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The US Tax reform

    • Milan
    • 22 January 2018

          Discussions at this national roundtable opened with the observation that the tax reforms signed into law by the Trump administration have an air of momentousness about them and have a significant impact on corporate taxation, with the company tax rate reduced from 35% to 21%. The impact on personal income tax is, however, decidedly more modest, with the tax rate cut by merely 2.6 percentage points, dropping from 39.6% to 37%. In addition, the former measure is, at least in theory, permanent, while the latter – for reasons tied to US parliamentary rules – will end in 2025. The law also provides for other deductions, tax breaks, and a shake-up of real estate and inheritances taxes.

          The participants considered it legitimate, in the circumstances, to question why a country such as the United States – whose Gini coefficient places it in the 144th spot in a ranking of 160 developed and developing countries – has not seen fit to take steps to alter the distribution of wealth, by means of general taxation, and has instead (at least seemingly) opted to give more favorable treatment to companies at the expense of individuals. Furthermore, this has been pursued through measures that will result in an estimated reduction in federal tax revenues of 1.5 trillion dollars, which will have a major impact on the already precarious US welfare state.

          It was felt that the reason may lie in the fact that, according to estimates, a 10% reduction in corporate tax translates into an average increase in employees’ salaries of 7%. Hence, weighing up the reform plan as a whole, it can be surmised that this would have a positive effect on the middle class, the quintessential voter base of the current President.

          In addition to these allocative and distributive considerations, it was noted that there are also aspects of the plan that impact on US international dealings. In particular, the measure aimed at encouraging – through an ultra-low tax rate – the repatriation by US companies of capital held abroad is proving very promising, as is the added attractiveness of the US for setting up companies, due to a corporate tax rate that is seemingly so low.

          It was stressed, in any event, that in order to gain an preliminary overview of the effects of this watershed tax reform, it is necessary to try to understand who it will benefit and who it will hurt. Certainly, US companies (not just the big publicly-listed ones, but also the granular array of SMEs that are the backbone of real corporate America) and – by reason of the previously mentioned distributive effects – individuals will be among the beneficiaries. These advantages will probably be at the expense of the federal government and the welfare state, as public debt will be prone to growth. On the other hand, companies will definitely have greater liquidity that they can accordingly invest in research and development, or use to purchase their own shares or distribute dividends. In addition, share prices will rise to the benefit of all investors, especially institutional ones (for instance, pension funds), whereas the greater disposable income of individuals will translate into higher consumption and savings.

          In summing up, the participants concluded that it is still too early to assess the overall effects of the reform. What was deemed certain, however, is that elements such as the boost given to US manufacturing, renewed forms of protectionism, and the special attention paid to the needs of the middle class have produced a radical strategic shift in the American tax system.

           

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