15 December 2017

Is Trumponomics taking off?


“We want to give you, the American people, a great tax cut for Christmas,” Donald Trump said on Wednesday, as the Republican majorities in the House and Senate checked their list of tax cuts, checked them twice, and figured out a compromise. That opens the path to a vote, and for the President to sign his promised overhaul of the tax system into law before the end of the year. And that makes it possible for Trump to end his first year in office with the significant legislative achievement that has so far eluded him.

The Democrats will claim that the deal will benefit “the rich and the corporations” and “hurt the middle class”. But which corporations and which middle class are they talking about?

More than 80 per cent of Americans consider themselves to be middle class. The top of the American middle class brushes against plutocracy, the bottom against poverty. The capping of the property tax break at $10,000 will hit the affluent middle class, especially in the Democratic-voting suburbs of the coastal cities.

The less affluent may, however, benefit from the bill’s maintenance of tax breaks for out-of-pocket medical expenses and graduate student tuition stipends. And the struggling may appreciate the repeal of the American Care Act’s requirement that all Americans have health insurance, and must pay fines if they do not.

Cutting the top rate of personal taxation from 39.6 per cent to 37 per cent will not affect the vast middle class, other than affirm the American credo that wealth is good and taxation is not. And cutting corporate tax rate from 35 per cent to 21 per cent —1 per cent more than Trump’s promised 20 per cent — still might not convince major corporations to “repatriate” their profits to the US. But a “corporation” can also be a small family business, all of whose transactions occur inside the US.

As Tyler Cowen pointed out, the tax deal is a compromise between “Trumpian nationalists” and the Republican Party. It also accords with Trump’s trade policies, including his disavowal of TPP and criticism of NAFTA.

The 20 per cent corporate tax rate seems intended to attract foreign investment. The underlying belief, Cowen writes, is that making America into “another Ireland” will “do so much economic good that it will offset the direct tax increase for many Americans”. This amounts to “a new kind of supply-side economics”, aimed at attracting corporations rather than freeing individual actors.

For decades, the American economy has suffered from low levels of foreign investment. Though Cowen remains critical of Trump’s broader economic policies, and finds flaws in the tax bill too, he suggests that super-charging foreign investment might “help build clusters of excellence, boosting innovation, wages, and eventually tax revenue”.

If this happens, it will not be before the 2018 midterms. The Democrats are hoping that the defeat of Republican candidate Roy Moore in red-state Alabama this week presages the beginning of the end for Trumpism. But the Alabama result is essentially a product of the current wave of sexual harassment cases. Even red states, it seems, draw the line at credible allegations of paedophilia.

More probably, the events of this week mark the end of the beginning of Trumpism. If the tax bill goes through, Trump will be on a roll. He will go into 2018 having honoured his election promises to move the US embassy in Israel to Jerusalem and to reform the tax system – and he’ll also have a plausible chance of hitting the target with his second shot at healthcare reform.

Meanwhile, the outrage of the Democrats is the gift that keeps giving. Their attempts to apply to Trump the moral standards that have brought down Harvey Weinstein and Roy Moore are doomed. The Democrats are the party of Bill Clinton, and there are plenty of offenders in their own ranks; one of the highest profile figures to take early retirement was Democratic senator Al Franken.

Claims that Trump conspired with Putin to rob Hillary Clinton of the White House are similarly self-harming. The allegations multiply and the enquiries proceed, but hard evidence has yet to touch Trump, or even his inner circle. The often shrill and credulous tone of much of the media does not help the Democrats, either.

Trump keeps aggravating the sensibilities of his enemies, and their preening irritates the sensibilities of ordinary Americans. If the 2018 midterms are a competition between a Democratic Party whose platform is that the sky is falling, and a Republican Party that can point to promises kept and laws passed, the outcome may not be kind to the Democrats.

The Democrats’ obsession with identity politics and their sudden concern with the “plight” of the “white working class” ignores the wider reality. Most Americans are property owners more worried about making their payments on mortgages, health care, and their children’s education. The floating voters of the squeezed middle class decided the 2016 election. They will decide the midterms, and the 2020 election too. While economists argue over whether Trump’s tax bill is naughty or nice, voters  will perceive the tax bill in a wider matrix.

One of the reasons that economics is a “dismal science” is that people are not rational. They act according to feelings as much as facts. Bret Stephens, the “Never-Trump” columnist at the New York Times, described the economic matrix and the mood that it is creating.

In the last quarter, the annual growth of the American economy was 3.3 per cent, the highest rate in three years. The unemployment rate is down to 4 per cent, and has fallen 0.5 per cent since the start of the year. The Dow Jones has risen 24 per cent this year, one of its best ever performances. And the non-partisan Joint Committee on Taxation concludes that Trump’s tax bill will benefit the economy overall.

Those who wish to unseat Trump console themselves that he is mad or criminal. But if they are to succeed, they must accept that he is cunning and rational. Barring the kind of unforeseen event that Trump seems to court, this tax bill, whatever its merits for individual tax payers, seems likely to cement his position. Given the economic tail wind, the tax bill is also likely to assist Republicans as they campaign for re-election in 2018.

Dr Dominic Green is a Fellow of the Royal Historical Society, and teaches Politics at Boston College