Edward Lotterman

We are now eight weeks from the election and two days away from a much ballyhooed presidential candidate “debate” between Republican Donald Trump and Democrat Kamala Harris.

The word “debate” is in quotes because modern presidential events such as these, no matter how “unscripted,” are really just occasions for slogans and posturing, not substantive explorations of fundamental issues as was done by Abraham Lincoln and Stephen Douglas in debating in 1858.

So expect generalities and sweeping assertions on Tuesday with little specifics on economic issues and their consequences, especially on taxes and the federal budget.

Last week’s column noted that neither candidate’s centerpiece economic proposal — Trump’s large import tariffs or Harris’s anti-gouging measures — are likely to become law, both being highly difficult to get through the contemporary Congress. Both also are flawed in terms of actual economic effects, would take a long time to implement, would raise strong political opposition and would roil financial markets.

Harris could work toward her consumer protection objectives by increased use of current laws and agencies. The Federal Trade Commission does have powers to curb abusive practices that harm consumers. The Justice Department has antitrust powers to challenge mergers that would limit competition and to break up existing companies that “restrain trade.” Recent FTC actions are far lower than they could be and antitrust enforcement has been moribund since the George W. Bush administration.

And there really is no parallel in terms of actions Trump might take within existing legislation to achieve some of the goals of his mega-tariff proposal.

Moving on, most of the rest of the two candidates’ economic platforms deal with taxation, especially of individual and corporate income.

As noted last week, they agree on two issues: Both would exempt tip income from taxes; Harris has called for more than doubling of the child tax credit and Trump joined in. As explained last week, the first is a bad idea, the second good.

But the glaring problem — and the blue whale in the room — is that both measures would reduce federal revenue at a time when budget deficits are high — both as a fraction of government spending and relative to the value of total national economic output. This is a bad situation getting worse.

Annual deficits accumulate into the national debt, which is at its highest point in peacetime except for just after World War II, during which the government patriotically sold bonds to finance the war. The fact that neither Harris nor Trump really addresses this is a glaring symptom of the failure of our politics and of our self-willful ignorance as a people.

In considering tax proposals of Harris and Trump understand a few things:

First, while taxes do create incentives that could stifle economic growth, differences in tax rates within ranges we have had in the past had little effect on output.

Looking at U.S. administrations from 1952 on, the Kennedy-Johnson years, 1961-1968, had the highest growth in inflation-adjusted gross domestic product at 5.2% a year. Top marginal tax rates for individuals and corporations were higher than now, although there were many loopholes in the corporate rate.

The next best era for output were the Clinton years of 1993 through 2000 with 3.6% annual GDP growth. These followed two tax increases, one from George H.W. Bush and another from Bill Clinton. Federal taxes equaled from 18% to nearly 20% of GDP and the national debt fell for four years straight in fiscal years 1997 through 2001. If tax revenues had stayed at that fraction of GDP, our current deficit would be $600 billion lower than it is.

Supply-side cultists and Republicans had forecast gloom and doom from the Bush and Clinton tax increases, but the result was the last real prosperity our nation has had. Moreover, the George W. Bush tax cuts of 2001-2003 were supposed to unleash a burst of investment and economic growth. Instead, coupled with a costly “war of choice, not of necessity” in the Middle East, those tax rate cuts put federal finances into a downward spiral from which they have not recovered.

Secondly, understand that the aging of the baby boom generation is the primary driver of increasing federal outlays. This is not a surprise. We have known for 60 years that increases in mandatory outlays for Social Security, Medicare, Medicaid and Supplemental Security Income were going to happen.

Nearly 40 years ago, the Reagan-appointed Greenspan Commission designed a sensible but poorly understood path to solvency. Congress at the time promptly perverted that into a screen for ever-higher deficits. The decades available to prepare became, using a famous phrase, “years that the locust hath eaten.”

The upshot is the political-suicide notion that taxes must increase. The idea that Congress can “just stop spending” and thus balance the budget is imbecilic. So we must evaluate both Harris’ and Trump’s proposals in that context.

On taxes, in the 2024 race, Harris wants more changes than Trump. Generally, she would raise top marginal rates for both individual and corporate income taxes. She would abolish the “carried interest” loophole that exclusively benefits hedge fund managers.

Most controversially, she would tax “unrealized” capital gains — although only for a small number of high-income households. These gains are increases in the value of assets like stocks, real estate, collectibles and similar items. “Unrealized” means not yet sold, so the tax would be due even if no cash were available to pay it. This proposal is a bad idea for several reasons, among them possibly incentivizing rich people taking money out of the stock market, which would then trickle down to the accounts of even small investors. But Harris is right in the general sense that our current taxation of such capital gains income is riddled with loopholes that are both unjust and economically inefficient.

Trump wants to lower taxes everywhere. He would restore provisions favoring high income people that had been included in the tax bill of his first administration but that have sun-setted. He wants lower top rates both for individual and corporate income taxes. He would preserve untaxed “carried interest.”

The key economic policy goal facing our nation is putting federal finances on the sustainable footing that we had in the Bush-Clinton years. That was relatively easy in the 1990s. After the intervening quarter-century of folly, the task is much harder. Neither candidate acknowledges that. Harris’ tax proposals are better in that direction than Trump’s, but voters are not yet willing to accept reality.

With current bastardized Senate rules that impose the need for a supermajority on any bill, and toxic showboating dominating House deliberations, the chances of getting any meaningful reform passed is very low. The wolf has not yet come, but the howling is being heard. Both candidates are either deaf to this, or, more likely, know that speaking honestly about our choices, let alone getting anything done, means certain defeat.

Related Articles

Real World Economics: Elections have consequences; here are some

Real World Economics: The give and take of city tax plans

Real World Economics: The Fed can only do so much

Real World Economics: Central banks’ practices are on a perilous path

Real World Economics: Prosperity has a price, and a cost

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.