TERRY McCRANN Fol­low Trump on tax, or else

Sunday Herald Sun - - FINANCE -

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.

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