growth suppression

Trump’s decision to severely restrict immigration into the US and his economic war with China, bizarrely framed in a way that benefits China while harming the US, have very quickly negated any short-term momentum his deficit spending might have achieved.

This suggests that federal debt projections are probably too low.

the pandemic

With Trump’s blessing, Washington passed legislation earlier this year authorizing $4 trillion in spending to combat the coronavirus. At the same time, Trump went out of his way to flaunt medical measures designed to check its spread and continuously urged his supporters to do likewise.

One consequence of this last is that deaths in the US so far are 40% higher than in the EU, despite Europe having 36% more people and being an older population than here.

A corollary is that some portion of that $4 trillion has had less effect in states that have followed Trump’s lead. $1 trillion wasted? …more?

ballooning federal debt

According to the Nation Debt Clock, the current national debt, which was about $20 trillion when Trump took office, is now just north of $27 trillion. This compares with federal tax revenue, from all sources, of about $3 trillion a year. Debt is now 128% of pre-pandemic GDP, which puts us within striking distance of Italy among the world’s most indebted countries. If Washington devoted all of its income to repaying this debt, it would take nine years to do so.

In short, the burgeoning debt is a potential mess. This is not all Trump’s doing. Bipartisan bungling that led to the 2008 financial crisis played a big role. He’s made things a lot worse, though, both by reducing revenue through TCJA and his general incompetence at running any sort of enterprise.

why this is a problem: general

–at some point, bond buyers begin to worry that the debtor nation is going to be unable to repay existing borrowings. So they become hesitant to add to their holdings, and at some point even to roll over their existing exposure. This happened in the US during the Carter administration.

–the debtor nation may begin to signal that it is unwilling to repay borrowings in full. It does so by creating domestic inflation in order to reduce the real (meaning adjusted for inflation) value of outstanding obligations.

–a byproduct of either is typically devaluation of the local currency. This can be either involuntary or a deliberate political strategy to wriggle out from under debt whose repayment in full would require fiscal austerity/higher taxes for a long time.

why this is a problem: here and now

The Republicans started out as the party of Lincoln, “dedicated to the proposition that all men are created equal.” and the party of financial responsibility. Under Trump they don’t appear to stand for either. And that is presumably eroding their traditional base of support.

The worst hit by devaluation would be the ultra-wealthy, the powerful political donors for whom the TCJA was tailor-made. I presume these donors and their financial concerns are behind the Senate’s opposition to further pandemic aid.

Also, it’s hard to know whether their opposition is a matter of principle or a worry that an increasingly erratic Trump would fritter a large part of any new money away, too.

For most countries, the main result of profligate spending and a subsequent devaluation is a deep loss of national wealth. For the US, there would be the additional negatives of damage to the leading positions of US banks in the world financial system as well as of the US$ as the de facto world currency. Both would be reasons to look to China for new leadership.