Anyone following the presidential campaign knows that the differences between Hillary Clinton and Donald Trump run wide and deep, and that’s clearly the case with their respective economic plans, according to Moody’s Analytics.
In its economic analysis of the two campaigns, Moody’s Analytics finds that “Secretary Clinton’s economic policies when taken together will result in a stronger U.S. economy under almost any scenario.”
In contrast, it says, “The upshot of Mr. Trump’s economic policy positions under almost any scenario is that the U.S. economy will be more isolated and diminished.”
Moody’s Analytics focused on the long-term economic impact of the candidates’ economic plans through 2026 using three different scenarios:
- The plans as is
- A smaller scale version of the plan
- A most likely version following negotiation with Congress
The lead author of both analyses is the firm’s chief economist, Mark Zandi, who advised John McCain’s 2008 Republican presidential campaign as well as Congressional Democrats when they were drafting the 2009 economic stimulus plan early in President Barack Obama’s first term.
The Clinton and Trump economic plans couldn’t be more different, according to Moody’s Analytics.
While Clinton raises taxes on the wealthy, Trump cuts them. Her plan raises revenues by more than $1 trillion over 10 years, while Trump’s plan squeezes revenues to the point that spending has to be reduced by 20% or deficits will rise substantially.
Clinton proposes new spending on education, infrastructure, paid family leave and economic development and research. Trump offers no new spending initiatives other than the wall between the U.S. and Mexico.
Here are some of the major differences between Clinton’s and Trump’s economic plans, according to Moody’s Analytics:
Taxes – Clinton
Clinton proposes tax hikes primarily on the wealthy. Those in the top 2% to 5% would pay an average $3,000 more in taxes per year, but those in the top 1% would pay an additional $78,000.
The tax system would become more progressive and raise an additional estimated $1.46 trillion in revenue over the next decade on a static basis, which doesn’t account for its impact on the economy.
Clinton wants to use the monies raised from additional tax revenues to spend billions on infrastructure, education — including preschool, free tuition at community colleges and four-year debt-free education at public universities — and up to 12 weeks worth of paid family and medical leave for workers.
Personal Income Taxes
Clinton’s plan imposes a 30% minimum tax on those with adjusted gross incomes above $1 million and a 4% surcharge on those whose AGI tops $5 million.
Private equity and hedge fund managers would be taxed at the ordinary income rate, not the current lower rate, which has a maximum of 20%.
There would also be a $1 million limit on lifetime gift tax exemption; a new tax schedule for capital gains, depending on asset holding periods; and limited use of tax-advantaged retirement accounts by taxpayers with very high balances.
Clinton proposes to close loopholes for high-income earners in order to eliminate the sequester that limits federal spending on multiple government programs, but she provides no details.
She would repeal the Cadillac tax on health insurance plans, which is set to take effect in 2018.
Clinton would limit corporate inversions by increasing the threshold for foreign ownership to 50% from 20% currently. (U.S. companies who have incorporated overseas would be subject to U.S. taxes if foreign ownership were less than half.)
Clinton wants to tax high-frequency trading and impose a “risk fee” on very large financial institutions and an excise tax on tar sands oil producers. She would also eliminate tax incentives for fossil fuel production.
Tax-advantaged Build American Bonds and New Market Tax Credits would help finance infrastructure spending and community development.
Moody’s notes that Clinton’s plan does not include broad corporate tax reform, which the Obama administration and Congressional Republicans have supported.
Taxes – Trump
All taxpayers – individuals and corporations — receive a tax cut under Trump’s tax plan, but the top 1% of earners would receive the most benefit — more than one-third of the benefits from the personal income tax cut, according to Moody’s Analytics.
The top 1% would receive an estimated additional $275,000 on average, while those in the bottom 99% would save less than $2,500.
Trump’s tax plan would lower marginal tax rates, flatten the tax code and make it less progressive. It would also reduce spending sharply or, failing that, add to the deficit.
It would simplify the tax code but also create complications, including a new loophole for owners of pass-through businesses such as S corporations and partnerships.
The result of all of Trump’s tax proposals: a $9.5 trillion decline in tax revenues over 10 years, which would reduce the ratio of revenues to GDP to their lowest percentage since World War II, according to Moody’s Analytics.
Personal Income Taxes
Trump would reduce the number of personal income tax brackets to three from seven with the top marginal tax rate at 25%, down from 39.6%, and tax carried interest as ordinary business income, rather than ordinary personal income, which could be higher.
Trump would also increase the standard tax deduction to $25,000 for single filers and $50,000 for joint filers, which is about four times what they are for 2016, while reducing itemized deductions except for charitable contributions and mortgage interest payments.
