Tax cuts: the risky bet of Donald Trump

Photo: Saul Loeb Agence France-Presse
Donald Trump has said that his reform had the power to bring economic growth to 2% a year on average’, 4%, 5%, 6% eventually”.

The recent declines in the tax of companies in the United States does not have anything original even if their effectiveness is, to say the least, uncertain. Canada will resist to the temptation to imitate them, even though there would be other ways to respond to them ?

Donald Trump has finally achieved its first major reform since his arrival at the White House. Considered as the most important tax reform since at least thirty years, the extent of 1500 billion over 10 years voted strictly according to the divisions of partisan makes it great for individuals most rich in one of the developed countries already hardest hit by rising inequality. It is, however, primarily in a downward revision of the tax on the profits of the companies in order, it is said, to catch up on all the other countries that have already done the same to attract investors and thus stimulate economic activity.


Always so nuanced, the u.s. president said that his reform had the power to bring growth to 2 % a year on average’, 4 %, 5 %, 6 % eventually “. More cautious, with its own experts evoke, at most, adding a percentage point, to 3 %. The analyses are non-partisan are even more reserved, the researchers of the Penn Wharton Budget Model talking about adding at most 0.12 of a percentage point per year from 2018 to 2027, the price of the addition of at least 1900 billion to the federal debt. And that is without mentioning the fact that they are more likely to widen the gap between rich and poor, first because of the strong majority of the shareholders of american companies are either wealthy people, or foreigners, then, because, when the debt will become unbearable, it’s a safe bet that we sabrera social programs.


The impact of the tax cuts


Why a stimulating effect if reduces ? In its economic outlook for the month of October, the international monetary Fund pointed out that, in contrast to the increase in public expenditure, which goes directly into the economy and which may even have a multiplier effect when it is aimed at the improvement of the infrastructure of production, training or research, tax cuts do not always go to the growth, and may, in the companies, rather serve to swell their cash reserves to repurchase shares or to pay more dividends to shareholders. According to the IMF, a change in the corporate income tax is thus likely to have ten times less economic impact in the United States that the same sums spent on public investment.


It is also necessary to choose the right time, ” added the IMF. To be effective, a stimulus must happen when there is a lot of unused capacity, he says, such as in the aftermath of the worst global financial crisis, when the predecessor of Donald Trump implored, without success, the elected republicans to give him more than a measly 780 billion to help revive the u.s. economy. Not when, as now, the economy is officially in its eighth year and that the unemployment rate is only 4.1 %. In the latter case, we run the risk of spending of budgetary resources for nothing, or push the economy into overheating and see the u.s. federal Reserve will be forced to put on the brakes by raising interest rates faster than expected.


The tax cuts will not only, argue the supporters of reform. They will be accompanied also by a deregulation, notably in the financial sector, which will swell, too, the optimism of consumers, firms and markets.


It was big news this week, the enthusiasm of some companies, including AT&T, Boeing, and Wells Fargo bank, who have announced their intention to share this year a portion of their tax cuts in premiums for their employees, charitable donations and investment project. Ironically, the Financial Times noted Wednesday that the output of the three companies had surely nothing to do with the fact that the first hopes to get the endorsement of the White House for its ambitious takeover of Time Warner, the second owes him thanks for his support in her crusade commercial against Bombardier and the third has need of his magnanimity after having been taken in all sorts of business practices are questionable this year.


Already raring to go, stock markets, meanwhile, are shown to be excited this week, as each time that businesses have more money in their pockets, lower taxes and deregulates… until things go wrong.


Follow the guide ?


Where Donald Trump is right, it is when he says that reform does not merely bring his country in the race to lower business taxes. A race in which, among developed countries, Canada has not played in the same leagues as tax havens such as Ireland or the netherlands, but where he had secured in spite of everything a very advantageous position with an effective tax rate of just 8.5 % in 2012, according to the budget Office of the us Congress (CBO), against 11.2% in France, 15.5% in Germany, 18.6 per cent in the United States and almost as many in the United Kingdom.


The Canada select-t-he to reduce its rates again to keep his advantage or will he copy a few measures, such as accelerated depreciation on purchases of machinery and capital ? We’ll see.


What we do know is that taxes are only one factor among other factors in the choice of investment and development of companies in a country. Among other factors are also important, sometimes even more : the existence of industrial policies well-targeted, the availability of a skilled workforce, the capacity of reinforcements from abroad, the access to large foreign markets, the burden of regulation, the state of public services and infrastructure, and the quality of life.

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