Reagan guru says Trump will usher in new boom era
Posted on November 13th, 2016

Szu Ping Chan

Donald Trump’s plan for sweeping tax cuts and deregulation will spur a US economic boom that could “last for generations” if the president-elect resists a lurch towards protectionism, according to an architect of “Reaganomics”.

Arthur Laffer, who advised Republican president Ronald Reagan in the 1980’s and UK Conservative prime minister Margaret Thatcher, said lower, broader-based taxes, together with “minimal regulation” and free trade would “recreate the pre-conditions” for “enormous economic growth” in the world’s largest economy.

Dr Arthur Laffer reckons US President-elect Trump's plan to slash corporate taxes will be implemented
Dr Arthur Laffer reckons US President-elect Trump’s plan to slash corporate taxes will be implemented Photo: Peter Braig

He also believes that Trump’s pledge to tear up trade deals is unlikely to become reality.

Laffer, who has a curve that bears his name after showing why higher taxes don’t always equal higher government revenue, is a champion of sweeping tax cuts and simplification.

He believes that by the time a trade bill is ready, the economic boom triggered by tax cuts will “ameliorate or eliminate” the problems suffered in the Rust Belt in the US north east because jobs will be created and living standards will rise.

Laffer believes in free trade, despite the losers.

“Trade legislation should always be passed in a boom,” he says. “No one gives a damn about anything else when they have a good, high-paying job. Economic growth solves so many problems. No one cares where the rice is grown or where the clothes are made when the economy is booming.”

But what if Trump starts a trade war? The US is already relatively tough, filing cases at the World Trade Organisation when it believes firms or states are abusing the rules. On steel, the US believes Chinese state support enables it to be sold in the US at a loss-making price, unfairly hitting American producers. As a result, the US charges import tariffs of more than 500 per cent.

If trade defences moved beyond alleged abuses and into limiting legitimate trade, it could hit the very workers Trump says he wants to help.

“Trade wars can spiral quickly, and when that happens, no one wins,” says Ian Shepherdson at Pantheon Macroeconomics. “Jobs are lost and prices rise, hitting the poorest, least educated people hardest. Trump voters, in other words.”

The president-elect has also made a much larger promise: “We have a great economic plan – we will double our growth and have the strongest economy anywhere in the world,” he said in his victory speech.

Growth fluctuates from quarter to quarter – it hit an annualised 2.9 per cent in the third quarter of 2016, and stood at 2.4 per cent in both 2014 and 2015. Doubling that would be an extraordinary feat as the US has not grown at 5pc in any full year since 1984.

Part of the plan is a spending splurge, with tax cuts and simplification for firms and individuals, accompanied by as much as $1 trillion of spending on infrastructure, roads, rail links and airports.

“This type of legislation would lift a big cloud off Washington and invigorate business investment – a real weak link in the economy,” says economist Mickey Levy at Berenberg Bank. “If combined with some reductions in regulations and government-mandated expenses, that would improve the efficiencies of business production processes.”

Trump has promised “the biggest tax revolution” since the reforms of “Reaganomics”, pledging to slash income tax and corporation tax, and “bring back trillions in business wealth parked overseas” by charging a reduced levy of 10 per cent, which he claims will “turn America into a magnet for new jobs”.

Laffer believes policies in this area will sail through Congress as they overlap with the ideas of Paul Ryan, the Republican Speaker of the House of Representatives. Both have pledged to simplify income tax by reducing the number of bands from seven to three and reducing the top rate to 33 per cent, from 39.6 per cent. Ryan also wants to cut the top rate of corporation tax to 20 per cent, while Trump believes it should be slashed to 15 per cent.

“These will happen,” says Laffer.

Mr Trump’s plan includes slashing the top rate of income tax, reducing the number of bands from seven to three and hand a one-off tax break to companies that bring back foreign earnings.

While many Republicans support this plan, a study in 2010 showed that most multinationals used a similar tax break in 2005 to pay their shareholders bigger dividends rather than raise investment or create more jobs.

While Mr Laffer supports targeted infrastructure, he stressed that any public investment had to provide value for money.

“You don’t want to build bridges to nowhere,” he said.

Mr Laffer urged Mr Trump to steer away from his anti-free trade rhetoric, which he said would be damaging for the economy, and focus on boosting growth.

“No one gives a damn about anything else when they have a good, high-paying job. Economic growth solves so many problems.”

While Mr Laffer believes lowering tax pays for itself by encouraging job creation and boosting US activity, most economists said slashing taxes was more likely to push up the deficit than reduce it. “Let’s be realistic,” said Berenberg Bank’s Levy. “The Republican leadership in Congress would push back on legislative proposals that are estimated to lift deficits and debt, and this will constrain the magnitude of tax cuts.”

The Sunday Telegraph, London

Leave a Reply

You must be logged in to post a comment.



Copyright © 2020 All Rights Reserved. Powered by Wordpress