The Clinton and Trump Economic Plans: Growing the State or the Private Sector

August 19, 2016 Updated: August 23, 2016

With poll after poll saying the economy is the most important issue in the presidential election, the candidate who connects with voters on this subject has a good chance of winning it all.

Donald Trump’s and Hillary Clinton’s economic plans offer a clear choice. Trump seeks to revive American greatness with policies aimed at kick-starting economic growth. Clinton seeks fairness and more benefits for the middle and working classes.

Their proposals fall on either side of one question: Is the state or the individual better at spending the people’s money?

Trump clearly thinks the people—as individuals or through the companies they run—should decide on consumption and investment, while Clinton wants to raise more money from the private sector so the government can spend and invest on behalf of the people.

Donald Trump

Republican presidential nominee Donald Trump makes his entrance during a rally in Jacksonville, Fla., on Aug. 3. (Mark Wallheiser/Getty Images)
Republican presidential candidate Donald Trump makes his entrance during a rally in Jacksonville, Fla., on Aug. 3. (Mark Wallheiser/Getty Images)

Trump’s tax plan includes a zero-percent tax rate for people making less than $25,000. This is a swing for the fences and could be a home run for the poor and the middle class.

“As part of this reform, we will eliminate … special interest loopholes that have been so good for Wall Street investors, and people like me, but unfair to American workers,” Trump said in a major policy speech at the Detroit Economic Club on Aug. 8.

In Detroit, Trump used the same brackets House Republicans have previously proposed: 12 percent, 25 percent, and 33 percent. “For many American workers, their tax rate will be zero,” he said.

In an article published in The Wall Street Journal, Trump suggested four tax brackets: 0 percent (for incomes up to $25,000), 10 percent (up to $50,000), 20 percent (up to $150,000), and 25 percent (above $150,000). Most analysis is still based on this proposal.

Under current law, there are seven brackets, with the top marginal rate at 39.6 percent. Because of the lower overall taxes, itemized deductions will be scrapped, except for mortgage payments and charitable contributions.

With more money in middle-class pockets, consumer spending will increase, college savings will grow, and personal debt will decline.
— Donald Trump

No long-term capital gains below an income of $50,000 with a maximum rate of 20 percent from $150,000 and up. No federal estate and gift taxes. On the other hand, hedge funds and other speculators who have previously been able to mask fees and income as capital gains won’t be able to do so in the future. The loophole of the so-called “carried interest” will be closed.

“The proposed policies will allow the middle class to keep most of their deductions while eliminating many of the deductions for the very rich. With more money in middle-class pockets, consumer spending will increase, college savings will grow, and personal debt will decline,” Trump wrote. The direction is clear: People and companies would decide what to do with their money, not the government.

Critics say his plan would deliver more cash to the rich on an absolute dollar basis, while his supporters claim that the poor and the middle class would benefit most, relative to their current tax burdens.

So what’s not to like about the proposal? It will cost money and maybe a lot.

Trump claims that he will eliminate the government’s wasteful spending and is banking on growth to make the tax cuts revenue neutral. The degree to which raising or lowering taxes discourages or stimulates economic growth is key in analyzing the effects of Trump’s and Clinton’s tax policies.

The Tax Policy Center (TPC) estimates the original pre-Detroit proposals—if implemented as is—will cost $9.5 trillion to the federal budget on top of current spending and will add that amount to the national debt, unless the amount lost through lower tax revenues is matched by budget cuts.

(Source: CRFB)
(Source: CRFB)

Moody’s Analytics notes that concrete proposals on Trump’s cost-saving plans only include increases in spending for veterans and the military, and some minor adjustments to the Medicaid program, leaving other entitlement programs such as Social Security and Medicare unchanged.

According to Moody’s, Trump would need to cut spending by 20 percent in order to pay for the tax cuts under the TPC’s assumptions and achieve his goal of revenue neutrality.

These models are “garbage in, garbage out,” said Peter Navarro, a policy adviser to Trump, in an interview with Epoch Times. Navarro said revenue neutrality can be achieved by reducing the trade deficit, which subtracts from GDP and is another one of Trump’s hallmark policies. Economic activity will also increase by substituting legal, tax-paying American jobs for black market labor by illegal immigrants.

