Trump's tax reform. Can Australia follow suit?
Overnight, US President (*cough*) Donald Trump announced the biggest shakedown of the American tax system since Reagan was in The White House.
A key platform of the campaign – along with such classics as ‘build a wall’ and ‘lock her up’ – the policy looks to drop corporate tax rate from 35% to just 15%. The idea is that by allowing corporations to take bigger profits, they are more likely to employ more people.
We’ve heard as similar argument in Australia, where the Prime Minister and Treasurer have struggled to sell a corporate tax cut of 5 points to 25%; the major barriers being significant doubt in trickle-down economics and a growing concern about the gap between the rich and the poor.
Cheif Economic Adviser Gary Cohn (l) and Secretary of the Treasury Steve Mnuchin (r) sell the politics of the plan at last night's media conference
Back to the US, there might be a silver lining for Trump’s proposal. If we were to ignore the perceptions of self-interest that a tax cut brings, as well as wonder how it aligns with his other catch-cry, “drain the swamp!”, there is no doubt that the current US corporate tax regime is utterly uncompetitive in an international setting.
And this is important. The make-up of the top stocks in the USA is very different to what it looked like in the time of ‘Reaganomics’. Apple, Alphabet (Google), Amazon and Facebook are four of the five most valuable companies in the United States, and there is every incentive for them to stash their money in offshore entities that the Internal Revenue System cannot get their fingers on.
By example, it is estimated that Apple holds some $250 billion in cash offshore. Well, 35% of nothing is… nothing. If the US Treasury could incentivise Cook & Co to return that money, not only does it represent a windfall of $37.5 billion to government coffers, but could potentially wash all that money through the US economy to even greater benefit. The proposed 'one-off' tax on this money could provide even further incentive, although there is little detail as to what that might constitute.
How many thousands of column inches will be dedicated to these 200 words?
One last thing to watch is this ‘bare-bones’ approach to tax reform (the ‘plan’ fits on a single page). Trump wants to reduce the number of personal income brackets to three (from the existing seven). Australia has four.
What we like about this strategy is that a simplified model has the potential to be much more efficient. Australia’s last great attempt at this – the GST – resulted in a tax code that was almost three times as long as the one it replaced.
Obviously, that was the result of poor negotiation on the part of the government of the day, but since then Australia has become hamstrung to even minor reforms – as this year’s kerfuffle over the corporate tax rate amply demonstrated.
With the Australian Federal Budget due to be handed down early next month, it's too late for any surprises on tax reform. However, fertile ground will be laid if Trump can ram his plan through the house. Morrison's porisiton in 2018 could be very different to today.
With obamacare roundly rejected by Congrtess, the challenge to get new tax policy across the line leaves Trump in an extremely vulnerable piosition. As you might expect, the Democrats remain unimpressed byt aht they;ve seen so far. The New York Times quotes Ted Lieu (D-CA): “America is a great nation but we haven’t yet discovered magic.” No-one yet knows how much this reform will cost, what the net benefit to the country will be or what effect it will have of Donald Trump’s personal wealth. If only he’d release his tax returns.
All we can do is wish The Donald the best. As the dust settles on his First 100 Days and some meat is put on the bones of these reforms there is every chance it will be stopped via Congress due to tough politics or simply bad policy.
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