The recent debate between Kamala Harris and Donald Trump revealed the worst sides of both candidates. As Heather Mac Donald wrote, the egregious partisanship of the ABC pair David Muir and Linsey Davis aside, there was no excuse for Trump’s unforced whoppers and his random asides on stage. The more serious problem, however, deals with substance.

On this point, Trump’s major shortfall was instantly evident. His opening remarks reaffirmed his view that tariffs on foreign imports could raise billions of American dollars from the Chinese and other outsiders, without once considering whether or not those increased taxes would in part be passed forward both to American consumers and to American manufacturers. The former would find it harder to put food on the table, and the latter would be less able to compete in global markets if the higher price on key foreign inputs raises the costs of exports destined to these same foreign markets. It would have helped if Harris had denounced these tariffs, but she is on the same page: the Biden administration recently announced huge tariff increases up to 100 percent on electric vehicles (EVs), as well as hikes on chips and steel. These tariffs will not clean up the air by making the shift to EVs more expensive, but they will endanger public health by increasing the costs of vital medical equipment. Another foolish economic move is the potential blocking of a purchase of struggling US Steel by Nippon Steel, a decision that has now been deferred until after the presidential election. Congratulations for a bipartisan mindset that is lose, lose, lose all around.

On top of all this, the distinctive intellectual weaknesses of Harris’s positions are all tied to her use of the phrase “opportunity economy” as part of her “new way forward,” which is a new label for the failed view that it is possible for the United States to tax and spend itself into prosperity. At the most generic level, programs of that sort always look at the direct benefits to the recipients of the new forms of government largesse, while paying almost no attention to the direct (let alone indirect) harms that these programs cause. Thus one can look in vain to the Harris programs for a coherent account of how she determines the benefit levels for her various individual programs on the one side, and how she plans to finance these benefits on the other.

The Harris program is very confident when it announces that it will provide first-time buyers with a $25,000 tax credit (for a cost of $100 billion), families with a $6,000 per year per child expanded child tax credit (which could run up to $1.2 trillion over ten years), and an increase in deductions of perhaps tenfold (from $5,000 to $50,000) to new businesses. What she does not have is a theory as to why she started this program in the first place, or why she chose these levels, when small variations could have substantial effects on the overall economy.

Most notably, the list of proposals suffers from the vice of seeking to funnel the gains to a certain segment of the population, without accounting for the distortions that come from the usual conceit of industrial planning—magically finding some crude instrument that the government uses to pick the right businesses for public investment. Whether the goal is to spur solar and wind energy or to start new businesses, it never works. It is more likely that the targeted subsidies will have the undesirable effect of inducing unskilled people who should not be forming new businesses into taking a gamble that they would never have taken in a subsidy-free world. Private lenders or investors, even within families, will look to see if an investment makes sense before committing themselves to a loan or a stock purchase. Here the government just writes a check to the wrong parties.  And Harris is happy to do so, moreover, without having a sensible way to pay for these massive tax breaks which are likely to yield a low rate of return on investment when the wrong people gain control over capital.

There is also the nasty correlative of how to pay for this. Harris never mentions that cheapening the currency via inflation, or borrowing more money in a rugged credit market, are ways to go. Instead, she puts all her eggs in the basket of increased taxes, both on individuals and on corporations, in truly disastrous ways.

She is prone to these massive errors because she never puts all the pieces together. It is always wrong to assume that the level of productivity will remain the same with or without a new tax regime, when indeed the opposite is true. Thus, the critics of the Trump 2017 tax cuts have claimed that it costs $3 trillion to $4 trillion in lost revenues, as if the entire exercise was a multiplication game, where the smaller share of a constant pie necessarily yields a decline in revenues. But the dynamic view, which takes into account the responses of all private and public parties to these various changes, tells a far happier result for the Trump tax cuts than it does about Harris’s targeted proposal.

The Trump tax cuts worked because they induced the costs of repatriating wealth into the United States on a favorable tax basis. Once home, and mingled with other capital, the lower marginal taxes on corporate income and capital gains reduced the immobility of investments, making it easier to take the gains from one transaction and, net of taxes, use it to make a newer investment with a higher rate of return. Those better investments are in turn invested in capital equipment, produced in part by the work of the employees of either the taxed company or its trading partners, which in turn increases demand for labor that leads to higher wages across the board. The lower taxes, moreover, do not have a bias in favor of certain kinds of transactions over others, and thus do not suffer from one of the major weaknesses of the Harris proposals, which are wrong in every respect. First, she wants to raise the capital gains rate from 20 percent to 28 percent, which, while lower than Biden’s ruinous 39.6 percent proposal (which nearly ends the distinction between the taxation of ordinary income and capital gains), is poles apart from the Trump proposal to reduce the gains to 15 percent. As new investment goes down from domestic and foreign sources, the demand for labor goes down with it. Therefore, the Harris proposal creates yet another lose/lose proposition, as no one gains from a shrunken pie.

She then endorses the ruinous proposal to tax unrealized appreciation of, at the very least, stock held by individuals with a net worth of over $100 million, covering both public and private firms. The public markets cannot survive if, at the end of each year, there is a desperate effort to unload substantial shares of stock, whose value could crater, bringing down with it small investors who have no ready strategy to deal with these annual efforts. The situation is, of course, worse if that tax extends to private corporate shares that rarely trade, and hence have no observable market value. These shares are also difficult to value under an estate tax, where the transactions can take years to sort out. But the difficulties are compounded if the tax on year two must be determined before the tax on year one is settled. The moment a tax like this is announced, private planners will go into high gear to divide assets among different holders and move them overseas into foreign trusts, all to reduce those high taxes. The tax will also be in limbo, as of course there will—and should—be a constitutional challenge on these taxes on the ground that they are a naked taking of property whose sole purpose is to take from A to give to B.

It is so unnecessary. Right now, the law has the right balance: it taxes cash and marketable securities when received, defers the taxation on various transactions that swap one form of corporate security for another until cash and marketable securities are obtained, and taxes without recognition requirement various financial instruments like options and derivatives where the forced sale of these instruments prevents massive tax avoidance without disrupting the operation of the business economy. It is generally unwise to switch to untested systems of taxation in the hopes of generating more revenue, when the likely effect is the disruption of standard business practices that only shrink the pie. In a previous generation, President Bill Clinton was stunned to find himself hostage to the bond market. Higher deficits are now in store no matter who wins the election, and it should be devoutly hoped that the bond market or some other economic force can constrain the political process before it consumes our economic system, with its only internal checks and balances.

Political markets can survive only when constrained by economic markets. Harris, even more than Trump, wishes to loosen those fetters, and if she succeeds, we all shall have to weather the economic storms that are sure to follow.

© 2023 by the Board of Trustees of Leland Stanford Junior University