Donald Trump appears to be proposing new tax regimes in the USA that are specifically intended to be punitive. As the FT put it yesterday:
In his first White House meeting with industrial leaders since his inauguration on Friday, Mr Trump stressed that he would look harshly on companies that moved production away from the US, but that his administration would ensure that firms that wanted to open facilities in the US would face fewer regulations.
Mr Trump told the business leaders, who included Elon Musk, chief executive of Tesla, and Marilyn Hewson, chief executive of Lockheed Martin, that he would impose a “substantial border tax” on goods that were made overseas by US companies, but would offer “advantages” to those who produced products domestically.
The implication (and we can only draw inference as yet) is that those who move functions out of the USA in the future will be penalised and those who bring them back will be rewarded.
My guess is that Donald Trump's experience of the tax system (as far as we know he hasn't paid much tax for many years) leaves him remarkably ill equipped to understand that tax systems don't work on the basis of cutting individual deals with separate taxpayers. Maybe that is his understanding, but I suspect even that is not his true experience. The reality is that tax systems work systemically (the clue is in the name) and as such any rule has to be applicable to all who find themselves in similar economic circumstances.
So, all importers have to be presented with similar tax incentives, irrespective of when they started importing, and exporters likewise. Cutting deals from a date just won't work.
But let's be clear that if Trump realises this and imposes his chosen tax system, which potentially imposes enormous and even crippling costs on US importers and delivers substantial subsidies to US exporters, then he does three things.
First he will create unprecedented effective tariff rates, even if they are imposed via a corporate taxation system.
Second, he will reinforce the incentives for companies like Google to use tax havens and so avoid tax in countries like the UK. If they can succeed in doing so then Trump is seemingly guaranteeing them the chance to pay no tax anywhere. The incentive to abuse will grow and not reduce as the world tax community has previously said it wants.
Third, if the price of imports into the US increase by maybe 20% massive import substitution will happen if many US retailers are to survive. This means trade war is inevitable and whilst the process of adjustment is going on economic chaos could break out in and outside the US as patterns of supply (and so of demand for labour) are seriously disrupted.
However you look at this, the implications are deeply worrying for economic and taxation stability. I want corporate tax reform but it is very hard to think of a worse way of doing that than the way Trump has seemingly chosen.
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“trade war” – reading his inauguration speech (I could not bring myself to listen) – trade war was the conclusion I drew.
However, the jobs that Trump hopes to create will not happen. Taking one example, Musk’s factories are highly automated (an EV has 12 moving parts, a ICE 2000), furthermore, some forecasts suggest an end to ICE production globally in 9 years – for the simple reason that ICE-based vehicles will not be able to compete on the basis of cost-of-ownership or overall performance. Where does that leave GM? or Ford? – the latter is spending $4.5bn on EVs – is this the future? Trump may trigger a trade war, but, give it a year or so of no (or negative) job creation & things will look different. Drill for oil & gas – sure. What are you going to put it in? Becasue it will not be vehicles. Power generation? PV & wind is at price parity with gas-fired generation.
For those that are tempted to dismiss the above. Let’s try this. 1988, AT&T paid Mckinsey to give them a forecast wrt the number of cellphones in the US market in 2000. Mckinsey figure 900,000 – reality 106 million. Or this, it took less than 13 years in the USA for cars to supplant horses in cities.
Trump like the Brexiters, knows very little & is guided mostly by prejudice. The people most damaged by such an approach are ordinary people – not the Trumps or Farages of this world.
With luck I have bought my last conventionally engined cars
It’s an inspiring thought
“Trump like the Brexiters, knows very little & is guided mostly by prejudice”. Hmmmm, who does that description remind you of in the not so distant past? A certain leader of Germany who was determined to “make Germany great again”.
And his policies worked out so well didn’t they?
Apparently he is also getting more ex-Goldman Sachs people in to help out.
As the Americans would say: ‘There goes the neighbourhood’.
Horrifying.
If this goes ahead most of the USA’s double tax treaties will become so lop sided as to be ridiculous. No one country is big enough and ugly enough to oppose this on their own but if a large enough group of countries (e.g. the EU + its friends and neighbours) threatened to get together and simultaneously revoke their DTTs with the USA, they might pay attention.
I agree
By the way – the UK also needs 27 new DTTs with EU member states…..
Another little spanner in the works to deal with
I am sure you know that the UK has double tax treaties with most of the EU member states already (France 2008, Germany 2010, Italy 1988, Spain 2013, Ireland 1976, etc … hmm, is there any EU member state that does not have a bilateral double tax treaty with the UK?).
https://www.gov.uk/government/collections/tax-treaties
HMRC has a continual process of renegotiating some of the 120 or so treaties each year, so this is way down the list of problems.
Significant features of existing arrangements are not covered by the treaties but by directives
All of those aspects have to be built in
27 in two years? You’re wildly optmistic
Which significant aspects of the EU rules do you think would need to be replicated through new or amended bilateral double tax treaties?
To the extent that we want to keep them, I expect domestic measures equivalent to the provisions of existing EU law will continue to apply: for example, the parent-subsidiary directive, or the interest and royalties directive, or the cross-border mergers directive. They have already been implemented in domestic law, so it would take positive action to remove them. If any new measures are necessary, I expect we will negotiate something with the other member states as a whole.
No, they won’t even try to renegotiate 27 double tax treaties over 2 years. But there is no rush. The UK’s treaty with Ireland dates to 1976, and the Italian one to 1988. It may take a decade or more to get around to, say, Malta, or Croatia, or Latvia.
I suspect t you’ll find those arrangements only work because they are from the directive I.e. Remove the directive and they don’t
So I do think treasures will be needed
Welcome to the US Trump reality of which we will be governed by for the next 4 years: unless a miracle occurs. One most worrying statement Trump made during his campaign was he knew more than the generals and he loved war. His views on trade are no better.
In his inaugural speech, Trump’s delivery was very very dark and not hopeful: NOT a reflection of what the US public majority think. As a Democrat, I voted for Hillary and like many Americans, was in shock total when Trump won.
Trump is totally unqualified to govern as US president, as is his cabinet members. Americans will be governed by former CEO of ExxonMobil, a racist Attorney General, and lover of private education (charter schools), the heiress of Amway billionaire as Education Secretary?!?
Trump is draining Washington DC’s swamp of scum, only to replace it with ex-Goldman Sachs sharks.
Another commenter wrote, Trump’s rhetoric is not unlike a previous German dictator. It seems the US has elected an ignorant man believing in conspiracy theories. Please pray for us!