Trump’s Tax Wisdom The economics profession starts to give him his due. James Freeman
https://www.wsj.com/articles/trumps-tax-wisdom-1533850010
Imagine how high the U.S. economy can soar if President Trump resolves the arguments he started with America’s trading partners. Already the conventional wisdom on the tax law he signed in December is moving in his direction. Whereas prior to the law critics suggested it would provide a modest temporary boost, there’s now an emerging consensus that the law may pull so much investment into the United States that it could impoverish governments across the globe.
Nothing says establishment consensus like the International Monetary Fund. The Journal reports on the findings of a new IMF working paper forecasting the results of the suddenly more competitive United States:
Companies will be more likely to put profits and real investment in the U.S. than they were before the U.S. lowered its corporate tax rate from 35% to 21%, according to the paper. That will leave fewer corporate profits for other countries to tax.
This obviously suggests that foreign governments will be collecting less revenue from U.S. firms. Is Mr. Trump really going to drain swamps all around the planet? While that may be rather an appealing thought, the good news is that even voracious governments will be more likely to see the benefits of maintaining a competitive tax system. This will allow them to keep businesses in their jurisdictions, still generating government revenue.
The Journal notes that “other countries are likely to chase the U.S. by lowering their corporate tax rates, too, creating the potential for what critics have called a race to the bottom.”
For a long time the U.S. refused to join this race. The IMF paper notes that prior to the new law, the U.S. corporate income tax rate was the highest in the OECD “with no significant change over 30 years.” The IMF economists add: “Compounded by investor-level taxation of dividends and capital gains, high tax rates discouraged equity investment in the corporate sector while creating a marginal subsidy for debt finance.”
Now we’re competing in a race that can have many winners. Just ask Ireland and the countries of Scandinavia, which enjoy low tax rates on corporate income. And there can be many more winners as pro-growth policies catch on. The Journal notes, “When one country cuts tax rates, usually other countries follow,” said Alexander Klemm, deputy division chief of the IMF’s tax policy division and one of the paper’s authors.”
America is no longer a follower. Separately the Journal reports that economists are now raising their expectations for the U.S.:
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The average estimate for growth in 2018 reached 3%, up from 2.9% last month and up from 2.4% a year ago, according to The Wall Street Journal’s monthly survey of private economists.
Kyle Pomerleau of the Tax Foundation writes that over the long haul, the Trump tax cuts “will boost the long-run size of the economy by 1.7 percent after it is all said and done. Wages will be 1.5 percent higher and there will be 339,000 more full-time equivalent jobs.”
Tax reform could allow the whole world to get sick of winning—as long as it isn’t made sick by trade barriers.
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