“The revenue neutrality is going to occur because the tax/trade policies accelerate growth, the policies generate the tax revenues to make up for it.” He noted the TPC doesn’t take into account increased revenues arising from economic growth stimulated by Trump’s tax cuts in its calculation.

Other estimates of the costs of Trump’s plan are much lower than the TPC’s. Stephen Moore, a Trump economic adviser and economist at Freedom Works, said Trump’s original tax plan would cost about $3 trillion over 10 years, according to a Politico report. After Trump’s Detroit speech, the Committee for a Responsible Federal Budget estimated his new tax plan would cost $2.55 trillion extra over a decade.

The revenue neutrality is going to occur because the tax/trade policies accelerate growth.
— Peter Navarro, Trump policy advisor

In Detroit, Trump characterized his tax plan as the biggest tax revolution since Reagan, saying that Reagan’s tax cuts “unleashed years of continued economic growth and job creation.”

Instead of debating which model or economist is right or wrong, history can be a guide, although not a definitive one.

Reagan cut the top marginal income tax from 70.1 percent to 28.4 and reduced the capital gains rate to 20 percent. Although the plan was supposed to deliver revenue neutrality, the results were mixed.

Real GDP per capita increased by 3.05 percent on average during Reagan’s tenure, as the lower taxes spurred economic activity. Inflation fell from 10.2 percent in 1982 to 5.4 percent in 1988 and unemployment decreased from 7.1 percent in 1980 to 5.5 percent in 1988.

However, the federal debt also increased, mainly because Reagan not only cut taxes but also increased spending, similar to Trump’s mix of policies. Public debt tripled from $712 billion in 1980 to $2.1 trillion in 1988. Reagan spent mostly on defense, boosting military outlays from $267 billion in 1980 to $393 billion per year in 1988.

Interestingly though, nominal tax revenues increased 72 percent from $599 billion in 1981 to $1 trillion in 1990—despite the cuts—and kept on growing throughout the 1990s. So the tax cuts increased revenues. It was the increased spending that busted the budget.

Trump on Trade

Trump’s cutting of corporate taxes from an average 39 percent to 15 percent goes hand in hand with his “fair trade” policy. The goal is to bring onshore American jobs and capital. Trump says he wants free trade but will retaliate if other countries, like China, cheat.

“Trade has big benefits, and I am in favor of trade. But I want great trade deals for our country that create more jobs and higher wages for American workers. [China] breaks the rules in every way imaginable. China engages in illegal export subsidies, prohibited currency manipulation, and rampant theft of intellectual property. They also have no real environmental or labor protections, further undercutting American workers,” Trump said in his speech in Detroit.

Trump also wants to renegotiate NAFTA and the yet-to-be-ratified Trans-Pacific Partnership and wants to exit the WTO if it doesn’t enforce his vision of fair trade.

When Donald Trump talks about tariffs, tariffs aren’t an endgame.
— Peter Navarro, Trump policy advisor

Trump told The New York Times he wants to impose tariffs of up to 45 percent on Chinese goods if they don’t reciprocate fair trade. However, Navarro said this is only a last resort and that individual countries and cases would be examined should Trump be elected.

“When Donald Trump talks about tariffs, tariffs aren’t an endgame. The goal is to use tariffs as a negotiating tool to stop the cheating. But if the cheating does not stop, Trump will impose defensive tariffs, countervailing tariffs. … You impose the amount [of tariffs] the country was cheating.”

According to Navarro, this was always the job of the WTO, which it hasn’t carried out in the past. “The WTO doesn’t work. All the WTO does is export American jobs and factories,” Navarro said.

Navarro refers to protectionism through tariffs as the second-best case behind mutually beneficial free trade but still preferable to the system in place now, which treats America unfairly and has cost the country millions of jobs.

Trump hopes to boost American manufacturing by making foreign goods more expensive through tariffs if needed and by lowering the corporate tax rate so companies can afford to pay higher American wages.

He also wants to entice top American companies to repatriate their $2.4 trillion in cash hoarded abroad by offering a 10 percent flat tax, rather than the current 25 percent. “This money will be re-invested in states like Michigan,” said Trump.

