In order to show his accomplishments in his first 100 days in office and boost his declining popularity, U.S. President Donald Trump has announced the biggest tax cut package in American history, which will benefit both enterprises and individuals. What attracts the widest attention in the proposed package is a sharp cut in the corporate tax rate from 35 per cent to 15 per cent, even lower than the 16.5 per cent in Hong Kong. Such a move by the United States is similar to waging a tax cut war to trigger off a global fiscal-policy competition. This will no doubt increase uncertain and unstable factors for the world economy still on a foundation of unstable recovery.
The crux of the U. S. tax reform lies in the massive tax cut in the hope of boosting corporate investment and individual spending so as to stimulate the economy lacking for growth momentum to grow by at least three per cent [this year]. But such a wishful calculation involves quite many variable. The package needs approval by the Congress. Big tax cut has serious side effects, such as increasing fiscal deficit and debt burden, causing inflation to hike and speeding up the pace of interest rate hikes. The game may not be worth the candle for the United States.It may even possibly burst the American stock and bond bubbles to trigger a new wave of financial turbulence, which in turn will hurt the whole world.
The tax reform is the climax in Trump's first 100 days in office, which however is still lack of details.For example, it remains unclear whether the sharp cut in the corporate tax rate will be made in one step or in several steps.Also, the reform proposes a one-time tax on trillions of dollars held overseas by U.S. multinationals in the hope of luring them back to invest at home, but the rate has yet to be fixed. Obviously, Trump is fully aware that the tax reform has a great impact and is controversial so it is not easy to get congressional approval. Therefore, he deliberately leaves room for revision at any moment.
In fact, the massive tax cut package proposed by Trump brings three risks for the U. S. and world economies.
1.It will trigger off a global tax cut war, causing chaos to the world economy. America's sharp cut in corporate tax rate is bound to arouse a global reaction.In order to remain competitive in taxation, other countries are expected to follow suit and compete with the U. S. in tax cut. The situation is similar to a currency war or trade war. As a matter of fact, the United Kingdom already made it clear long ago that it would cut taxes to ease the impact of Brexit on its economy. A global tax-cut competition will make the world economy even more chaotic. Once a tax-cut war breaks out, every country in the world is a loser and there is no winner at all.
2.It will intensify fiscal-policy competition, and a global sovereign debt crisis may become worsened. Nine year after the financial tsunami, the world economy has yet to completely recover which is now in a predicament of slow growth. Globally, loose monetary policy has come to the end of road, and the world is now turning to the direction of more positive fiscal policy, including cutting taxes to stimulate the economy regardless of the rise of fiscal deficits and debts. This prompts worries about quickly worsening of global debts and upgrading of a sovereign debt crisis.In fact, announcing the sharp tax cut, the U. S. fails to unveil a concrete plan for expanding its financial resources. Thus it is expected its tax revenue will decrease by US$2 trillion. The bubble of U. S. debts, already reaching US$20 trillion, will sooner or later burst.
3.Tax cut will push inflation higher, and the pace of interest rate hikes will become faster than expected. If the U. S. put into practice the sharp tax cut plan, inflation will sharply increase, and the pace of interest rate hikes will be much faster. As a result, the U. S. dollar will become remarkably stronger. Global financial market will fact a new wave of turbulence.
As a matter of face, the effects of U. S. tax cut to lure corporate investment and revitalise the economy remain doubtful.Taxation is not a main factor in consideration when enterprises make their investment decisions. More important are such factors as production costs and Return On Investment (ROI). Trump may eventually work to no avail by introducing such a tax cut package on his own wishful thinking.
28 April 2017