He would eliminate federal estate and gift taxes, the alternative minimum tax and the surtax of 3.8% on investment income of high-income households that helps fund the Affordable Care Act.
Trump would reduce the corporate tax rate to a maximum 15% from the current 35% maximum while also repealing most tax breaks for businesses.
Pass-through businesses such as S corporations and partnerships would be taxed at no more than 15% rather than an owner’s personal tax rate, which could potentially create a new tax loophole.
“Enterprising individual taxpayers would be able to become pass-though entities to take advantage of the lower rates,” according to Moody’s Analytics.
Companies could repatriate overseas profits by paying a one-time tax of 10%.
Among the biggest differences between the candidates are their positions on immigration.
Clinton supports immigration reform similar to a 2013 bipartisan bill that ultimately failed to pass. That bill would increase legal immigration, which in turn would boost GDP by 3.3% over 10 years through the creation of more jobs and increased demand for goods and services, according to Moody’s Analytics.
Trump proposes to deport more than 11 million undocumented immigrants, who comprise just over 5% of the U.S. labor force, build a wall along the U.S. border with Mexico to stop Mexicans from entering the U.S., and end federal grants for so-called sanctuary cities, where city employees are forbidden to inquire about immigration status.
If implemented as is, Trump’s immigration policy would reduce the labor force by about 5%, tighten the labor market and raise labor costs as employers struggle to fill open positions, according to Moody’s Analytics.
Despite their current shared opposition to the Trans-Pacific Partnership trade deal, Clinton and Trump hold very different views of global trade policies.
Clinton’s opposition to the TPP, which she had championed as secretary of State but now opposes, would have little impact on the U.S. economy if she becomes president, according to Moody’s Analytics.
“Failure of the TPP to become law would in and of itself have little impact on the U.S. economy … but if the failure of the TPP to become law signals a slowing or even an end to globalization, a process that has been underway more or less since World War II, then it would eventually weigh on economic growth.”
Trump has proposed imposing a 35% tariff on products imported from companies that outsource U.S. jobs to Mexico to help pay for the wall he wants to build between the U.S. and Mexico as well as a 45% tariff on Chinese imports until China lets its currency float freely.
As a result, prices of those imported good would increase about 15%, which would push up consumer prices by 3%, according to Moody’s Analytics.
In addition, U.S. exports to those countries would decline if Mexico and China retaliated by levying tariffs on U.S. products, which is likely, according to Moody’s Analytics. Mexico imports about $250 billion worth of U.S. goods annually; China imports about $100 billion worth.
Trump’s trade policy combined with his immigration policy would force businesses to raise prices more aggressively, leading to higher inflation, higher interest rates orchestrated by the Federal Reserve and finally a recession one year into a Trump presidency, according to Moody’s Analytics.
Economic and Fiscal Impact
What Trump is proposing “is fiscally unsound,” writes Moody’s Analytics analysts. “His tax and spending proposal will result in very large deficits and a much higher debt load … and a recession that begins in early 2018 and extends into 2020.”
Real GDP, which is adjusted for inflation, would decline peak to trough by close to 2.4% and average 0.6% during the presidential term compared to expectations for 2.3% growth under current law.
Unemployment would rise, peaking at 7.4% in summer 2021, and the deficit in 2020 would be about $1 trillion greater than if no changes had been made to tax and spending law.
Debt as percentage of GDP would rise from 75% currently to over 100% by 2021, and the 10-year yield would peak at 8.6% in 2018 before falling to 7.0% by 2020.
The standard of living for a typical family would “go nowhere” during Trump’s term, with real income per capita remaining near $45,000.
Moody’s Analytics paints a very different scenario for the impact of Clinton’s economic plan.
Real GDP would grow by 2.7% per annum compared with 2.3% under current law, 10.4 million jobs would be created during her presidential term – 3.2 million more than under current law — and unemployment would bottom at 3.7% in 2018 and 2019 before rising to 4.4% by 2020.
Debt as a percent of GDP would increase slightly to 78% by 2020 and the 10-year Treasury yield would rise to 4.6% by 2020.
Real median after-tax income for the average American household would increase between $2,000 and $3,000 more than under current law, but stock prices and home prices would be little changed.
Clinton’s plan to increase the minimum wage to $12 an hour by 2012 would reduce employment by 650,000, or 0.4% of all jobs, but the wages gained by those still working would be substantially higher than the wages lost by those who were not, according to Moody’s Analytics.
And while increased government spending would boost GDP and job growth, higher taxes on the wealthy would offset some of those gains.
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