Trump and Bernie Would Destroy the US Economy

Trump and Bernie
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A lot of you out there are ‘feeling the Bern.’ Others, including future Hall of Fame QB Tom Brady, want to ‘make America great again.’ There is just one problem. Trump and Bernie would destroy the US economy, and I have the numbers to prove it. If you like either man, you’ll see a lot you don’t like. Read to the end though to see I’m bipartisan in my prediction of economic doom with either one of these two men in the Oval Office. 

Pick Your Poison

The heart of my argument is based on the examination of the candidates’ policy plans. Trump and Bernie have said what they’re going to do and have been very clear about it. Notice that both rail against elites and the powers that be without detailing specific numbers. Bernie is slightly more honest about this and goes into detail sometimes on the stump about what he wants to do. Trump on the other hand often takes four or five different positions in the same rambling speech. Both men would cause so much damage to the American economy that it would almost surely slow in growth or even shrink over their presidential terms. With Bernie, the main destructive force is his unprecedented tax increases. With Trump, it’s his careless words that could start a trade war with China, slowing immigration to a snail’s pace, and reckless tax cuts in the absence of spending cuts. Here’s how Trump and Bernie would destroy the economy in their own individual way.

President Bernie: A Backbreaking $13.6 Trillion Tax Increase

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If you haven’t taken a look at Bernie’s tax proposals, they should make you shudder. His plan calls for $13.6 trillion in new revenue over 10 years. Here’s what would happen under his plan according to the Wall Street Journal:

  • Top tax rate goes to 52% from current 39.6%. I’m assuming that the 3.8% investment income tax stays in place.
  • New 2.2% income tax on everyone to pay for Medicare for all.
  • Social Security taxes extended to highest income earners.
  • Financial Transaction tax of 0.5% on all stock market trades
  • New progressive estate tax rates starting at 45% and going up to 65% of assets at death.
  • New 6.2% payroll tax paid for by employers.
  • Capital gains and dividends are treated the same as ordinary income, meaning the dividend tax rate goes from 23.4% to over 60%.
  • Increasing the payroll tax by 0.2% to provide paid family leave.

The top tax rate for high income earners goes from 43.4% today to 52%+ 2.2% (new income tax everyone pays) +6.2% (new Social security tax) +6.2% (new employer payroll tax) + 1.45% (current medicare tax) + 0.2% (family leave tax) + 0.9% (medicare surcharge) + 3.4% (Obamacare investment tax) = 71.65%. By the way, I’m excluding the employer share of Social Security that is already paid which I’m assuming stays the same, so that’s another 6.2% if you care to add that as well. That would bring it up to 77.85%. If he rolls the new Obamacare taxes into his own you could subtract 4.3%, which brings it down to 73.55%. You can reference current governmental tax info here.

Anyway you slice his proposals, he clearly would bring the top income tax rate to over 70%. Dividend and capital gains taxes would approach 60%, once you include everything he’s proposing. Even socialist countries like Great Britain recognize lower tax rates for capital. Part of the reason is that corporations already pay taxes on profits, so when they distribute these profits to shareholders who get taxed again, it amounts to double taxation. When people attacked Mitt Romney for having an effective tax rate of 14% in 2012, it wasn’t the full story. The companies pay up to 35% corporate tax then the investor pays on top of that. The combined tax rate is actually quite similar to the 43.4% top personal rate currently.

How Would High Income Earners Respond to These Tax Changes?

Bernie’s top income tax rate would be higher than even France. People respond to incentives. It’s one of the first lessons you learn in economics. Some people would keep working and not be fazed by the new changes. These folks would include professional athletes, entertainers, celebrities, etc. Some business people would continue to work as well, like the Ben and Jerry’s guys, liberal techie types, and some medical professionals. Others would simply work less or change their schedules to reduce their income.

If you’re a brain surgeon working 65 hours a week, how would you respond to a new 70% top tax rate? The current rate is already over 40%, but with 70 cents on the dollar being taken from you, why not work 40 hours a week instead and spend more time at home with your family? High income professionals would certainly reduce their hours under Bernie’s plan. These type of behavioral changes would result in less availability to see surgeons and lower taxes paid by them as they substitute work time for leisure time.

The Impact on Small Businesses

Say you’re a mom and pop car dealership looking to keep the business in the family. You worked for 30 years to build up what you have, employ 300 people, and have three different dealerships across your local area. The total business value is $30 million. Bernie’s new estate tax rules mean you would owe about 50% of everything over $7 million, assuming you’re married. That tax bill comes out to about $11.5 million when you pass. To get $11.5 million out of a business valued at $30 million, you will have no choice but to sell it. The only other option is taking advantage of trust laws that were all the rage back when estate tax rates were really high in the past. You could deposit shares in the company at a low valuation in an irrevocable trust for your children and avoid estate taxes entirely if you did it soon enough. Smart billionaires, like the Waltons, have great lawyers and figure out ways to dodge all the rules. Small business owners who have access to the small town lawyer would probably pay more than their fair share of estate taxes.

