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.