Financial Observer: What will be the impact of the largest tax cut bill passed by the United States in 30 years?

Financial Observation: What will be the impact of the largest tax cut bill passed by the United States in 30 years? Xinhua News Agency, Washington, December 20th. Financial Observation: The United States passed the largest tax cut bill in 30 years...

新华社华盛顿12月20日电财经观察：美国通过30年来最大规模减税法案影响几何？

Xinhua News Agency reporter Jiang Yujuan, Gao Pan, Jin Minmin

The U.S. House of Representatives and the Senate passed the largest tax cut bill in the United States in 30 years on the 20th. Analysts believe that tax cuts have limited stimulating effect on U.S. economic growth, and some provisions involving multinational enterprises may violate bilateral tax agreements and international trade norms.

Corporate tax reform is the focus

Corporate income tax reform is the core of this tax reduction bill, and has received widespread support from the American business community. According to the tax reform bill, the U.S. federal corporate income tax rate will be reduced from the current 35% to 21%; a one-time tax will be imposed on the profits retained by U.S. companies overseas, of which the tax rate on cash profits is 15.5%; the principle of "territorial system" taxation will be implemented, that is, in the future, U.S. companies' overseas profits will only have to pay tax in the country where the profits are generated, without having to pay taxes to the U.S. government. In order to encourage long-term investment by enterprises, the content of the corporate income tax reform is permanent.

U.S. Chamber of Commerce President Thomas Donoghue issued a statement on the same day, saying that the U.S. business community has been calling for lowering the corporate tax rate and implementing comprehensive direct capital investment deductions and territorial taxation principles. These measures will make U.S. companies more competitive.

In terms of personal income tax, the current federal personal income tax rate in the seventh bracket remains unchanged, but most tax rates have dropped, with the highest tax rate falling from the current 39.6% to 37%. In addition, the standard deduction for personal income taxes would be doubled, but deductions for taxes such as local and state taxes would be capped. The personal income tax changes are only valid until the end of 2025.

Preliminary forecasts from the U.S. House-Senate Joint Committee on Taxation show that in 2019, the middle class with annual household income between $20,000 and $100,000, or half of U.S. taxpayers, will enjoy a tax cut of $61 billion. However, after the tax incentives expire, the tax payments of these families will increase.

Research from the Tax Policy Center, a Washington think tank, shows that most of the benefits of this tax cut will be obtained by high-income families, which is likely to further exacerbate the divide between rich and poor in the United States.

The economic stimulus effect may be limited

At present, the mainstream economic circles generally believe that the impact of tax cuts on economic growth is relatively mild. The Joint Committee on Taxation of the House of Representatives and the Senate predicts that over the next ten years, the tax cut bill will increase economic growth by less than 0.08 percentage points per year on average. Forecasts from the Wharton School of the University of Pennsylvania show that tax cuts will increase economic growth by 0.06 to 0.12 percentage points over the next decade.

Federal Reserve Chairman Yellen also recently stated that Fed officials are consistent with most economists’ analysis of tax cuts and believe that tax cuts may slightly increase U.S. economic growth in the next few years. The economic forecast recently released by the Federal Reserve shows that the U.S. economic growth rate is expected to be 2.5% this year and next, which is higher than the 2.4% and 2.1% forecast in September respectively. But by 2019 and 2020, the U.S. economic growth will fall back to 2.1% and 2% respectively.

Analysts pointed out that the tax cut bill will not only fail to achieve a strong stimulus to the U.S. economy, but may further worsen the federal government's debt level. Preliminary projections from the House and Senate Joint Committee on Taxation show that the bill will increase the U.S. federal government's fiscal deficit by $1.46 trillion over the next decade. According to estimates from the U.S. bipartisan research institute and the responsible Federal Budget Committee, the U.S. federal government debt will account for 98% of gross domestic product by 2027, up from 77% in 2017.

Former U.S. Treasury Secretary Lawrence Summers pointed out that the tax cut bill will further push up the U.S. fiscal deficit, and the government’s investment in infrastructure, human resources, and technology will be limited, which will not help increase the potential economic growth of the United States.

Global competition for tax base may begin

Regarding the tax reform of multinational enterprises, in addition to promoting the "territorial system" taxation principle and a one-time tax on overseas profits of US enterprises, this bill also introduces tax base erosion and anti-abuse taxes. That is, if transactions between multinational enterprises and overseas branches or headquarters reduce the tax liability of these enterprises in the United States, the US government will tax such transactions. This new tax will restrict multinational companies from avoiding taxes through such internal transactions, and will also prevent them from transferring industries or intangible assets such as intellectual property and patents to other countries.

This provision has already drawn opposition from U.S. trading partners. A few days ago, the finance ministers of five European countries, including France, Germany, Italy, Spain and the United Kingdom, jointly sent a letter to U.S. Treasury Secretary Mnuchin, saying that part of the U.S. tax cut bill may violate current bilateral tax agreements and world trade rules.

Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics, a Washington think tank, said that base erosion taxes will disrupt the current global industrial chain and may trigger protests and retaliation from U.S. trade and investment partners, and may even trigger litigation at the WTO.

In the context of globalization, international tax coordination has become increasingly severe. Summers said the United States should not join in global competitive tax cuts, but should become a key force in global tax coordination.