How does the business’s forced sale impact the company employees? Well the valuation would probably be forced down to a level below what it’s worth because all the potential buyers would know it’s a forced auction for tax reasons. The people who take it over would not need to worry about the jobs of the folks that worked there for years. Most likely, the new owner would be some sort of private equity investment firm famous for making businesses lean and trimming fat, aka laying people off. I find it hard to believe that workers would not suffer under all the changes in ownership forced by increases in the estate tax.

What’s certain is a new 6.2% employer payroll tax would result in either wage cuts or layoffs. If you have a 3% – 4% profit margin in your car business and your employees are two thirds of your expenses, your entire profit would be wiped out by the new payroll tax. You would probably have to make layoffs or offer reduced wages to afford to keep everyone on.

The Blood Letting of the 1% Would Trickle Down and Hurt the 99%

When your tax rate is over 70%, you don’t work as much. When death taxes take away more than 60% of your business, you don’t work as hard to build up a large company to pass down for future generations because you won’t be able to. New payroll taxes mean fewer workers. There would be lower business investment, as returns from taking risk aren’t there anymore. Why take a venture capital style bet on a company or idea when you would lose 75% of it to taxes if you’re right, and you have a high chance of losing all your money if you’re wrong? It would move the balance of decision making in investing to putting less money into promising startup companies. Badly funded pension funds would suffer under the financial transactions tax, effectively adding a 0.50% expense ratio to their operating expenses every year. Currently, an index fund might cost 0.05% a year.

For average people, their taxes would go up to the mid 30% to mid 40% range. They would enjoy generous benefits and new labor protections, but it would be harder to get a job so more people would be reliant on government programs and handouts to live.

Democratic socialists always cite Denmark as a reason why higher taxes aren’t such a bad thing. Denmark though is a small country, with zero national security obligation to the rest of the world. While it might be a member of security organizations, its contribution to NATO is tiny both in absolute terms and as a percent of its budget. I would love to cut the military and reduce spending on stupid wars, but the threat of terrorism and the knowledge that some power will dictate the rules to the rest of the world mean America has a burden of a few percent of GDP a year to guarantee freedom and democracy can continue around the world. I don’t like that we have to spend money on this, but it is generally necessary. Also, Denmark’s economic growth long term trails ours tremendously. Their society is relatively homogeneous, a fact we are reminded of as they move to block refugees from their country. Other successful socialist countries like Sweden are still small quite small compared to the US, with disproportionately large reserves of natural resources and influence over global affairs. Administering centralized government programs is much easier, more efficient, and less costly in a country of a few tens of millions than a country of over 330 million.

Bernie would result in massive tax increases so large that it would cripple American investors and corporations. His tax increase is 27 times that of Mrs. Clinton, to put in perspective the radical policy proposal he is calling for. The middle class and working poor would lose jobs and have fewer new companies providing the kind of opportunities that lead to real wage growth. GDP would probably grow at 1% to 2% a year, if we’re lucky. That would result in an economy about one third to one half the size that it would otherwise be over several decades.

President Trump: Precipitating the Next Depression

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While you might think I’ve been overly harsh on Bernie, Trump might be even worse economically. At least Bernie comes out with an honest plan and says, “I want to raise spending by trillions of dollars but here’s how I’m going to pay for it.” Trump just throws out numbers for plans that if he actually pursued would bankrupt the country and possibly even start another Great Depression.

The worst idea he has is a new 45% tax on all goods coming from China. He is correct that China manipulates their currency and follows policies that give it unfair advantages in international trade. However a 45% tariff would be similar to the infamous Smoot-Hawley tariff of 1930 that was one of the key causes of the Great Depression. For those that don’t know, the Smoot-Hawley tariff was enacted in response to the economic calamity befalling US businesses as the stock market plunged in 1929. The idea was that with high protectionist taxes on imports US companies could better compete and survive the downturn. Instead, foreign countries retaliated with high tariffs of their own, and the result was that global trade declined by half. The reduced economic activity from trade caused the Depression to spiral out of control.

With China currently in an economic fragile state, what might happen if a new 45% tax was implemented by one of their largest trading partners? An already teetering Chinese economy would go into freefall. The importance of the Chinese economy cannot be overstated. Having such a domino fall could cause a global recession or even depression as demand for commodities, services, and goods dried up. We literally tried this extreme protectionist approach Trump is talking about already. It resulted in the worst economic disaster the world has ever known and the rise of extreme political leaders like Stalin and Hitler.

Tax Cuts Without Spending Cuts

Another horrendous Trump idea is his tax cuts he declines to pay for. One group found his tax cut proposal would cost about $12 trillion over 10 years. That number is very similar to the Senator from Vermont. Trump and Bernie really do have more in common than you think. The big difference is that Trump has made no promises that he would reduce spending.

He swears that he will not get involved in any ‘stupid wars,’ which will save us billions. However, when you cut taxes by trillions of dollars, you are going to have a financing problem. I definitely believe that same of this cut will come back to you in the form of higher growth. Still, there will be a large hole in the budget even accounting for growth that will need to be filled with deficit spending. The US would go to the bond markets and borrow still more money to pay for massive spending and new tax cuts. As I’m writing this article, we have a national debt of almost $19 trillion. If you added Trump’s tax cut costs to that number, we would be looking at a debt to GDP ratio that would be one of the highest in the developed world. Eventually we’d have to resort to inflation to get our way out of it. The inflation would hurt the living standards as well as the value of savings of average Americans.

