What does a Clinton or Trump presidency mean for America’s economy?

Secretary Clinton’s tax plan would raise taxes on individual and business income.  When tax hikes are introduced, economists calculate how much they will raise tax revenues for the state. Two very different types of calculations exist, "static scoring" and "dynamic scoring."

Static scoring assumes that a tax increase will have no effect on the economic behavior of individuals. Dynamic scoring adds to the calculations the predictable changes that a tax increase has on economic behavior. These additional calculations yield more precise estimates of projected tax revenues.

The Tax Foundation analyzed the candidates’ proposed tax policies with dynamic scoring.  Secretary Clinton’s proposed increase in taxes will cause investment and employment to decrease, thus slowing economic growth. Even though the analysis accounts for the feedback effects of a tax increase, the Tax Foundation estimates an increase in tax revenues of $191 billion over the next decade.

Mr. Trump’s plan would lower individual income taxes as well as the corporate income tax.  Mr. Trump also plans to reduce the complexity of the current tax code.  The Tax Foundation predicts that the tax cuts would increase the capital stock by 29%, create 5.3 million new full-time jobs, and increase real wages by 6.5%. Despite the economic growth generated from increases in labor and investment, the Tax Foundation analysis concludes that tax revenues would decrease, thus reducing our ability to service the nation’s debt.

While the Tax Foundation dynamic Taxes and Growth (TAG) model is consistent with the long-run behavior of the US economy, the estimated effect of Secretary Clinton’s tax policy on tax revenues remains too optimistic. This is because the TAG model cannot account for three key facts. First, higher tax rates may lead to tax avoidance.  Second, a complex tax code leads to lower tax revenues.  Finally, higher tax rates are associated with capital flight.

Tax avoidance means that corporations may lobby for special loopholes and breaks in the tax code and hire top lawyers and accountants to devise plans to reduce their tax burden. Individuals may simply underreport income or take to the black market by “working under the table.” Either way, economists find that a complex tax code coupled with tax hikes result in tax avoidance because when taxes increase, the reward to dodging taxes also increases.  

Capital flight refers to a large-scale exodus of financial assets and capital. Corporations and high-income individuals often move their assets to countries with a lower tax burden.  Again, the benefit from moving assets abroad can increase when individuals are faced with higher taxes.

By simplifying the tax code and eliminating a large number of existing loopholes, it’s likely that Mr. Trump’s plan would raise more tax revenue than experts anticipate. Secretary Clinton’s tax plan will reduce America’s competitiveness due to the mobility of capital.