Harris and Trump platforms would both do economic damage. But one is worse than the other

Open this photo in gallery:

Despite their starkly different economic platforms, U.S. presidential candidates Kamala Harris and Donald Trump do agree on one thing.

They think tips should be tax free.

Not that either Ms. Harris, the Democratic nominee, or Mr. Trump, the Republican standard-bearer, have offered a whit of evidence to support the idea that exempting tips from taxes is good policy. Most economists would argue that it is not.

But Ms. Harris’s move to match Mr. Trump’s vow to exempt gratuities from taxes is a sign of just how badly she wants to win Nevada, where about 17 per cent of workers depend on tip income, compared to about 2.5 per cent of all employees nationally.

That is not the only sign that economics is getting short shrift in this campaign – even more than is usually the case in U.S. presidential elections. Ms. Harris and Mr. Trump have crafted economic platforms aimed at appealing to their respective bases. Both would do damage, though Mr. Trump’s would probably do more economic harm.

Not long ago, economists almost universally agreed that free trade made everyone better off. Mr. Trump never bought that idea and slapped tariffs on a range of Chinese goods. President Joe Biden kept most of them in place. But, overall, the tariffs were applied selectively, and U.S.-China trade remained relatively steady.

Mr. Biden also slapped a 100-per-cent tariff on electric vehicles from China, and Canada this week followed suit. The measure is a pre-emptive one aimed at protecting North American electric-vehicle makers from competition, since few Chinese EVs are sold on this continent. But it will hurt consumers and raise prices.

Now, Mr. Trump has suggested that tariffs would form the backbone of his economic policy if he retakes the White House. He has raised the prospect of a 60-per-cent tariff on all Chinese goods and a 10-per-cent to 20-per-cent import tax on products from other countries. His plan would likely set off a global trade war.

It would also insulate U.S. industries from competition, which, in the longer term, would lead to less innovation. The Trump plan would likely lead to widespread retaliation from U.S. trading partners, making everyone poorer in the end.

Ms. Harris warns the Trump plan would raise prices on middle-class families by US$4,000 ($5,400) a year. The Peterson Institute for International Economics pegs the cost for a typical middle-income U.S. household at US$2,600 in the case of 60-per-cent tariff on China and 20 per cent on non-Chinese imports. At 10 per cent, the cost would fall to US$1,700. Either way, the Trump plan would be inflationary.

Ms. Harris’s signature economic policy so far consists of a promise to raise and expand the US$2,000 child tax credit and make it refundable, so households that pay no income tax will get a government cheque of US$6,000 for children in their first year, and US$3,600 for children between one and six years old.

The Committee for a Responsible Federal Budget estimates Ms. Harris’s child tax credit plan would cost US$1.2-trillion over a decade. While the plan has merits, and copies in some ways the Canada Child Benefit – a means-tested family allowance program – some critics warn it could discourage some parents from working or taking jobs with higher salaries.

Economists have largely panned Ms. Harris’s proposal to give US$25,000 to first-time home buyers; it would boost housing demand amid a shortage, and likely lead to higher home prices. Ditto her vow to crack down on price gouging by food retailers. Price controls typically have perverse effects that end up hurting consumers.

Regardless of which candidate wins the White House this fall, a battle royale is shaping up in Congress next year over the fate of Mr. Trump’s Tax Cuts and Jobs Act. Most of the legislation’s provisions – except for the corporate tax rate, which was cut to 21 per cent from 35 per cent in 2017 – are set to expire at the end of 2025. Mr. Trump has vowed to extend them permanently. That would cost the U.S. Treasury an estimated US$4.5-trillion over a decade.

Ms. Harris wants to increase the corporate tax rate to 28 per cent. Experts calculate that would raise about US$1-trillion in additional tax revenue over a decade. “However, any revenue would come at a high price of lost economic output, investment, and wage growth,” the Tax Foundation, a right-leaning U.S. think tank, warned in a recent report.

Ms. Harris also wants to raise income taxes on Americans earning more than US$400,000, pushing the top federal marginal tax rate to 44.6 per cent from 37 per cent now. Even so, she would maintain Mr. Trump’s tax cuts for people earning less than US$400,000. Overall, her tax and spending plans would create a hole in the federal budget nearly as big as the one the Republican candidate, who also proposes to exempt Social Security benefits from taxation, would make.

In June, the Congressional Budget Office projected that U.S. federal debt held by the public will exceed US$28-trillion at the end of the fiscal year on Sept. 30. That is up from $US$17-trillion in 2019. The debt is on track to hit nearly US$51-trillion, or a record 122 per cent of gross domestic product, by the end of 2034. And the CBO projection assumes the Trump-era tax cuts will expire next year as planned.

After years of budgetary drift, whoever wins the White House may face a financial reckoning. Just don’t expect either candidate to fess up to that before the election.