The US President Donald Trump seems to be on a mission to prove that he means business (no puns intended), despite the controversies that have dodged his presidency from the start. Trump’s $1.5 trillion tax law has been touted as the most significant overhaul of the tax system in the United States since the Reagan era in the 1980s. And riding on the first major legislative success of his presidency, Trump attempted to recast himself at Davos as a pragmatist. Is this enough to reboot the American economy?
The run-up to the World Economic Forum (WEF), the annual meeting of global political and business leaders at Davos in Switzerland, was far from encouraging. The Trump administration had unilaterally withdrawn from two major multilateral trade agreements, viz. the Trans-Pacific Partnership, and Trans-atlantic Trade and Investment Partnership and there were lingering fears of a full-blown trade war against China and other countries.
President Trump, however, surprised many at Davos by putting on the garb of a moderate globalist who was willing to negotiate mutually beneficial trade treaties and support free trade as long as it was fair and reciprocal. Riding on the recently-announced $1.5 trillion tax code, President Trump shed the image of a protectionist and drove home the message that the world was witnessing a resurgent America. He went on to insist that ‘America first’ did not amount to ‘America alone’ and when United States grows, so does the world. The outcome was positive and instantaneous, with many of the assembled corporate honchos expressing a desire to expand their businesses in America.
The landmark Tax Cuts and Jobs Act will cut the tax brackets from seven to five and nearly double the standard deduction for individuals. The reduced tax burden will enable families to pay mortgage and other bills. The tax cut bill is expected to raise the average American’s household income by more than $4,000; millions of workers having already received tax cut bonuses in excess of $3,000.
The new tax law will slash the corporate tax rate drastically from 35% to 20%. It will provide 100% expensing for plants and technology, making it easier for big companies to bring money back home. The tax cut will also make businesses and workers more competitive by incentivizing investments in new equipment, technology and factories, thereby enabling US to compete with China and other countries. The new tax code also creates Opportunity Zones, which will make use of tax incentives to attract long-term investment to regions in US that are bedeviled by poverty and sluggish job growth.
The tax code has been welcomed by many. The IMF lifted its forecast for US economic growth this year to 2.7%, although it cautioned that short-term effect would wane away by 2022 due to budget deficit and expiry of individual tax cut regime. Credit Suisse CEO Tidjane Thiam exuded confidence that the tax reform in US will provide a new impetus to global growth. JPMorgan Chase Bank CEO Jamie Dimon was confident that the tax cuts would spark an economic boom. Adena Friedman, the CEO of Nasdaq Inc. hailed the tax overhaul as a growth driver for the United States. In fact, Starbucks has announced pay hikes, stock grants and enhanced benefits, in wake of the changes in US tax law, and other major corporations are expected to follow suit. Not to be left behind on the sentiment front, the S&P 500, the benchmark for large-caps listed in the US stock markets, has gained nearly 5% since Donald Trump signed the corporate tax cuts into law.
There are concerns though, especially with regard to Trump’s protectionist instincts. The Trump administration has already slapped tariffs on imported solar panels and washing machines. William White of the Organization for Economic Co-operation and Development has pointed out that the current market indicators resembled the situation that prevailed prior to the Lehman crisis. Christine Lagarde, the managing director of IMF has warned of a social disaster arising from the fact that working-age people were lagging behind in Europe. The Indian Prime Minister Narendra Modi has argued that the world was veering dangerously away from globalization. There are also fears that the tax plan would aggravate America’s debt situation and create a dangerous race to the bottom as countries compete to cut taxes. The extent to which the new tax law would help the middle class (rather than the super rich) is a matter of debate. More crucially, the US government will have to scale back the spending on education and infrastructure to compensate for the looming $1-plus trillion rise in federal deficits over the next 10 years, a direct fallout of the new tax. According to Sandhurst Consultancy in Singapore, there have been many examples of Americans who took strong measures to become tax residents in other parts of the world, including Singapore: “Eduardo Saverin, the co-founder of Facebook went as far as renouncing his US citizenship before relocating to Asia. Whilst the new tax code in the US will bring some relief, many Americans still take issue with the fact that they are liable for taxes on their worldwide earnings after relocating. It remains to be seen whether President Trump can stem the outflow of wealthy entrepreneurs.”
The jury is still out on whether the $1.5 trillion tax law will transform the socio-economic situation back home in the US. Time alone will tell.