Trade war could backfire on Trump
Donald Trump is dangerously close to becoming the first Republican president since George H.W. Bush to raise taxes. According to the Tax Foundation, if the tariffs already announced by Trump go into effect, they will amount to a $200 billion annual tax increase. That’s larger than the $165 billion average annual reduction in 2017’s Tax Cut and Jobs Act. Bush’s brazen break with Republican orthodoxy, along with a sluggish economy and broken promises, made him a one-term president. If Trump’s not careful, he may join him.
In his 1988 campaign, Bush famously asked the public to “read my lips” when he promised “no new taxes”. While Bush had been Ronald Reagan’s vice-president, he came from an earlier generation of moderate Republicans. Movement conservatives always had doubts about his fealty to their low-tax agenda.
As it turned out, those concerns were justified. In 1990, two years after a successful campaign based in part on a commitment to fight Congress’s attempts to raise taxes, Bush faced a rising deficit and a Congress reluctant to cut domestic spending.
He caved. In June, he announced that he was willing to accept a budget that not only cut defence spending, but also included tax increases.
The final package included increases in both income and payroll taxes, and went into effect in 1991. In the next year’s campaign, Bush had to deal with rising unemployment and withering criticism, in both the primary and the General Election, over his decision to go back on his pledge.
Trump’s situation is not exactly analogous, of course. But, his fate could be same. In his 2016 campaign, Trump promised that nearly every American would see a tax cut. He also pledged to renegotiate America’s “horrible trade deals” and reinvigorate US manufacturing.
When those negotiations failed and a trade war broke out, Trump assured Americans that trade wars were good and easy to win.
That hasn’t exactly worked out. The trade war has been raging for nearly 18 months, the trade deficit continues to increase and manufacturing growth is beginning to slump. Meanwhile, the White House continues to assure Americans that the trade war is only temporary.
The reality looks different: every bit of good news is soon undermined by a stumble. Tariffs are still rising, and the trade war is taking an increasing toll on the broader economy.
So far, the trade war’s effect has been felt primarily in business investment. Analysis from JP Morgan Chase&Co, however, suggests that consumers will soon be feeling the pinch as well.
If fully implemented, this next phase of Trump’s tariffs will cost the average US household up to $1,795 per year, $495 more than the bank’s estimate of the average increase in disposable income from tax reform. (The biggest tax cuts in the 2017 law were on the corporate side; they were not paid out to any actual humans.)
If consumer spending starts to slip, there won’t be much left propping up economic growth. This combination of weak growth, a rising tax burden and broken promises echoes the 1992 election. In addition, Trump is already accumulating primary challengers who will, no doubt, criticise him for his failure to deliver. When the Democrats pile on, it will be that much harder for the President to make his case for re-election.
In tone and substance, Donald Trump and George H.W. Bush are nearly polar opposites. In terms of their economic and political circumstances, however, they are eerily similar, in a way that should raise some doubts about Trump’s chances of re-election.
Karl W. Smith is a former assistant professor of economics at the University of North Carolina’s school of government and founder of the blog Modelled Behaviour. He is also a Bloomberg Opinion writer and can be contacted at email@example.com
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