Stock Market and Economy

Trump's Tax Plan

Donald Trump's stance on trade -- namely, that cutting corporate taxes will incentivize companies to stay in the U.S. (as will a tariff on the imported goods of offshoring companies) -- is one that is denounced by his opponent Hillary Clinton. Clinton argues that the tax break proposed by Trump will only benefit the 1% and that his plan to place a tariff on companies that export labor only to turn around and import their products would lead to massive job loss. Trump's rationale is that by cutting the corporate tax rate, which is among the highest in the world, it would allow companies to keep labor in the U.S. as they will not have to chase margins by employing cheaper labor in foreign countries. This would be the positive incentive. Adding the tax on U.S. companies that manufacture abroad and sell in the U.S. would serve as the negative incentive -- that is to say, if companies choose to hire cheap foreign labor in spite of the reduction in their corporate taxes, Trump will ensure that they pay in the end. The essence of Trump's position is that by helping corporations lower the percentage of profits that they must give over to the government, the government can thus help to keep more jobs from fleeing the country and put an end to "offshoring" (Hersh, Gurwitz) -- which in turn would help the purchasing power of families to grow. In this paper I will argue why I believe that Trump's stance is the most rational for the U.S. economy and beneficial to the U.S. worker.

The first premise in Trump's argument is that by exporting jobs overseas, poverty is increased at home. The accompanying premise is that corporations pursue cheap labor offshore because they are too heavily taxed by the federal government. The conclusion that poverty will be reduced by returning jobs to the U.S. from overseas is deductive, as more jobs in the U.S. means more opportunities to make money for families and more purchasing power for individuals. (A number of other variables could impact the economy and/or purchasing power of families -- such as Federal Reserve policies, destabilization of the currency, hyperinflation, etc. -- but these can be treated as separate issues and do not necessarily have to be discussed in terms of identifying the relationship between exporting jobs and the rise of poverty).

The premise that an increase in poverty results from offshoring manufacturing jobs is supported by the argument of Sir James Goldsmith, a businessman and member of the 1%, who objected to the General Agreement on Tariffs and Trade (GATT). As Goldsmith noted, GATT would undermine the domestic infrastructure by taking jobs away from citizens at home, thus pulling money out of the pockets of average citizens -- just as happened with NAFTA, which accounted for a "net loss of 879,280 jobs" just five years after its implementation (Muhho). Jobs that move overseas means a loss of income for families at home. No jobs means no way to pay for goods and services, which means the quality of life for families at home suffers.

The premise that corporations pursue a policy of offshoring because of high tax rates at home is supported by the fact that tax rates are highest in the world (third only to Puerto Rico and the United Arab Emirates) (Pomerleau). At the same time, the tax rate on foreign-source income is significantly lower, which means the U.S. tax code actually incentivizes corporations to offshore (Hersh, Gurwitz). The argument that opponents such as Clinton would make is that in spite of these claims by Trump, the economy has actually grown -- a point that Goldmith acknowledges when speaking about the effects of the free trade agreements on his own France: "In France the economy has grown by 80%" -- however, he points out that this is a pointless figure because right alongside it the real issue emerges: "The number of unemployed has gone from 420,000 to 5.1 million... What is the good of having an economy that grows by 80% if your unemployed -- the people excluded from active economic life -- goes from 420,000 to 5.1 million" (Quijones). In other words, having a growing economy does not help the average citizen if he has been priced out of it for want of a job. Thus, the claim of Clinton (whose "pay to play" Clinton Foundation and Global Initiative may serve as a good rationale for why she and her husband were willing to sell out the American worker) (Publius) does not stand up to the actual figures.

Moreover, Clinton's argument that Trump's plan would only serve the 1% (Lee) is untrue -- for as Goldsmith points out, keeping jobs at home serves the average citizen, which is what corporations should do: "The economy is there to serve the fundamental needs of society, which are prosperity, stability and contentment... If you have a situation whereby the economy grows but you create poverty and unemployment and you destabilise society, you're in trouble" (Publius). Conversely, the "free trade" agreements signed by Bill Clinton (NAFTA) and promoted by Hillary Clinton (TPP, TTIP) actually serve the 1% by ensuring that nations and governments are accountable to billionaires and their corporations rather than the inverse (Publius). Trump's plan does not serve the 1% -- it helps create an atmosphere in which the 1% can better serve the 99%.

Two possible objections to Trump's plan are 1) that it will not actually be able to be implemented (Congress could oppose it), and 2) even if it is implemented, corporations will find a way around and jobs will continue to flow out of the country because we now live in a globalized world. Globalization is a reality and cannot be legislated away or renounced by Executive Order, some might say. A third argument, as Moody's notes (Long), is that the economy would crash under Trump's plan because the stock market would fall and economic growth would dwindle as a result of tariffs.

These arguments may appear true on their face but they can be objectively countered. First, Congress could veto Trump's plans -- but then again this is not a given -- especially if constituents urge Congress to support the President's initiatives. Second, corporations will be hard pressed to find a way around a tariff. On the contrary, corporations should welcome a lower tax rate as it would allow them to adopt better strategies of corporate social responsibility, which pleases consumers, and cater to domestic workers at home. Third, there is no clear reason for Trump's plan to crash the stock market or for economic growth to fall. In fact, there is no real correlation between the strength of the stock market and Trump's plan at all. As Trump and many others have pointed out, the stock market is in a bubble that has been blown up by the Federal Reserve's policy of keeping interest rates low (and also by its policy of Quantitative Easing, which has pumped billions of dollars into the stock and bond markets) (Durden).

Understanding the stock market and its relation to Fed policies as well as other central banks policies around the world is part of the complexity of understanding the economy today. Essentially, easy credit has been given corporations, who have bought back shares and thus helped to inflate the market. Likewise, the Fed has sunk billions into bonds -- as has the European Central Bank and Bank of Japan -- and all of this money goes to inflating the stock and bond markets. These are not indicators of a healthy economy. Moreover, these markets do very little to benefit the 99%. On the other hand, they do benefit the 1% that invests in them.