Trump speaks of huge entitlement programs and public pensions like they are birthrights. He has not spoken much if at all on raising the retirement age for Social Security or cutting benefits. He really is a big government spender for social programs, in a style similar to that of Chancellor Bismarck of Germany in the 1800s. The ‘Iron Chancellor’ was famous for his realpolitik views on foreign policy, which can basically be summarized by acting tough, talking tough, and having a powerful military to back it up. While Bismarck was pursuing an aggressive foreign policy, he also pushed for social insurance programs similar to Social Security. Trump’s unwillingness to say what spending he would cut ensure that the tax relief would be added onto the bill for the national debt.

The Crushing Economic Blow of Low or No Immigration

In the 1960s to 1980s, America welcomed new communities by the millions to its shores. Doctors from India came and set up shop in underserved communities. Engineering professors from China immigrated too, bringing with them their technical knowledge and strong academic standards. Other immigrants from places like Bangladesh, Pakistan, Nigeria, South Africa, Korea, Vietnam, Mexico, and more brought with them new skills and a desire for economic opportunity. Look around at the most successful people in American society. A hugely disproportionate number of them are immigrants or children of immigrants. People that have been here for generations get complacent and lazy.

All you have to do is look up entrepreneurship numbers to see the value of immigration. Immigrants are far more likely to start new enterprises. They bring familiarity and economic ties with far reaching parts of the world, creating new potential groups of visitors and tourists who want to spend money and pay taxes here.

Trump and his supporters might say that he only wants to end all illegal immigration, not the legal kind. His nativist rhetoric is so extreme, with Muslim bans and mass Mexican deportations on the top of his to do list, that quotas would almost surely be established. The drop off in immigration would be so extreme under his administration that economic growth would have to be affected. Even illegal immigration creates growth in the American economy. Many latino workers who come to America without proper documents work under the table for cheap. The excess value lines the pockets of American consumers and businesses. When my hometown was hit by Hurricane Ivan in 2004, there was an influx of more Mexican men that I’ve ever seen in my small community. You would walk down the street and there would be dozens of crews working on roofs to repair the damage from the storm. Most of these groups spoke exclusively Spanish. Did these men all have the correct papers and documents? It’s very unlikely as they did not seem to speak English. However, if my hometown had to hire white working class folks to come from around the country to repair the roofs, the cost would have been much higher.

When mostly latin workers come to America illegally, they pay some taxes and do not receive corresponding benefits. While some families do try to come to the US to have ‘anchor babies,’ the truth is that most of the people in the US illegally contribute greatly to the economy. Without them, the rate of growth we would experience as a country would doubtlessly be smaller.

Trump and Bernie: Great For Ratings, Disastrous For the Economy

Trump and Bernie say things that appeal enormously to a lot of people. Folks are understandably frustrated with the last eight years of slow economic growth and anemic recovery. However, they see false saviors when they listen to the two men.

Bernie’s speeches are a thing of glory. He wants to stick it to the immoral banks and Wall Streeters whose greed got us into the subprime mortgage crisis. He attacks the growing inequality in America and fights back against the stagnant wage growth of working people with a plan to take a huge bite out of the 1%. He seeks healthcare for all, and would do away with the unpopular program that is Obamacare, with its split private and public system. After years of ill advised wars, he wants to trim the defense budget back to keep us from having the ability to engage in overseas conflict. The problem is $13.6 trillion of tax increases would destroy new business creation, result in fewer hours worked by the most productive employees in the economy, and cause large numbers of layoffs as businesses are forced to cope with a new 6.2% payroll tax.

Trump would start a trade war with China, add trillions to the national debt, and drastically slow the influx of talented immigrants who contribute to economic growth in a big way. His dangerous actions could cause high inflation, a new Great Depression, and increased costs for services of every kind from lawn mowing, nail care, and haircuts to surgery, college, and software development.

Both Trump and Bernie pose a major danger to the health of the US economy, for differing reasons. One would support protectionism and xenophobia not seen in the country for almost 100 years. The other would raise taxes to such high levels that France might be attractive as a tax haven. If either man wins, the economic growth of the past several years will look rapid by comparison.

Do you support Trump or Bernie and believe that they would in fact be great for America? Do you agree that they would bring down economic calamity? Let me know why in comments below!

4 thoughts on “Trump and Bernie Would Destroy the US Economy”

  1. You told me in a previous email that, of the Republican candidates, you would choose Kasich. After the NH primary, both he and Hillary are in 2nd place in their respective parties. Would you PLEASE write a blog comparing and contrasting J. Kasich and H. Clinton?

    1. Just wrote one today on Hillary’s speech income. I think Kasich is unfortunately a one trick pony and will struggle in South Carolina with Cruz and Trump taking the lion’s share of the vote. Rubio v Bush in South Carolina is the key matchup. There will be tremendous pressure for whoever underperforms there to drop out before the Super Primaries to avoid a Cruz or Trump nominee

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