Karen G. Mills and Jan W. Rivkin
City leaders across America are struggling to bring shared prosperity to their hometowns. The last two decades in the United States have brought reasonable rates of aggregate economic growth—slow by historical standards, but fast compared to other advanced economies. The gains from that growth, however, have been concentrated in the top half of the top 1% of the population. Large corporations and the people who run and invest in them have prospered, while working- and middle-class Americans have struggled, along with many small businesses. By all accounts, the lack of shared prosperity in the country played a major role in generating the antiestablishment fervor that propelled Donald Trump to the presidency.
Are the economic policies of President Trump likely to deliver the shared prosperity that his supporters crave? There are three paths by which they might, in theory. First, the tax policies proposed by Trump might directly redistribute prosperity from the very wealthy to the less well-off. Second, the overarching policies of a Trump Administration might create an economic context in which all boats rise—that is, Americans across the income spectrum thrive. Third, the non-tax policies of a Trump Administration might disproportionately favor prosperity among the less well-off. Let’s examine each in turn.
Redistribution by taxation. Donald Trump’s proposed tax policies have a few key features: they consolidate personal tax brackets, reduce marginal personal tax rates essentially across the board, simplify the tax code by removing certain exemptions and deductions, and reduce the corporate tax rate markedly. It’s tricky to estimate the policies’ impact on income distribution, in part because the policies are not yet fleshed out in detail. The most thorough analysis we’ve seen had to make seven pages of assumptions in order to fill in the blanks and complete the estimation. That analysis concludes that the changes would make inequality worse: the highest-income tenth of one percent of the population would see a 14% increase in after-tax income; the middle quintile would experience a 1.8% increase; and the poorest quintile a 0.8% increase. Gains for the wealthy come especially from plans to reduce the top tax rate, do away with the alternative minimum tax, eliminate estate taxes, and allow owners of pass-through businesses to be taxed at a low 15% rate.
All boats rise. Consistent with this analysis, the main thrust of Trump’s economic argument has not been redistribution. Rather, the primary pitch has centered on overall growth: tax breaks, removal of regulation, incentives for investment, better trade deals, greater U.S. energy production, and infrastructure improvements will unleash rapid economic growth, and all boats will rise with the resulting tide. A reliance on overall growth rather than redistribution is fully consistent with the Cabinet members Trump has nominated: the slate is weighted toward corporate CEOs, investment bankers, and others who are not natural fans of redistribution.
There are two reasons to question the ability of the current Trump economic plan to deliver growth and shared prosperity. First, the sustained economic growth rate that Trump has touted—4% per year—has not been attained since Bill Clinton’s presidency, when widespread adoption of new technology was boosting productivity growth and demographic changes were expanding the workforce. Without such tailwinds, it is unclear that the U.S. economy has the potential to grow so quickly. Second, since about 2000, overall growth (when it has occurred) has failed to lift all boats. Instead, the working- and middle-class boats got swamped as the tide rose. Trump’s economic plans do not address the underlying reasons that growth these days leaves behind most Americans.
A final point connects the “redistribution” and “all boats rise” ideas. If overall growth falls short of the 4% mark, Trump’s plans will lead to large and growing federal budget deficits. There will then be enormous pressure to curb government spending. The burden of spending cuts would fall heavily on the least wealthy Americans, who tend to receive the most government services. So if Trump falls short of his growth goals, the distributional consequences of his plans will be even worse than described above.
Non-tax policies for broad opportunity. Even without rapid overall growth or redistributive taxation, a Trump Administration could contribute to shared prosperity by enacting non-tax policies that disproportionately create opportunity for the less well-off. So far, we see mixed evidence that this will be the case.
- On the hopeful side, the deep investment in infrastructure that Trump has pledged to spark could create jobs for construction workers and improve the lives of working- and middle-class Americans who rely on sound roads, public transportation, water systems, and so on. (See our separate post.)
- But we doubt that Trump can bring lots of manufacturing jobs back to America (see why here), and the trade wars he might spark would raise prices of the imported goods that many Americans buy.
- We worry that the new President’s policies on healthcare will work against Americans who are less well-off (see why here).
- On public education—a key to opportunity for most Americans—President Trump’s policy direction remains unclear. His choice of Betsy DeVos to be his Education Secretary suggests a focus on giving parents a choice of schools for their children, via charter schools and vouchers. Evidence to date suggests that school choice works well for underserved students when the choices are tightly governed (e.g., underperforming charter schools are shut down), and DeVos’ record in Michigan tended toward loose governance.
What should city leaders take from all of this? Shared prosperity is unlikely to result from the federal policies on the horizon, so local efforts to open up broad opportunity are now more important than ever. Such efforts are likely to emphasize steps that are not currently the focus of President Trump: improving underperforming schools, upgrading workforce skills (hard and soft), aligning educational programs with the current and future needs of employers, expanding apprenticeships, broadening access to entrepreneurial opportunities, providing public transport that links poor neighborhoods to jobs, expanding early childhood education, and retraining workers displaced by automation and global trade, for example. Most of these local efforts aim to give individuals access to scarce, valuable skills. And many are best accomplished by local cross-sector collaborations—educators, businesses, nonprofits, and government agencies working together.
Dear YALP participants, tens of millions of American voters see President Trump as someone who will advance shared prosperity. Yet in our view, his economic policies so far do not align with this vision. Are we missing something? Please tell us how you see it, especially if you see it differently than we do.
 Jim Nunns, Len Burman, Ben Page, Jeff Rohaly, and Joe Rosenberg, “An analysis of Donald Trump’s revised tax plan,” Urban-Brookings Tax Policy Center, October 18, 2016.