According to Navarro, reducing the trade deficit automatically boosts GDP, which is also positive for tax revenues, contributing to revenue neutrality.

As for retaliation from other trading partners, Navarro isn’t that concerned: “Donald Trump knows that America is the best market to sell into. The countries want to trade with America. But right now they are willing to do so because they are treating us like Uncle Sucker.”

It’s outrageous that multi-millionaires and billionaires are allowed to play by a different set of rules than hardworking families, especially when it comes to paying their fair share of taxes.
— Hillary Clinton

Hillary Clinton

Democratic presidential nominee Hillary Clinton is greeted by supporters as she arrives at a campaign rally where she talked about her economic plan in Des Moines, Iowa, on Aug. 10. (Steve Pope/Getty Images)
Democratic presidential candidate Hillary Clinton is greeted by supporters as she arrives at a campaign rally where she talked about her economic plan in Des Moines, Iowa, on Aug. 10. (Steve Pope/Getty Images)

Clinton’s proposals aren’t quite as clear-cut as Trump’s, but can be broadly summed up in two categories: how to invest and spend in the U.S. economy and how to raise enough revenues to fund her ambitious spending plans. In pursuit of fairness, she wants to give the middle class more income by raising taxes on the rich and corporate America.

“It’s outrageous that multi-millionaires and billionaires are allowed to play by a different set of rules than hardworking families, especially when it comes to paying their fair share of taxes,” she states on her campaign website. The Clinton campaign did not respond to a request for comment on this article.

“Hillary is proposing middle-class tax breaks to help families cope with the rising cost of everyday expenses, like child care and education—and she’s announced new tax credits to help families caring for an ill or aging family member. She’ll pay for them by raising taxes on the wealthiest Americans and closing loopholes in our tax code,” her campaign website states.

So what are some of the perks the middle class and the poor would enjoy? Clinton did mention tax cuts for the middle class but hasn’t elaborated on how they would effectively look. The spending proposals, however, are plentiful and would have a wide reach.

(source: CRFB)
(source: CRFB)

One of Clinton’s core tenets is making college affordable, albeit not completely free, as suggested by Bernie Sanders. She wants free education at community colleges and wants to refinance existing student loans at lower rates, as well as help delinquent borrowers.

Families with an income smaller than $85,000 won’t have to pay tuition for in-state public education. Clinton calls this the “New College Compact.” Including early childhood education and limiting spending on child care to 10 percent of family income, these proposals would cost $700 billion over 10 years, according to Moody’s.

The Clinton campaign has proposed initiatives to improve the study of science, technology, engineering, and mathematics, although it focuses mostly on pre-university education.

A related policy is paid family leave in the case of childbirth, and medical leave for up to 12 weeks at 66 percent of the worker’s wages. On balance, both proposals are good for the economy, according to Moody’s. “Her paid family leave plan would lift labor force participation, while increased spending on college education and early childhood education would raise the educational attainment of workers,” it states in a report.

Nearly all of the tax increases would fall on the top 1 percent.
—  Tax Policy Center

Clinton also claims her plan to rebuild U.S. infrastructure will create many middle-class jobs. The focus of this program is on transportation infrastructure and she aims to achieve this objective by two methods. One is a National Infrastructure Bank with a capitalization of $25 billion, which will give out loans and loan guarantees to encourage private and local infrastructure investment of up to $250 billion. Another $250 billion is slated for direct federal spending on infrastructure for rail, sea, air, highways, public transit, and broadband internet.

Clinton also wants to expand the Affordable Care Act (aka Obamacare) by supporting states and limiting the out-of-pocket expenses of the insured. This proposal will cost $300 billion over 10 years, according to the Committee for a Responsible Federal Budget, and may be the last chance to save the ACA.

Her last major proposal, which would not cost the federal government any money, is to raise the federal minimum wage to $12 from $7.25. Although this policy doesn’t cost money, Moody’s is doubtful it will benefit the economy, although the income of many low-wage workers will be increased. “Some jobs for low-wage workers would be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would fall modestly.”

All in all, Clinton’s proposals would cost $2.2 trillion over 10 years according to Moody’s, which also includes the elimination of the sequester or automatic spending cuts implemented in 2013. The Moody’s estimate does not account for dynamic changes in the economy like positive effects from government spending or negative effects from higher taxes.

