"A US Tax System with Comprehensive Import Taxation Would Initiate a Global Trade and Tax War"

In his first speech to Congress, US President Donald Trump outlined the key aspects of his government programme. Professor Friedrich Heinemann, head of the Research Department "Corporate Taxation and Public Finance" at the Centre for European Economic Research (ZEW), comments on the economic and fiscal policy measures Trump proposed in his address to Congress.

"With regard to Trump's plans for economic and fiscal policy, Trump's address to Congress did not eliminate, but rather fuelled the contradictions inherent in the strategies he announced during his electoral campaign. In his speech, President Trump reaffirmed his protectionist views, emphasising that international trade had cost many US citizens their jobs and that the United States had shifted both jobs and wealth abroad. While he plans to prevent foreign companies located outside the US from profiting from new expenditures, Trump also pledged to protect 'dying industries' in the United States and to increase government spending programmes.

It is notable that Trump remained particularly vague with regard to the state of national debt. In fact, Trump only mentioned the word 'debt' once during his speech, referring to the past administration and their role in the massive increase in national debt. If he translates his plans into actions, Donald Trump's policies could, however, lead to a government deficit even exceeding that of the Obama administration.

"Trump makes no mention of monetary policy and interest rates"

Trump’s plans for 'massive tax relief for the middle class' are in conflict with his equally ambitious spending programme. He has promised not only to increase defence spending and investment in infrastructure, but also to improve the quality of social services, such as affordable child care and new health programmes. In this respect, his government programme constitutes an unusual combination of increased investment in both national defence and social services. Along with his plans to reduce taxes for the middle classes and businesses, this would massively increase the structural budget deficit.

Furthermore, Trumps makes no mention of monetary policy and interest rates. The US is currently at full employment; if Trump were to increase both public spending and national debt, inflationary pressure would rise, which would in turn accelerate interest rate hikes by the Federal Reserve.

With regard to his corporate tax plans, Donald Trump announced that his team is developing 'historic tax reform'. What he did not reveal, however, was whether the reform will only entail tax reductions or constitute an entirely new approach to corporate taxation. In general, Trump's address only increased existing concerns that he might seize on Republican plans to introduce comprehensive taxation on imports. In this respect, the use of the word 'historic' points towards a rather more fundamental the reform of the tax code. If Donald Trump introduces comprehensive import taxation reforms, this could initiate a trade and tax war."

For further information please contact

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail heinemann@zew.de