What with all the insults, threats and bizarre assassination attempts. one aspect of the ongoing US Presidential election campaign is going largely unnoticed. Both candidates are wheeling out some of the most ridiculous economic policy proposals in living memory. Here are just a few.
The biggest and potentially most damaging proposal is Donald Trump's pledge to impose tariffs on just about everything the US imports, with a view to reducing income taxes. It's clear that his Wharton degree did not equip him to understand how tariffs work. He believes that any tariffs he introduces would be paid by foreign countries. It does not seem to occur to him that either (a) the tariffs would be passed on to US consumers, thus rapidly pushing up inflation, or (b) countries and companies would simply stop shipping their products to the US, in which case the tariffs would not produce any revenue and the shelves at WalMart and just about everywhere else would rapidly empty.
What's worse, it's impossible to imagine that foreign countries would not react to Trump's tariffs by retaliating with their own tariffs on American exports. As the experience of the 1930s showed, that's a recipe for a global recession, or worse -- and the global economy is much more closely integrated now than it was in the 1930s.
Sticking with Trump for the moment, his latest genius idea is to exempt all overtime earnings from income tax. He affects to believe that this would promote and reward hard work, but the likely consequence is surely the exact opposite. How many tasks that workers are currently able to accomplish in a 40-hour work week would suddenly start to consume more time, compelling employers to pay overtime? How many new jobs might never be created as existing workers start to demand overtime rather than allowing the employer to add new workers? And how would this be implemented for salaried workers, many of whom routinely work more than forty hours a week? (Asking for a friend on that last one, obviously).
Let's give Kamala Harris a look-in here. One of her off-the-wall proposals is to introduce taxation of unrealized capital gains. Now, it's clear enough that the immense book wealth of the Musks and Zuckerbergs of this world is a very tempting target for revenue-hungry politicians, but is this really a workable idea? The nature of unrealized gains is that you don't have the cash on hand to pay the tax. Do you sell assets to pay it, in which case you now have a realized capital gain anyway? Or do you borrow the money, thereby making your balance sheet more risky?
Does the unrealized capital gains tax apply at all income levels, in which case the impact on small to medium sized entrepreneurship is likely to be severe? Or does it only apply above a certain cutoff point, which no doubt triggers all manner of accounting shenanigans? And what happens if, after you pay the tax on unrealized gains, you run into a period of losses? Do you get your money back?
Lastly there's a silly idea that both candidates have embraced: removing income tax on tips. I blogged about this one back on August 13, so allow me to quote myself:
Basically, the case not to do this comes down to the good old Law of Unintended Consequences. One: eliminating taxation on tips directly reduces any incentive for employers to pay their staff a living wage. Two: in all likelihood it reduces the percentage that customers actually tip -- "hey, I've paid tax on this money that I'm tipping you, but you won't be paying tax on it, so it's only fair that I give you less, right?" Three: eliminating taxation on tips creates incentives for smart people to structure their compensation in order to take advantage. Ready to start tipping your investment broker? Just give it time.
Heck, not just your investment broker. Your realtor just lowered his fee from 6 percent to 4 percent, but the sales agreement now includes a provision for a 2 percent tip, and that tip is, of course, mandatory.
This is a scary list of dumb ideas, and I'm sure there are quite a few more that I've missed. We can assume that most of them will never be heard of again after November 5, but the very fact that the candidates are even thinking on these lines is pretty worrisome.
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