Friday, January 29, 2016

Trump on Taxes & Trade

For Iowa: Trump’s Tax Plan a Positive, but Trade Plan a Negative, Andrew Busch, 1/28/16

Iowa remains front and center on the US political scene with the first primary of the election season occurring here on February 1st. The “Hawkeye” state is important to Republican candidates in large part because historically it has been home to a core conservative voting group and because it has been crucial for initiating momentum as the primaries get underway. Iowa has a strong, diverse economy that boasts a low unemployment rate, a strong manufacturing base, and a vibrant financial sector. The next president and his or her policies are likely to have a significant impact on Iowa’s economy as well as that of the country as a whole.

According to the latest pols on Real Clear Politics, the top three Republican candidates in Iowa are: Donald Trump 27.8%, Senator Ted Cruz 26.7%, and Senator Marco Rubio 11.7%. In this article, we’re going to review the key components to Donald Trump’s economy plan and their impact on Iowa’s economy. While the tax reform component of Trump’s plan would help most businesses in the state, the protectionist trade component would likely reduce sales dramatically for a range of businesses and hurt Iowa’s exports to her top trading partners as Canada, Mexico, and Japan. Trump has stated he is in favor of the renewable fuel standard mandate and called for a higher ethanol mandate.

Trump’s Plan on Tax Reform, Regulation, and Trade

Unlike past presidential campaign years, 2016 appears to be a year in which most of the Republican candidates have agreed on reforming the tax code and they have released plans on how to do so.

Here are major components of the plan according to the Tax Foundation:
§  Reduce the corporate income tax rate to 15 percent from 35 percent.
§  Limit the tax rate on pass-through business income (sole proprietorships, S corporations, LLCs, and partnerships) to 15 percent.
§  End tax deferral on overseas corporate income.
§  Enact a one-time repatriation of tax of 10 percent on all foreign profits currently retained in foreign countries.
§  Eliminate all other corporate tax expenditures.
§  Eliminate the corporate Alternative Minimum Tax.
§  Substantially reduce the deductibility of interest expenses.

We need to remind ourselves that even were Trump to be elected, these proposals would be far from realized: all tax bills of course need to originate in the House and be approved by the Senate. Given the recent acrimony between the Legislative and Executive branches and between the House and Senate, it could take quite some time for such a bill to become law.

On trade, we’re going to take what Mr. Trump has said during the debates and what is on his website as his current policy statement.
Here are the major components of Trump’s trade program:
§  Kill the Trans Pacific Partnership (TPP) trade deal.
§  End NAFTA.
§  Impose 35% tariff on imported autos and auto parts from Mexico.
§  Impose 20% tariff on imported goods.
§  Impose a 15% tax on outsourced jobs.
§  Declare China a currency manipulator and begin the process of sanctions.

One again, even as President, the termination of NAFTA, like that of all treaties needs to be approved by the Senate, which may well be harder to persuade than the American electorate.

Lastly on energy, Trump has not released a full plan to review and therefore all analysis stems from his comments made during speeches or debates. At a January 2016 speech hosted by the Iowa Renewable Fuels Association, Trump stated the Environmental Protection Agency (EPA) ought to follow the ethanol volumes Congress set in 2007 (15B gallons per year or approximately 10% of gasoline volume). According to The Hill, “Trump has generally very supportive of the ethanol law, saying he is “100 percent” behind the ethanol industry, a powerful force in Iowa. “As president, I will encourage Congress to be cautious in attempting to charge and change any part of the RFS,” he said.”

Impact on Iowa

To understand the impact of these plans on Iowa’s economy, we’re going to look at these top areas: manufacturing, finance, and insurance, and exports (includes agriculture).
On the business tax reform side, Trump’s plan for lower corporate and pass-through tax rates would enhance economic growth in Iowa. For those companies in the top three sectors paying the top nominal 35% tax rate, they would see a 57% drop in their tax costs. In the United States, the median effective corporate tax rate is 29% and consequently the reduction in tax costs would be 48%. The Trump rate cut would help offset Trump’s proposed termination of the tax code’s provision for the tax deferral on overseas corporate profits, which would add at 15% new tax on foreign profits and create a one-time 10% tax on past earnings held overseas. Moreover, the reduction in the overall rate would help those losing other corporate tax deductions in the US code like some of those involving domestic manufacturing and the R&D tax credit.

Trump’s current plan would limit the deductibility of interest expenses without stipulating what the limit might be. Nearly all companies using debt would see an increase in their expenses and a reduction in profits. (This would likely lead to a major change in the way US companies are structured as it diminishes many of the advantages debt might have over equity within a company’s financial structure.) By cutting the cost of investment through lower tax rates on corporations and pass-through entities, the Trump plan will result in an estimated 29% increase in the size of the capital stock. This will increase productivity and economic growth. (Tax Foundation).

