International Implications of the US Tax Code Reform

On December 22 Donald Trump signed into law the “Tax Cuts and Jobs Act,” the first significant reform of the U.S. tax code since 1986.  By greatly reducing taxes and thereby adding $1.5 trillion to the $20 trillion federal deficit over the next decade, the bill represents a significant milestone in the decades-long neoliberal restructuring of American society, and it will also have important international repercussions. 

The new legislation reduces corporate taxation from 35% to 21%, establishes a territorial tax system that will allow U.S. corporations to repatriate the after-tax profits of their foreign subsidiaries with little additional tax, and enables U.S. multinational corporations to repatriate existing profits held outside U.S. jurisdiction by paying greatly reduced taxes. These changes will deliver a massive and unprecedented windfall to corporate American and wealthy individuals. For example, just four Silicon Valley giants--Apple, Cisco, Microsoft and Oracle together hold nearly $500 billion overseas. Goldman Sachs predicts that its long-run per-share earnings will increase by an average of 13%.  Celebrating with his friends at Mar-a-Lago after signing the bill, Trump reportedly proclaimed that “You all just got a lot richer.” 

While reducing corporate taxes, the bill eliminates or limits many deductions for working and middle class taxpayers. Estate (inheritance) taxes have been greatly reduced.  Subsidies for religious and private schools will further undermine public education.  The bill repeals the individual mandate of the Affordable Care Act (“Obamacare”); which will cause an estimated 13 million people to lose health insurance by 2025 and may serve effectively to repeal Obamacare.  It also opens up Alaska’s Arctic National Wildlife Refuge to oil extraction.

The claim that tax cuts will pay for themselves by stimulating more growth and, hence, tax revenues has provided the main public justification for the bill, but few economists have endorsed this supply side argument.  Indeed, with corporate America already awash in capital, even advocates of the bill acknowledge that much of the repatriated profit will go to speculation and share buybacks.  However, by increasing the deficit and “starving the beast,” the legislation sets the stage for substantial cutbacks in the social safety net, including government provision of health care (Medicare and Medicaid), food stamps, and social security.  The White House is reportedly preparing an executive order mandating a comprehensive review of all social insurance programs in 2018.

While the international implications of the bill have thus far received relatively little attention, they are very important and indicative of an emerging U.S. grand strategy.   The U.S. trade deficit with China, Mexico, and Germany increased during 2017 despite the decline of the dollar.  Steel imports have continued to surge and plants have been shut down.  Negotiations over the NAFTA remain stalemated.  Yet, despite his protectionist campaign rhetoric, Trump did not carry out a frontal assault on the global trading order in 2017, in large part because America’s largest corporations, many of which dominate global production chains, are divided over trade policy.  By contrast, the transition to a territorial tax system received an overwhelming mandate from all sectors of American capital.  The new system has clear mercantilist implications.  It allows the United States unilaterally to increase the wealth and profitability of American corporations on a global scale at the expense of its competitors.  It leverages the nation’s vast market and financial power even as it provides greater incentives for these corporations to invest and produce outside the United States.

European trading partners with more highly regulated labor markets have traditionally used lower corporate taxes to compete against firms in the United States, where unions have been eviscerated and there is greater access to lower interest rates and venture capital.   The bill will almost certainly provoke a new round of global tax competition.  It is also likely to deepen divisions among EU member states and encourage them to intensify their own neoliberal restructuring.  It may also attract more FDI and portfolio capital into the United States, and serve as an indirect export subsidy.  The bill imposes a 20% “excise tax” on purchases made by an American company from its own subsidiary unless it is treated as income in the United States, a very significant factor given that half of transatlantic trade is intra-firm trade.  It also provides for tax rebates on U.S. exports.  German firms are especially vulnerable.

EU finance ministers have already protested the legislation, and challenges can be expected in the WTO.  Notably, the law is also potentially destabilizing for China as foreign companies resist more forcefully controls on capital outflows. Beijing has already responded to the legislation by temporarily abolishing taxation of foreign enterprises.  

The upward redistribution of wealth that will result from the bill comes in the context of the already staggering increase in income inequality and poverty in the United States over the last generation.  The average annual wage of the bottom 50% has stagnated since 1980.  By contrast, the income of the top 1% has increased by 205% and that of the top 0.001% by 636%.  In 2016 the CEO-worker compensation ratio was 271-1 as compared with 40-1 in 1975. The top income tax rate has sharply declined since the 1970s.   Trump’s tax bill thus serves to consolidate and deepen the neoliberal corporate counterrevolution that has been carried out under both Republican and Democratic administrations since the late 1970s, albeit at the present time with distinctive authoritarian dimensions: by the end of his first term Trump is expected to select more than 30% of the nation’s federal judges. 

Not surprisingly, polls show that fewer than one-third of Americans supported the legislation and most understand that it is highly skewed towards the wealthiest Americans.  Candidly voicing the hubris and elitism of many in the latter group, Senator Charles Grassley of Iowa has professed that “not having the estate tax recognizes the people that are investing as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies.” The legislation violates Trump’s core campaign promises, throwing a spotlight on the myth of economic populism. African-Americans will bear the brunt of the changes, but Trump’s white working class voters will also be hit hard. 

The longer-run impact of the tax bill on Trump’s presidency is uncertain. The Republicans’ newfound unity with respect to the tax bill reflects the contingent support given to Trump from the main power centers of American capitalism:  Wall Street, Silicon Valley, the military industrial complex, and the oil and gas sector along with the Murdoch media empire.   Moreover, the bill has been crafted so that in the short term many working and middle class taxpayers will experience modest benefits; its full regressive force will not be felt until after the 2018 congressional elections.  Trump expects that his white nationalist base will remain loyal to him and his party on the basis of racism, xenophobia, and frustration with a Democratic Party that has long since abandoned its working class base. 

What the Trump Tax Cuts Show About Power in the US Richard Lachmann
Tax increases have been targeted at heavily Democratic locales. The existing deduction from Federal income taxes of state and local income and property taxes has been largely eliminated. This will affect taxpayers in Democratic areas that tend to have higher incomes and higher local taxes than in Republican areas.

At the same time, however, Republican control of the Senate rests on a razor-thin margin. Corporate America has learned to live with Trump but it does not trust him or need him.  As federal investigators continue to close in on some of his closest associates, the potential loss of the Senate and perhaps even the House in 2018 presents a clear danger, raising the prospect of impeachment. A Democratic Administration with congressional majorities would be likely to modify the bill.  Nevertheless, given the present balance of power within the Democratic Party the scope for progressive changes appears limited, and the transition to territoriality is likely irreversible.

The Trump administration and the Republican Party are also betting that the tax bill will spur further growth, thereby making it palatable to working class Americans.  However, the 2017 stock market boom, in part a reflection of the anticipated tax reforms, belies relatively low productivity amid growing poverty, inequality and antiquated infrastructure, all of which limit the prospects for significant future growth.  Higher deficits in the context of interest rate increases suggest that an infrastructure program—the great bipartisan hope of 2018--will be based largely on privatization and dispossession of public assets rather than public investment. In sum, corporate America will benefit greatly from the tax bill even as the structural foundations of the American economy remain very weak.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.