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Gradually the news is sinking in. The initial shock has been absorbed. Attention has shifted to what Donald Trump will actually do when he becomes President. Which promises will he keep? Which will he discard? Financial Times readers were given a clue this morning that bold tax cuts would be pursued. Anthony Scaramucci, a member of the President elect Economic Advisory Council says:

“At 35 per cent, the US corporate tax rate is the highest in the developed world. As a result, US companies have stashed an estimated $2.5tn abroad. Mr Trump’s plan would bring that home with a 10 per cent one-off repatriation fee while making our corporate tax structure more competitive. While he would ideally like to see rates at 15 per cent, getting US corporate taxes down to the UK rate of 20 per cent would add an estimated 3.3 per cent, or nearly $600bn, to our gross domestic product.”

He adds:

“Financial markets are responding positively to Mr Trump because he will tackle the key problems facing America: overregulation, a lack of fiscal policy, a messy tax code, unfair trade deals.

“The US economy has been choked by over-regulation since the financial crisis, leading to the slowest recovery in 80 years. Small businesses have suffered under the demands of Obamacare and community banks have scaled back lending due to stringent provisions of Dodd-Frank financial regulation. The Department of Labor’s new fiduciary rule, due to take effect next April, would be the next piece of major legislation to kill jobs and hurt investors. You cannot rid society of all regulation without creating bad incentives, but the new administration will cut unnecessary rules and conduct more meaningful cost-benefit analyses.”

What about the deficit? There is concern that the spending cuts might not be as bold to match. However there will be the reasonable expectation that a cut on business tax from 35 per cent to 15 per cent would have a “dynamic” impact. Economic growth would be stimulated allowing for tax revenues to grow over time. Allister Heath argues in the Daily Telegraph that a a temporary increase in the deficit would be acceptable.

He says:

“The left often believes that it’s fine to borrow to invest; free-marketeers can make the argument that it’s tolerable to borrow to invest in a new, dramatically improved and simpler tax system. In other words, a temporarily bigger deficit, if it is doesn’t become permanent, is accompanied by a sustainable spending reduction plan and genuinely leads to a drastic tax reform, would be fine.”

Income tax is also due to be cut and simplified – the top rate would fall from 39.6 per cent to 33 per cent. The recent experience from the UK suggests that tax rate cut would be likely to result in increased tax revenue even in the short term. President Trump will also be encouraged by the increased revenue brought in by the tax cuts of his predecessor, John F Kennedy.

There is a lot of talk of countries “competing” against each other. Mostly this is nonsense. The richer the rest of the world is the richer we are. But there is some competition in the globalisation era between Governments for tax revenues. The British rate of Corporation Tax is already due to fall to 17 per cent by 2020. Philip Hammond, the Chancellor of the Exchequer, will surely take into account changes in America in deciding if he should go further and faster. He may also reflect whether the 45 per cent top rate of income tax in the UK really sends out an “open for business” message to the world’s entrepreneurs – if the rate is falling to 33 per cent in the USA. Other Finance Ministers around the globe will be scratching their chins and having equivalent thoughts.

This bold example could be discredited if it coincides with trade protectionism. That could more than offset the benefits of the tax cuts and plunge the United States (and the rest of us) into recession. The indications (from Scaramucci, other briefings, and the reaction of the markets) is that this will not happen. But it remains an alarming possibility. It is why we had the curious situation before the election of many free market British Conservatives quietly rooting for Hillary.

Let us imagine for a moment though that trade is not restricted. That indeed, with Brexit negotiations between the US and the UK, trade becomes freer. Let us follow the Foreign Secretary’s caution against a “collective whinge-o-rama”. Then the prize of greater prosperity could be considerable – not just for Americans but for the rest of us too.

58 comments for: Trump’s tax cut plans are good news for the whole world

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