TERRY McCRANN Follow Trump on tax, or else
Donald Trump’s tax plan poses a huge challenge to not just Australian politicians but also to investors.
The three big proposals are to cut the top personal rate to 35 per cent, to slash the company rate to just 20 per cent, and to provide a tax holiday so big US companies like Apple which have trillions of dollars offshore will take the money back to the US.
The big, big qualification, of course, is how much of it will actually make its way out of the White House and into law.
Despite having “control” of both houses of Congress, his promise to “repeal and replace” Obamacare went down in a screaming heap, twice; and just shy of one year into his presidency, he still hasn’t started “building the wall”.
The uncertainty, though, just makes it that much more complicated for investors — both on Wall St, although they don’t seem to realise it, yet; and down here, where we are on the receiving end of everything that comes rolling across the Pacific.
The one big thing that Trump “delivered” on his election last November was a huge boost in confidence, both to investors and across the US economy.
The Dow Jones index has soared nearly 25 per cent to a record level which is more than 50 per cent higher than the pre-GFC record high.
Our market has barely followed. It’s up about 7 per cent since the US election and is still around 15 per cent below its pre-GFC high. Imagine, sombrely, where we’d be but for that Trump boost.
So it’s been confidence — expectations — that has driven Wall St. It’s also driven the US economy. But in both cases it hasn’t just been “all been about the Donald” — the Fed’s record low interest rates and money printing have also poured buyers into the markets and boosted the economy.
Well, we know the Fed is now — slowly — “snatching away the punchbowl” (although it would probably stop if Wall St took fright). And the “Trump confidence factor” was beginning to run out of steam: Wall St had slipped from its record high.
You might say the tax package came along “just in time”. And that is what poses the problem for us.
This is not only whether Trump — and the Republican Congress — can now deliver (and when). But how does Wall St react.
If the Tax package ends up in the same political dumpster as the Obamacare repeal, Wall St could go straight over the cliff. You could get a Perfect Storm with the Fed tightening. And where Wall St goes, we follow, the next day.
In short, instead of putting a floor under global markets, the Trump tax package doubles down on the mix of uncertainties which add up to the changed investment environment that we face after nearly a decade of post-GFC stability (zero global rates plus easy money and booming — overseas — share markets).
It’s also critically not just the share market. One of the “new” dynamics of the last month or so was a weakening US dollar. That threatened to send the Aussie climbing uncomfortably (for our economy, our businesses and the Reserve Bank) into the 80s against the Greenback.
The Trump tax package has sent the US dollar back up (all that money which might flow back to the US).
As of Friday, the Aussie was back to a more comfortable US78c. But it is going to jump about as the chances of the tax cuts getting up waxes and wanes.
In sum and in short, rather than deliver greater certainty, the Trump tax proposals have significantly increased the uncertainty and likely volatility in global markets.
That’s the first and most immediate challenge for our politicians and especially the government — it has to steer the ship of state through all this.
The bigger, more fundamental challenge is if the tax cuts get up even in amended form.
Right now the US 35 per cent corporate rate is the only rate among the major countries (to say nothing of those to our north) higher than our 30 per cent.
If it goes down to 20 per cent or even 25 per cent, we will have indirectly hung a big sign on Australia: foreign investors go home.
Not especially sensible for a country that owes $1 trillionplus to foreigners and needs at least $50 billion a year of new investment, every year.
Yet we have a Labor opposition which has stopped the government cutting the general corporate rate to 25 per cent; and taking 10 years to do it. On the basis that it would only give money to big banks (false) and to foreigners (true).
Earth to Bill Shorten: that’s the entire point! You give money to foreigners so they give even more to us.
Heaven help us if he ever makes it into the Lodge.