US Tax Reform Raises Fears of Trade Skirmishes

EghtesadOnline: Once again, tax reform is on the agenda in Washington, and this time there’s a genuinely radical idea under discussion: the House Republicans’ plan for a new “border adjustment” corporate income tax. It would, they say, transform the sluggish United States into a much better place to invest and create jobs. Would it work? The answer depends, in part, on who’s right—economists or lobbyists.

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07 March 2017

The House GOP plan would sweep aside the corporate tax system with its 35% maximum marginal rate, the highest such rate in the industrialized world but one riddled with loopholes. In its place, there would be a new 20% flat rate levied only on income earned in the United States, news outlets reported.

To offset the huge loss of revenue, the plan eliminates the deductibility of imports as a business expense, as well as a few other large deductions. The net effect is a big reduction in the after-tax cost of doing business within the United States—paid for by foreign exporters.

Economists (at least those who like the idea) believe it creates fresh incentives to locate economic activity—and register ownership of intellectual property—within the United States, to export rather than import, and to finance businesses with equity rather than debt, Financial Tribune reported.

Other things being equal, that could improve tax efficiency and domestic job creation. To those who fear a sudden hit to import-dependent businesses and their customers, advocates respond that the tax plan would trigger an offsetting rise in the dollar exchange rate. There would be short-term winners (agricultural exporters) and losers (big retailers of Chinese goods).

Return to Ruination

While President Donald Trump has recognized that America's private sector desperately needs reflating, he doesn't yet appear to have realized that this involves alleviating the personal and business debt overhang and enabling more equitable distribution of wealth and income, especially in favor of the poorest and lowest earners, CNBC reported.

This can be achieved in several ways, including a combination of higher benefits and earned incomes, reduced real debt burdens (by devaluing the currency, by deflation and/or by debt forgiveness) and greater provision of free or low-cost services by the state.

Although Trump has outlined indicative policies purportedly designed to promote higher economic growth (or in bloviated Trumpspeak "to make America great again"), the reality of the policies seemingly favored by the new administration appears to be a fast-track return to ruination and possibly serfdom. Despite the rhetoric of phenomenal tax reform supposedly for the benefit of everyone, it appears they may not have learned the lessons of counter-intuitive history.

Impact on Global Economy

A proposal for a new levy on imports included in a Republican tax reform plan has set off a lobbying war in the US business community and raised fears of looming trade skirmishes. But economists have also begun focusing on another potentially worrying aspect: What it means for the global economy.

The inclusion of a 'border adjustable' tax system in the proposal being pushed by House Speaker Paul Ryan and other leading Republicans would, according to experts, amount to the biggest change in global taxation in almost a century.

If economic orthodoxy holds true—and whether it would is the subject of significant debate—it could also lead to the biggest surge in the dollar since the 1980s with potentially damaging consequences, particularly in emerging economies.

Paired with rising US rates and a Federal Reserve determined not to let the US economy overheat that could present a shock to the global economy that economists at the International Monetary Fund and other institutions have begun trying to quantify.

In a report released last week, rating agency Moody’s said that a 20% tax on imports could lead to an appreciation of as much as 25% in the dollar. That would be the largest swing since the aftermath of the 1985 Plaza Accords between the US, Japan and major European economies.