Candidates' tax plans simply don't add up

First in a series on the candidates and the economy.

Dan White

is a senior economist at Moody's Analytics in West Chester

Americans face a difficult, and for many, frustrating choice in the presidential election.

Fiscal policy may be one of the areas where voters should feel the most frustrated. Each set of fiscal policy proposals leaves us with more debt and a smaller economy in 10 years' time. Picking a winner on this dimension alone boils down to picking the lesser of two evils, and hoping that more moderate factions of both parties in Congress can limit the potential damage.

I won't dwell too much on the details of the proposals here, precisely because that's just what they are, proposals. Neither will survive congressional scrutiny intact, leaving the overall theme of each proposal left over to inform our decision as voters.

In very simplified terms, Donald Trump proposes a substantial across-the-board tax cut by reducing and simplifying the tax code and cutting wasteful spending. Hillary Clinton, on the other hand, proposes to raise taxes by expanding the tax code, and using those proceeds to substantially increase federal spending. Neither candidate can be accused of running to the center in terms of fiscal policy.

There are pros and cons for both sets of proposals, but the biggest con for each is that they simply don't add up. Long term, Clinton won't be able to raise taxes enough to pay for her spending promises, and Trump won't be able to cut spending enough to pay for his tax promises. Both plans increase the deficit and national debt. Thus the frustration.

Stepping back from the specifics, however, there are some encouraging themes to be had. Trump's proposals, for example, would result in a much simpler tax code. This is important in encouraging economic growth for a variety of reasons, namely that simpler and more transparent tax codes require fewer resources from the taxpayer to comply and fewer resources from the government to enforce. This results in more efficiency and less distortions on the overall economy. Transparency and simplicity also allow easier long-term decision-making by businesses and taxpayers, helping boost long-term investment.

This is one area where Trump and Clinton most diverge. Where Trump would make the tax code simpler and more transparent, Clinton's proposals are widely panned as doing just the opposite. From adding more tax brackets and surcharges to introducing an extremely complicated method of calculating capital gains taxes, Clinton's proposals would result in a more complex and less transparent tax code. This would weigh on the pace of economic growth by increasing the costs of compliance and enforcement, and make it more difficult to plan long-term economic decisions.

However, this is offset at least in part by another metric, which Trump's proposals do less to address; equity. Tax equity, or fairness, is the third dimension, along with simplicity and transparency, upon which all tax proposals should be judged for efficiency. Clinton's proposals would create more progressivity - higher rates for higher incomes - in the tax system than Trump.

All tax systems should be at least somewhat progressive. Those pushing a "flat tax" as fair, because all taxpayers pay the same percentage of their income may forget that taking away 10 percent from someone making $10,000 per year is much more burdensome than taking away 10 percent from someone making $10 million. It is possible to be too progressive, however, and several of Clinton's proposals run up against, if not over, that line.

Ideally, federal tax reform would incorporate characteristics of both sets of proposals for the sake of simplicity, transparency, and progressivity.

There are several other positive features that both candidates have included to generate additional economic growth; for example, their intentions for a sizable near-term boost in infrastructure spending. Both candidates also would attempt to keep more business at home through international corporate income tax reforms, though they would go about it in very different ways.

Lastly, both candidates also include some fiscal stimulus in their proposals that would boost short-term economic growth. Trump would accomplish this through across-the-board tax cuts, and Clinton through large increases in government spending. The effects of these proposals are probably the largest source of disagreement among economists, as evidenced by the many conflicting papers and opinions thus far published on the merits of one set of proposals over the other.

While it can be said without controversy that both methods - cutting taxes and raising spending - would stimulate near-term economic growth beyond the status quo, neither plan could be sustained beyond the winning candidate's first term in office without material increases to the deficit and national debt.

Impartial studies have shown that both candidates' fiscal policies in and of themselves will leave us with a smaller economy, larger deficit, and more burdensome debt load than the status quo 10 years from now. And let's not forget that the status quo already is pretty gloomy. By the end of the next president's term, the Congressional Budget Office projects that 93 cents out of every federal tax dollar will be reserved for entitlement programs and interest on the debt.

Neither candidate has put forth any proposals that would address the most pressing fiscal problems facing our country, and in some instances could actually make them worse. Clinton's ideas to expand Social Security and the Affordable Care Act, not to mention her new plan to turn higher education into an entitlement program, would double down on the very same programs that are driving our current budget mess in the first place.

To Trump's credit, he has proposed some cost-saving reforms to Medicaid; however, he has also vowed to leave Medicare and Social Security untouched. His tax cuts would provide economic stimulus, but a decrease of trillions of dollars in tax revenue without any substantive changes to the most important cost drivers in the federal budget is not a recipe for sustained long-term economic growth.

In the aggregate, if Clinton's fiscal proposals appear more sober in comparison with Trump's, it is only because they increase the deficit by hundreds of billions of dollars as opposed to trillions of dollars. However, that does not mean they are sober compared with the status quo.

At the end of the day, both sets of fiscal proposals result in a smaller economy and larger debt. As such we are left without an adult in the room on fiscal policy.

@DanWhiteEcon daniel.white@moodys.com