The public debt would be $750 billion higher than the current baseline scenario after netting out the increased revenue from raising taxes for the rich.

Paying For It

And by saying taxes on the rich, she means it. “Nearly all of the tax increases would fall on the top 1 percent; the bottom 95 percent of taxpayers would see little or no change in their taxes. Marginal tax rates would increase, reducing incentives to work, save, and invest, and the tax code would become more complex,” the Tax Policy Center states in a report.

In a speech in Warren, Michigan, on Aug. 11, Clinton said: “Wall Street, corporations, and the super-rich should finally pay their fair share of taxes. That’s why I support the so-called ‘Buffett Rule,’ because multi-millionaires should not be able to pay a lower tax rate than their secretaries.”

The Buffett Rule is an effective minimum tax of 30 percent on incomes higher than $1 million. The current system allows high earners like Warren Buffett himself to pay much lower taxes because of several loopholes in the code. In March 2013, Buffett said he paid less tax than his secretary.

Other taxes would include a surcharge of 4 percent on income higher than $5 million, lowering the threshold for the estate tax to $3.5 million, and increasing the top rate on estates to 45 percent. She also wants to reduce the exemption for gift taxes to $1 million over one’s lifetime and limit specified deductions to 28 percent tax value, excluding charitable giving.

She wants to keep the same corporate tax or raise it. That will cause companies not to reinvest in the United States and continue to move more and more offshore
— Joseph Cari, president, World Policy Institute

The top capital gains rate for the highest earners would go up to 47.4 percent if the investment is held less than two years. Right now, the long-term capital gains rate is 20 percent for investments held longer than one year. The so-called “carried interest” of hedge funds and private equity partnerships, now taxed at the low, long-term capital gains rate, would be taxed as ordinary income with a top rate of 43.6 percent.

On the corporate side, Clinton wants to limit corporate tax avoidance by imposing a penalty tax on companies that store cash abroad. She will also raise the minimum foreign ownership necessary for establishing a tax domicile abroad from 20 percent to 50 percent. She also spoke about tax on high-frequency trading and a “risk-fee” on large financial institutions. However, she promises some relief for smaller businesses by making tax filing simpler to reduce their overhead costs.

“She wants to keep the same corporate tax or raise it. That will cause companies not to reinvest in the United States and continue to move more and more offshore,” said Joseph Cari Jr., chairman of the non-partisan World Policy Institute.

Moody’s notes the plan would raise $1.46 trillion over 10 years, limiting the impact of her spending programs, always under the assumption that her tax hikes wouldn’t impact the economy negatively.

France’s recent experience with high taxes provides a warning for Clinton. France imposed a 75 percent tax on euro millionaires and had to drop it after droves of wealthy French individuals changed their nationality and stopped paying taxes in France altogether.

“Her proposal would make the tax system more complex and less transparent. … This is effectively adding several forms of a minimum tax to the code, on what is already a complex individual alternative minimum tax. Capital gains taxation would also be substantially more complex under her tax plan,” states Moody’s.

But the report also notes that raising taxes on the rich has a limited impact on their spending behavior. For every dollar increase in taxes, spending would decrease by 49 cents for the top quintile of taxpayers compared to 86 cents in the bottom quintile.

While the effect on consumption should indeed be muted, raising taxes on the well-do-to would still reduce private sector investment in favor of increased government spending.

When wealthy people don’t spend their income and don’t pay more tax, they have to invest it in the private capital markets in stocks, bonds, real estate, or private equity firms. In this case, the private sector decides capital allocation; if taxed, the government decides what happens to the money.


Different models and assumptions provide different outcomes for the candidates’ proposals. But 10-year surpluses or deficits are notoriously hard to predict and should not be taken at face value. In addition, the final implementation of the proposals will depend on Congress and many other factors.

The voter is better served by evaluating the higher principle behind each plan. While Trump’s proposals focus on leaving individuals and companies with the money they earned and letting them decide how to spend it, Clinton’s proposals would afford a larger role to the government to decide how to spend the money raised from extra taxes on the rich.

Voters need to decide if they prefer the government or the private sector making decisions over scarce resources. Thanks to both candidates, it will be easy to make a decision this year.