Hillary Clinton and Donald Trump's fiscal plans are equally hopeless

In the US there is a huge need for tax and regulatory reform. The personal tax system is full of loopholes, so that the very rich can end up paying lower rates than middle-earners. Donald Trump has used these devices himself

With only a few days to go, Ms Clinton only has a single point lead in the latest head-to-head Fox news poll (Getty)

“It’s the economy, stupid,” was the slogan thought up by James Carville for Bill Clinton in 1992. That it should be quoted so often today is testimony to its brilliance. But actually the interaction between politics and economics in a mature democracy can be quite tenuous, for a number of reasons.

The time lags before a shift in policy takes effect can be quite long. Often investors will look through an action that would otherwise discourage them because they expect the policy will be reversed after the next election. Large firms can gain an advantage with apparently adverse regulations, using them to shut out smaller competitors. Obviously politicians can on occasion wreck an economy, as they have in Venezuela and Zimbabwe, but in western mixed economies politics is less invasive.

There is, however, a problem, and it is relevant to the US now. Policies that in the medium term would help not only boost economic growth but also build more equable society may be unpopular in the short-term. The best example of that were the Hartz labour reforms, introduced in Germany from 2003 to 2005. It is hard to recall that at that time Germany had far higher unemployment than the rest of the eurozone and was dubbed “the sock man of Europe”. The reforms changed everything - unemployment fell from 11 per cent in 2005 to 7.5 per cent in 2007. But they were unpopular and the government fell.

In the US there is a huge need for tax and regulatory reform. The personal tax system is full of loopholes, so that the very rich can end up paying lower rates than middle-earners. Donald Trump has used these devices himself. Corporation tax rates are among the highest in the developed world, but companies can avoid them by shifting profits offshore. Regulation inhibits job creation and shuts out potential workers. It also varies from state to state. Example: to become a hairdresser in Florida you have to have 1,000 hours of education in another state and one year working elsewhere before you can even apply to take the Florida exam for a licence.

The American economy has been growing steadily and in many ways still leads the world. But it is not satisfying many of its voters - witness the anger evident in much of the campaign. With a less distorting tax system and better-crafted regulation it could be so much better.

That is really the central economic challenge for the next President. Can he or she improve the tax and regulatory system so that growth is higher and, crucially, the benefits of that growth are spread more widely?

We have plans, detailed ones in the case of Hillary Clinton, as to what might be done about federal taxes. Neither candidate’s are encouraging. Clinton’s would complicate the personal tax system further, increasing tax on high-earners, and in any case such plans would be hard to get through Congress. Trump’s have the benefit of simplicity, but at the cost of fiscal irresponsibility. The present seven income tax bands would be cut to three, with the biggest cuts at the top and without corresponding cuts in spending. And while Trump would also cut corporation tax, it is not clear how the loss of revenue would be made up.

As for regulation, the thrust of Clinton’s proposals would be increased controls, particularly on the banks and on the environmental performance of companies. Trump would do the reverse. But many of the restrictions on labour, such as those of Florida noted here, are state matters rather than federal ones. An effective President would learn to work with Congress, but that would not affect matters decided at state level. The US system is built round the concept of separation of powers.

Many outside observers write about gridlock: the notion that any President will find his or her efforts to reform stymied by Congress. That is certainly an issue, but during the financial crisis the President and his administration were able to take radical action – in, for example, supporting the banks and the motor industry – and the US managed to achieve a swifter recovery than Europe or Japan. But it is also a problem of complexity. The US has a poor tax, benefits and regulatory system by world standards. Until a President accepts that, and then cajoles, charms, and bullies the various vested interested to change their ways, the US economy will continue to disappoint too many of its people.