UK has much to learn from Trump’s tax gamble
Critics say he is simply enriching the rich, but his real aim is to reboot and revitalise the US economy
For those interested in political ideas, the gulf that today separates American from British “conservatism” has rarely looked greater. Back in the glory days of the Eighties, president Ronald Reagan and Prime Minister Margaret Thatcher found themselves in virtual lockstep on matters economic. They were natural bedfellows in their tax-cutting, de-regulatory zeal.
Yet as we approach the first anniversary of Donald Trump’s presidency, America is almost alone in the economic radicalism of its “supply side” policy agenda; the constraints of minority government in combination with the all-consuming process of Brexit have left British Conservatives trapped in the consensually driven welfarism of the centre ground.
What Trump is doing is certainly a giant gamble, both politically and economically. According to opinion polls, his tax-cutting plan, recently passed into law, is the most unpopular piece of tax legislation of the modern age. The programme has also drawn almost universal condemnation from the economics establishment, where it has been depicted as tax cuts for the rich that, as the deficit balloons, will end up being paid for by the less well off through legally imposed reductions in social spending.
The wisdom of greatly expanding the deficit at this relatively late stage in the business cycle has also been called into question. From a macro-economic perspective, the US does not obviously need another splurge of fiscal expansionism, even if focused on tax cuts rather than spending increases.
The business world absolutely loves it, however. The stock market is close to an all-time record, confidence has rarely been higher and the US economy is thriving. This broad welcome from the business community is instructive, for the Trump plan actually has a very worthy purpose that is far from the cynically minded reward for Republican donors that political opponents depict it as. Rather, the idea is to remove the 10-year logjam in business investment that has ruled since the financial crisis, thus revitalising risk-taking in the economy and restoring American growth to past, much more vibrant levels.
There is a legitimate argument to be had over whether it can succeed, and indeed whether it is correctly targeted. In Trump’s playbook, the tax cuts will more than pay for themselves through enhanced investment and growth. Scarcely anyone outside the Republican Party agrees, and even many Republicans think it fiscally reckless.
Analysis by the Congressional joint committee on taxation finds that the plan will boost growth by 0.7 per cent on average over the next 10 years. And that it will add approximately $1 trillion to the national debt even after these macro-economic feedback effects. The independent Tax Policy Centre is more disdainful still, insisting that the boost to growth will be just half that level, in part because the tax cuts are most beneficial to the already wealthy, or those least likely to spend their gains.
Perhaps, but these criticisms also largely miss the point. Since the rich pay most tax anyway, it is actually quite hard to design a tax-cutting plan that doesn’t enrich them most. They are merely being allowed to keep more of their own money. And if the purpose of the tax plan is not to boost consumption, but investment and jobs, then slashing the rate of tax on corporate profits is surely a reasonable way of going about it.
It’s perfectly true that many corporations already have very large cash balances, and still show no particular inclination to invest. Just five companies – Apple, Microsoft, Alphabet, Cisco Systems and Oracle – hold more than half a trillion dollars in cash between them, according to the credit rating agency Moody’s. The collective cash pile of corporate America at the end of last year totalled an astonishing $1.84 trillion. Will these companies be any more likely to invest once allowed to keep even more of their profits?
The answer, actually, is yes. Much of this cash is money deliberately kept offshore to avoid penal rates of US corporation tax. Once these rates are lowered, there is a good chance it will be repatriated and put to more productive use.
In any case, when it comes to creating the right environment for business confidence and risk-taking, Mr Trump is succeeding. When elected, he was widely condemned not just as a demagogue, but as a likely wrecking ball who would smash up the world economy. In this latter regard, he’s so far proved the reverse. Mr Trump will no doubt end up leaving his successors with terrible public debt as Reagan did before him. Indeed, unlike Britain, where the Conservatives are invariably left to clean up after big-spending Labour’s mess, in America it’s the Democrats who clean up after the fiscal profligacy of tax-cutting Republicans. Until then, however, the overall Trump effect is to reboot and revitalise a previously becalmed economy. As it struggles with shamefully low levels of productivity growth, Britain should take note.