President Trump has unveiled the basic contours of a far-reaching plan to alter the U.S. tax code. Analysts are now debating the plan’s likely ramifications and also speculating about how the proposed changes might affect Trump’s own economic interests.
Trump is unique among contemporary presidents for his refusal to fully extricate himself from his business empire. This new tax plan adds to some people’s worries that he may try to profit from the presidency, perhaps through real estate or licensing deals.
Trump’s past business dealings may also affect his conduct. We know he has amassed lots of business debt. In May 2016, then-candidate Trump told CNN’s Wolf Blitzer: “I’m the king of debt. I love debt.” From what we know about Trump’s balance sheet, he owes more money to people than people owe to him.
This makes Trump a “net debtor” — but what does this mean for his views on fiscal policy? It’s hard to know. In February, Stanley Fischer, vice chair of the Federal Reserve, said “There is quite significant uncertainty about what’s actually going to happen … in deciding fiscal policy.”
Here’s where social science research can provide some insight. We tend to peg politicians as sticking closely to party orthodoxies: Democrats like to tax-and-spend, while Republicans are fiscal conservatives.
But lawmakers’ personal economic interests also shape their actions. A study of a 2011 vote to raise the country’s debt ceiling found that U.S. congressional members who had relatively more stock investments than their colleagues were more likely to vote yes, even after considering party affiliation.
Does Trump’s status as a net debtor shape his outlook?
Similarly, the president’s status as a net debtor might make him less concerned about the U.S. bottom line. He has called for massive infrastructure spending as well as significant tax cuts, a combination that suggests we’re looking at a growing fiscal deficit.
Economists believe that fiscal deficits can stoke inflation. Indeed, the Federal Reserve’s decision in March to raise interest rates indicates that it anticipates that inflation is on the rise. And even small shifts in the inflation rate can be consequential. With inflation, the real interest rate on existing loans declines — basically, people can pay back debts with money that is now worth less than before.
Net debtors benefit in such circumstances. And net creditors — people who lent more money than they borrowed — stand to lose.
Here’s what the historical record shows
My research indicates that these credit market positions can greatly affect leaders’ fiscal policy. A colleague and I examined how net creditors and net debtors influenced fiscal policy historically. We looked at countries at a crossroads, when they were beginning to build modern tax institutions. Strong tax institutions collect revenue from a variety of sources, and do so with government agents, rather than private contractors. Such institutions promote stable revenue flows and dampen inflationary pressures.
We looked at the composition of ruling coalitions — who was actually in power — to see if it affected fiscal institution building. We reasoned that net creditors should support stronger fiscal institutions.
Here’s why: Robust tax institutions can stifle inflationary pressures and support the value of creditors’ outstanding loans. By contrast, net debtors receive a relative gain from inflation, because it reduces the real interest rate on their debts. So net debtors should be less willing to strengthen tax institutions.
We scrutinized four cases
A group of net creditors in 18th-century Great Britain ardently pressed for robust tax institutions and were politically powerful enough to get these in place. But in a variety of other settings — 18th-century Western Europe, 17th-century Eastern Europe, and 19th–century Latin America — we found that governments led by net debtors repeatedly disregarded pleas by net creditors to build strong tax institutions.
The net debtors didn’t mind inflation, because it could “inflate away” their debts, even though this strategy led to economic problems, such as currency depreciation, down the road. Some statistical analysis supports our basic finding that the credit market positions of key politicians and other important social actors directly affected fiscal policy.
Other researchers have highlighted the salience of creditors’ interests. While Great Britain was building robust tax institutions, it was also undergoing a financial revolution, en route to becoming the world’s most powerful country.
Some scholars believe these developments flowed from the Glorious Revolution in 1688, and new parliamentary checks on the crown. But David Stasavage shows that key aspects of Britain’s financial revolution, such as lower borrowing costs, did not develop until around 1715, when creditors gained a strong voice in Parliament — a crucial development.
Debt and credit have long been a part of politics
In other research, Stasavage finds that urban capitalists played a role in the emergence of early forms of democracy across Europe. Historically, European rulers regularly borrowed money, particularly to fight wars against their neighbors. Stasavage demonstrates that leaders of city-states, where urban capitalists were concentrated, borrowed more cheaply than leaders of larger territorial states. Among city-states, rulers’ borrowing costs were lower if they gave merchants a voice in representative assemblies, and especially if capitalists had a say in fiscal policy. Overall, these studies highlight how issues surrounding debt and credit permeate politics.
Now 21st-century America differs in many ways from these other contexts. But the basic implications for fiscal policy remain. President Trump’s status as a net debtor suggests that he might be relatively indifferent toward a larger fiscal deficit. Despite his rhetorical overtures to fiscal balance, Trump’s policy pronouncements signal the opposite.
This disposition could lead to confrontation with GOP lawmakers. The Republican Party has traditionally championed the interests of the financial industry, the leading net creditors in American society.
And this industry is vocal: Data from the Center for Responsive Politics show that the financial services industry contributes mightily to political parties. The differing credit market position of Donald Trump and key Republican Party backers may cause contention. Some Republican lawmakers are already voicing concern that the plan would enlarge the deficit, while tax experts expect it to push up interest rates. President Trump may be headed for more intraparty strife.