After the US Congress passed a sweeping tax overhaul this week, the rest of the world is trying to figure out what it means for them.
In Europe, a range of attitudes are shaping up about the bill. Widespread criticism regarding the soundness of ballooning the deficit amid sustained economic growth, as well as concern about implications for trade, is drowning out acknowledgement by others that the bill was long overdue.
A study from Germany’s Center for European Economic Research released shortly after Trump’s election last year, said that Europeans could make an exception to their distaste for Trump and give him credit where it is due. America’s 36.5% corporate tax rate, second only to France, compares to an average EU rate of only 21%. The new tax bill will bring the US rate down to 21.6%
“Trump’s plans actually seem like a much overdo adjustment to international standards when it comes to tax burdens,” Friedrich Heinemann, the author of the study, was quoted as writing.
The then president-elect’s tax plan could reduce the incentive for US companies to shift their profits abroad in order to avoid high taxes in the US, Heinemann said. A German government official, who declined to be named, also reportedly praised Trump’s tax plan at the time.
“If Trump implements his tax plans, it would solve half of the problems with base erosion and profit sharing,” according to the study.
Fast forward to this week, and Germans are decrying the plan, citing fears that it would distort trade relationships and siphon jobs from Europe to the US. German business daily Handelsblatt reported that some German experts also think it could actually increase the US trade deficit.
Head of the influential Ifo economic think tank, Clemens Fuest, argued that it could backfire in the short term. By encouraging companies to repatriate foreign profits the dollar could rise in value, making US goods more expensive relative to foreign competitors, he said.
“From Trump’s protectionist point of view, the tax reform is a big misunderstanding,” Mr. Fuest said. “The tax cuts will massively increase the US trade deficit.”
A Spiegel Online headline read, simply, “Trump Tax Plan Worries Europe.”
“The United States, the world’s most important economy, is transforming itself from a high-tax country to a low-tax paradise. Currently, most companies have to hand over 40 percent of their profits to the taxman, more than any other developed economy. In Germany, it’s 30 percent.”
No wonder, then, that Trump’s tax win is setting off alarm bells in Germany and other European countries. “One doesn’t need to be a prophet to predict that the United States is about to be flooded with foreign direct investment. American companies, meanwhile, are likely to invest more at home and to repatriate money that has been stashed away abroad,” the Spiegel article went on.
You are darn right.
20% of USA companies does not pay any federal income tax. Average is between 15-19% with domestic corporations like banking, retailer (e.g. Walmart) paying the highest. Therefore, some economists believe that 21% is the result of K-street (over 13,000 firms of lobbyist) negotiating among themselves. Apple’s Ireland corporation pays 1% income tax and every Apple corp in other countries pay tremendous loyalty fees to Ireland. There is no incentive for Apple to bring back those cash and pay 14%.
My understanding is that most American companies don’t pay much in tax anyway. They have already come up with various ways to hide tax; many of them are effectively subsidized by the US government. Note the video where Gary Cohn asked a room full of executives how many of them would invest in the US if the tax rate came down; he was genuinely puzzled when very few put up their hands. There is also a larger problem with this analysis: every nonpartisan analysis agrees that the social costs of the American tax cuts are going to be enormous. How many companies will want to invest in the US when there is no sustainable middle class to buy their goods or when social and political instability and inequality make American cities too dangerous and disspiriting to live in? If Europeans are genuinely concerned about these issues, they should consider implementing protectionist measures against the US. Requiring companies that want to sell in Europe to be in Europe is a strategy that worked in the past and should be back on the table in the Trump beggar-thy-neighbour world. The rest of the world can start working around the US, but it will take coordination and the willingness to isolate the US economy.