Trump and His Tax Ambitions
04-Oct-2017, 12:03 / Brokerage About eleven months ago Donald Trump won in the presidential elections. In spite of Trump’s apparent divisiveness and populism, financial markets reacted positively to the victor. This was caused by the expectation of incentives for economic growth in the form of tax cuts, investments in infrastructure and easing of regulation.
Consecutive failures of Trump to fulfil his promises and the failure to achieve healthcare reform dented the trust of investors in the promised fiscal incentives. However, the agitating activities of Trump and assurances of the Secretary of the Treasury in recent months have brought back the excitement of investors.
On 27 September, Trump and his administration disclosed a plan on wide-scale change of the US tax system. Regardless of the fact that the plan forms a basis for shaping a bill in the Senate, it lacks a lot of detail.
The tax plan anticipates simplification of the tax system, reduction of the tax burden on small enterprises, reduction of the corporate rate from 35% to 20%, a switch in perspective with regard to interest payments and other changes.
One of the most ambiguous changes is the cancellation of inheritance tax for expensive real estate. Trump and the Republicans in the Congress assert that the chief beneficiaries will be owners of small enterprises and farmers. However, an analysis of the Tax Policy Centre in 2013 shows that the share of small business and farmers is only 3% of the paid real estate tax, and the main payers are rich residents of the USA.
The switch in perspective regarding interest payments may be a momentous change. Currently, debt servicing (payment of interest) is performed before taxes. The new plan anticipates that some corporations will start paying interest on debt after taxes. This change will become negative for companies with a high tax burden, will introduce changes to business models of private investment companies and will change the approach of corporations to the selection of capital structure.
According to preliminary estimations of an independent organisation – Committee for a Responsible Federal Budget, the tax reform will increase the budget deficit by USD 2.2 trillion. Still, the organisation notes that the estimations are very approximate, due to a lot of assumptions caused by the absence of detail in the plan.
As a whole, the proposed tax reform needs to positively affect most sectors of the US economy due to the increased budget deficit. It has to be noted that a reduction of taxes at a time of economic growth is a pro-cyclical policy and reduces the opportunities of the government during a recession. Taxes have a distributional function and, as such, do not stimulate long-term development; therefore, investors should treat the excitement with due care.
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