Thursday, 27 April 2017

Donald Trump’s Plans to Cut Corporate Tax Rates by 20%: The First Domino To Fall in the Story of a Race to the Bottom?

Today’s post reacts to the news that President Trump is seeking to ‘cut corporate tax to 15%’ from the current rate of 35%. The proposal, which was announced this week, represents what White House officials are labelling as the ‘largest tax reform in US history’ and which has its basis in the (supposed) aim of repatriating taxes on money that major US companies like Apple, Google, and Microsoft generate abroad. For this post the focus will be on the larger picture; specifically, the focus will be on the connection between this story and the fears that Brexit will promote the idea that Britain will set itself up as a tax-haven if it is shut out of the single market. The two developments, potentially, point to a much larger issue that has been mentioned time and time again here in Financial Regulation Matters – the escalation in divisiveness within modern politics is playing right into the hands of big business.

The plans to cut the US Corporate Tax rate by a massive 20% have not yet come to fruition. Speaking yesterday, new US Treasury Secretary Steven Mnuchin, who has been the focus of Financial Regulation Matters previously, stated that the Administration is moving ‘as quickly as we can’ to pass the reforms, which Chief Economic Advisor Gary Cohn suggested was a ‘once-in-a-generation opportunity to do something big’. The plan, which would be the first major corporate tax reform in the US since 1986, aims to redirect the taxes that major US companies are paying to tax-havens all around the world – a recent study by Oxfam suggested that the 50 biggest US companies ‘stashed another $200 billion of profits in offshore tax havens in 2015 alone, taking the total to approximately $1.6 trillion’. The plans will slash taxes for companies large and small – including, as many media outlets have noted, Trump’s own businesses – but will see the largest firms experience a $328 billion tax break. Critics have responded in the expected manner by pointing out that the proposed cuts are ‘basically a huge tax cut for the rich’, whereas other critics have chosen to focus on the practicality of the cuts by asking how the national debt will be lowered by reducing tax revenue; Governmental aides have suggested that this issue would be ‘offset by the new revenue created by the rapid growth [the tax cuts] would trigger’. This is obviously an important issue as the US Government is flirting with yet another ‘government shutdown’ because of the ever-increasing national debt – it has been suggested the tax cuts could add up to $2.4 trillion to the national debt, which at the time of writing stands at just under $20 trillion. Leaving aside the issues surrounding Trump and his own personal tax returns, which seem to be a consistent form of scandal, and also the fact that the proposed reforms have a very long way to go – Democratic Senator Joe Crowley insists that the White House needs to ‘get their act together’ – the in-your-face aspects of this story mask a much deeper issue.

There is a fear, which was represented in the recent Oxfam report, that the cuts to US Corporate tax rates will trigger a ‘race to the bottom that will harm consumers in America as well as the world’s poor’. However, if we proceed on this globalised viewpoint, there is the potential situation that post-2016 politics – Trump’s election win; Brexit; the upcoming U.K. General Election; and the French Presidential Election (not to mention Germany’s at the end of the year) – and the sheer divisiveness that is resulting from it is playing right into the hands of corporate elites. In January of this year, the Chancellor of the Exchequer Philip Hammond, who was the subject of a recent post in Financial Regulation Matters, brazenly threatened that the U.K. is willing to ‘whatever we have to’ to bounce back after Brexit, including, amongst a number of other things, engaging in a tax-rate race to the bottom to make the U.K. into a tax haven to ‘regain competitiveness’ in the event of a so-called ‘hard-Brexit’. There are a number of issues with this threatening posture. The first is the realisation that the U.K. already has one of the lowest corporate tax rates in the G20, and plans to reduce the rate to 17% from 20% in 2020 would see the U.K. boast the lowest rate of any member, which has led some to fear for the consequential effects upon environmental and safety standards, as well as upon social cohesion. Others have argued that the move towards becoming a tax haven should be viewed against the common features of tax havens, which they argue include anti-democratic sentiments, high house prices, disproportionate employment economies, and a high cost for everything for those who actually reside in tax havens. Whether or not the British Government carry out this threat is another matter entirely, but the sentiment that the threat contains is telling – we are entering into a phase where the aim of the game is to court the business of corporate elites.

The loss in revenue to places like Ireland and Luxembourg if Trump’s proposals come to fruition will see those countries aggressively attempt to undercut the US. The U.K., if it decides to proceed down the path of reducing corporate tax to the lowest of any G20 country, will then be forced to follow suit, and so on and so on. Whilst there is a lot up in the air in this area at the moment, one thing is certain – playing this game of bending over backwards to corporate elites that only have their interests at heart will result in catastrophe. Whilst business cannot be regulated in every single thing that they do within this current society, it is remarkable that, just a decade on from one of the largest financial crashes in history, amnesia has recommenced and the corporate elites who threatened the very fabric of society are now being courted to save it. Yet, it is not remarkable. It is, if we take a step back for a moment, actually very ordinary. The cyclical elements to these stories are clear, yet the smallest details are being hashed out by officials and the media – the larger picture shows, unfortunately, that the bubble that these deregulatory and tax-reducing moves will create will pop with an almighty bang; the question is, and it is a question that should concern us all, ‘will the reverberations of that explosion be too close to the last one?’

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