Summing this up, Trump’s business tax reform plans would benefit Iowa’s top three business sectors overall. However, there would be losers (domestic manufacturing, E&D tax credit and debt) as well as winners (high tax rate entities). Clearly manufacturing (reduction in tax expenditures) and financial firms (debt issuers) would see a significant change due to these measures.

From the trade side, there would mainly be losers to the export sector from Trump’s stated plan. Iowa’s export sector was over $15 billion in 2015 and comprised of 8.9% of state GDP. According to the US Census Bureau, the top exports were:
Description
2014 (millions of dollars)
1
CORN (MAIZE), OTHER THAN SEED CORN
1,161
2
TRACTORS, NESOI
966
3
MEAT OF SWINE, NESOI, FRESH OR CHILLED
530
4
MEAT OF SWINE, NESOI, FROZEN
518
5
SOYBEANS, NESOI
515
6
SOYBEAN OILCAKE & OTH SOLID RESIDUE, WH/NOT G
450
7
HERBCD, ANTISPROUT. PROD. & PLANT-GRWTH REG.
374
8
CIVILIAN AIRCRAFT, ENGINES, AND PARTS
284
9
ALUMINUM ALLOY RECT PLATES ETC, OVER .2 MM TH
245
10
MECH FRONT-END SHOVEL LOADERS, SELF-PROPELLED
222
11
BREWING OR DISTILLING DREGS AND WASTE, W/NT P
210
12
MEAT OF BOVINE ANIMALS, BONELESS, FROZEN
203
13
MOLYBDENUM ORES AND CONCENTRATES ROASTED
196
14
ETHYL ALCOHOL & OTH SPIRITS DENATURED ANY STR
176
15
MEAT OF BOVINE ANIMALS, BONELESS, FRESH OR CH
156
16
OFFAL OF SWINE EXCEPT LIVERS, EDIBLE, FROZEN
152
17
SPECIAL PURPOSE VEHICLES, NESOI
149
18
COMBINE HARVESTER-THRESHERS
144
19
COMBINED REFRIGERATOR-FREEZERS W SEPARATE DOO
135
20
AGRIC, HORT, FOREST, BEE-KEEPING MACHINERY NE
133
21
MECH SHOVELS, EXCAVATORS AND SHOVEL LOADERS N
127
22
ANIMAL FEED PREP EXCEPT DOG OR CAT FOOD, RETA
124
23
FRUCTOSE, NESOI & SYRUP, OV 50% FRUCTOSE IN D
118
24
GRAIN SORGHUM, NESOI
118
25
ENGINE AND MOTOR PARTS, NESOI
115

The top 5 destinations: Canada (30.6%), Mexico (15.3%), Japan (7.8%), China (6.3%), and Brazil (3.3%). NAFTA countries comprise 45.8% of Iowa’s exports.

Trump’s plan to end NAFTA, end TPP, impose import tariffs and name China as a currency manipulator would likely lead to a retaliation of the same from all of the US trade partners affected. In turn, this could lead to a slowing of global trade and slowing of demand for Iowa’s exports. While it’s unlikely this would lead to a 1930s Smoot-Hawley Tariff Act, economic response, global trade is already slowing significantly and Trump’s plan could exacerbate its deceleration.

From corn to tractors to civilian aircraft, the Trump trade agenda would negatively impact Iowa and lead to a slowing of economy. If his trade plans were enacted, the global economic damage would have the potential to offset all of the positives from his tax reform plans.

On ethanol, Trump supports both the mandate and advocates increasing it. For corn growers and ethanol producers, this is very positive and will continue the use of ethanol in gasoline production. However, Trump’s plan to increase production of ethanol may cause negative secondary effects. First, corn production is already at a high level and to produce more corn would likely mean taking other grains out of the field. This could lead to higher prices for those grains. As well, the majority of corn grown goes to feed stock and the increased demand for corn would likely keep the price higher than otherwise.  This would increase the cost of corn to beef, dairy, and poultry producers. Lastly, the emphasis on energy production via a government mandate means the Iowa economy becomes more dependent on both government spending and the price of oil. Given the dramatic increase in US production and the decrease in global prices for oil, this reliance on energy production will make the Iowa economy more volatile.

Points to Keep in Mind for Iowa

Iowa has a vibrant, diverse economy that is a microcosm of the entire US economy. Therefore, changes to the US tax code and trade matter significantly more to the state. As a candidate, Donald Trump has stated his goal to reform the tax code and to change US trade policy. While the tax reform plan would generate economic growth, the trade plan would take it away and potentially cause a global slowdown if other nations followed in a similar way. Despite the difficulty in getting his trade agenda through Congress, the announced trade policies would likely generate a negative signal to US trade partners and the markets, should Trump become president. Finally on energy, Trump advocates for increases in both the RFD and ethanol production, which is positive for corn growers and ethanol producers. While in the short run this will have a positive impact on Iowa, these policies may increase the cost to other food producers and make the Iowa economy more Volatile.

Originally posted on Andrew Busch’s website.

http://affluentinvestor.com/2016/01/3942/


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