Americans are Choosing Between an Absurd Tax Framework and Chaotic Monetary Policy Tampering
A Dispatch symposium on Populism
(Originally appeared in the Dispatch)
Donald Trump recently told reporters that, as president, he would seek control over the monetary policy decisions currently under the jurisdiction of the Federal Reserve. While no details have been provided, Trump added, “I feel the president should have at least [a] say in there. ... I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.” Previous comments by the former president suggest he has strong disagreements with Federal Reserve Chairman Jerome Powell (who Trump himself reappointed in 2018) and a desire for lower interest rates.
When it comes to Trump, it’s often unclear whether he should be taken seriously or treated as if he is just blowing off steam. However, Trump allies (unaffiliated with the campaign) have drafted plans to transfer monetary policy authority to the White House. Thankfully, current law gives the president little authority to seize the monetary policy controls. The Fed’s board of governors consists of seven members appointed by the president for staggered 14-year terms, leaving Trump without the authority to replace the full group in one term. Nor can Trump replace the presidents of the regional Fed banks, who also rotate onto the rate-setting Federal Open Market Committee. Powell’s term as chairman ends in May 2026, at which point Trump can appoint a new chairperson subject to Senate confirmation. Any structural reforms to the Fed would require an extremely unlikely act of Congress.
While presidents have often publicly lobbied the Fed for lower interest rates (sometimes successfully), formally demanding a White House role in setting monetary policy would be extraordinarily destructive. The vast majority of nations with advanced economies maintain independent central banks, because political influence would inevitably pander to popular demands for low interest rates that—in the short-term—aid borrowers, goose economic growth, and lower the financing cost of the national debt. Over time, however, the resulting inflation (and inflation expectations) would harm families and destabilize the economy. Financial markets would recoil at the unpredictability of monetary policy shifting on presidential moods and political fortunes rather than economic fundamentals. The result would be economic chaos, steep inflation, and eventually recession (or worse). Given Trump’s stated desire to rein in inflation, it would be wiser to let the Federal Reserve do the unpopular dirty work of tightening monetary policy when necessary, and then take credit for the stronger, lower-inflation economy that such actions produce.
Kamala Harris’ tax agenda, meanwhile, is based on an economically absurd and mathematically impossible framework. With budget deficits projected to leap toward $4 trillion a decade from now, Harris is attempting to maintain rising spending, significantly cut taxes for 95 percent of families, and still keep the deficit at manageable levels—all by imposing historic new taxes on corporations and the highest-earning 5 percent of families.
According to data from the Organization for Economic Cooperation and Development (OECD), the United States already has the most progressive federal tax system of all 38 OECD nations. America’s top marginal tax rates for income, capital gains, corporate, and estate taxes each exceed OECD averages, while the U.S. taxes middle- and low-income families at dramatically lower rates than our international competitors. Harris’ proposed increases would, when coupled with state taxes, raise America’s corporate tax rate to the second-highest level in the OECD, with total corporate tax revenues jumping from current levels by up to 50 percent. Capital gains tax rates (including surtaxes and state taxes) would exceed 45 percent in some states—dwarfing even tax-drenched Scandinavian nations and likely reducing revenues from current levels. The U.S. would even begin taxing theoretical income—in the form of unrealized capital gains—for the highest earners. Again, even most European nations do not go this far.
Yet rather than put this additional revenue toward deficit reduction, Harris would plow this money into extending the 2017 tax cuts for the bottom-earning 95 percent of families, expanding the child tax credit, cutting taxes for small businesses, subsidizing home ownership, and mimicking Trump’s inane proposal to exempt tips from taxation. Collectively, these reforms would ensure that the bottom-earning 60 percent of families collectively pay no income taxes, while corporations and the top-earning 5 percent of families would be tasked with financing nearly the entire free-spending federal government. While such populism is surely politically popular, even Europe eventually discovered that such an extremely top-heavy tax system is unsustainable. There are not enough wealthy corporations and families to finance all of the spending, and such exorbitant tax rates starve an economy of investment, limit productivity, drive capital abroad, and ultimately kill wages and jobs.
Unsurprisingly, the Tax Foundation found that Harris’ tax plan would shave 2 percent off the long-term gross domestic product, reduce wages by 1.2 percent, and wipe out nearly 800,000 jobs. And after accounting for revenue lost to economic damage as well as to middle- and lower-income tax cuts, the plan may ultimately lose revenue, allowing deficits to rise further. Hopefully, a Harris presidency would be paired by a sane Congress putting the brakes on this destructive tax vision.