Showing posts with label Trump tax cuts. Show all posts
Showing posts with label Trump tax cuts. Show all posts

Wednesday, May 9, 2018

8/5/18: Law of Unintended Consequences and Complexity: Tax Cuts and Jobs Act 2017


The law of unintended consequences (or second order effects, as we call in economics) is ironclad: any policy reform has two sides to the coin, the side of forecasted and analyzed changes the reform engenders, and the side of consequences that appear after the reform has been enacted. The derivative proposition to this theorem is that the first side of the coin is what gets promoted by politicos in selling the reform, while the other side of the coin gets ignored until its consequences smack you in the face.

Behold the U.S. Tax Cuts and Jobs Act 2017, aka Trump's Tax Cuts, aka GOP's Gift for the Rich, aka... whatever you want to call it. Fitch Ratings recently released their analysis of the Act's unintended consequences, the impact the new law is likely to have on U.S. States' fiscal positions. And it is a tough read (see full note here: https://www.fitchratings.com/site/re/10025493).

"Recently enacted federal tax changes (H.R.1) are making budgeting and revenue forecasting more complex for many U.S. state governments," says Fitch. "...provisions including the cap on SALT deductions are a likely trigger behind a spike in state revenue collections for the current fiscal year. In Massachusetts for example, individual income tax collections through January 2018 were up nearly 12% from the prior year, this after the commonwealth recorded just 3% annual growth in January 2017. Many states are seeing robust year-over-year gains in revenue collections, though this will likely amount to little more than a one-time boost with income tax collections set to level off for the rest of the fiscal year."

State tax revenues can increase this year because, for example, of reduced Federal tax liabilities faced by households. As income tax at federal level falls, State tax deductions taken by households on their personal income for Federal tax liabilities will also fall, resulting in an increase in tax revenues to the States. Similarly, as Federal corporate income tax falls, and, assuming, corporate income rises, States will be able to collect increased revenues from the corporate activity domiciled in their jurisdictions. All of this implies higher tax revenues for the States. Offsetting these higher tax revenues, the Federal Government transfers to the individual states will likely decline as deficits balloon and as Pentagon demands an ever-greater share of Federal Budget.

In other words, the tax cuts are working, but do not expect these to continue working into the future. Or put differently, don't spend one-off revenue increases, folks. For high-spending States, like California, it is tempting to throw new money onto old bonfires, increasing allocations to public pensions and state hiring programs. But 2017 Tax Reform is a combination of permanent and temporary measures, with the latter more dominant than the former. Expiration of these measures, as well as complex interaction between various tax measures, suggest that the longer term effect of the Act on States' finances is not predictable and cannot be expected to remain in place indefinitely.

As Fitch noted: "Assessing the long-term implications of H.R. 1 will not be an easy task due to the complicated interrelationships of the law changes and because many of the provisions are scheduled to expire within the next decade. Yet-to-be finalized federal regulations around the tax bill and the possibility of additional federal legislation add more complexity and risk for states."

Thursday, January 18, 2018

17/1/18: Apple's Plans for Foreign Cash and the Need for Larger Reforms


There is a lot that can be criticized in the GOP/Trump tax reforms passed late last year, but some things do make sense. Back in November 2016, in my column for the Cayman Financial Review (see here: http://trueeconomics.blogspot.com/2016/11/31116-cfr-tax-cure-for-american.html), I argued that a comprehensive tax reform of the U.S. corporate tax system, alongside a generous repatriation scheme for off-shored profits of the U.S. MNCs can provide a significant boost to the U.S. economy.

Today, we got some news confirming my assertion. Apple is planning to bring some USD350 billion back to the U.S. with a large scale investment portfolio aligned to this repatriation: https://www.cnbc.com/2018/01/17/apple-announces-350-billion-investment-20k-jobs-over-5-years.html.

However, to really lock in the new investment, President Trump and the Congress need to significantly revamp the existent system of work permits, work and business visas, starting with the current H1B system. Returning financial capital back to the U.S. is but the first step on the road to increasing the U.S. economic potential.

The second step must be opening up U.S. labor and entrepreneurship markets to inflow of talent from abroad (these markets are currently extremely closed). This will require not only revising numerical quotas, but also the following:

  1. Shifting admissions away from contingent workforce employers (contractors) and in favor of direct employment and sustainable, skills-based self-employment;
  2. Increasing ability (and incentives) for integration into the American society for newcomers (including, but not limited to, improving bureaucratic barriers to access to permanent residency and naturalization, improving the culture and the climate of government bureaucracies vis-a-vis higher skilled newcomers, etc);
  3. Creating new, more open, programs for entry into the U.S. for highly skilled and entrepreneurial migrants; and
  4. Encouraging greater mobility across employers for foreign highly skilled workers.
The third step must involve regulatory reforms that remove markets, financial & contractual supports for incumbent monopolistic firms (the rent-seekers, like big telecoms, large banks, automakers, etc). Opening the sectors to genuine competition will be the only chance the U.S. has to compete with the likes of China, and increase its own potential GDP).

Finally, the fourth step (partially already targeted by the recent tax reforms) must involve reducing the burden of direct and indirect taxes on the American wage earners, especially those with higher skills levels. The key here is to focus on both, direct and indirect taxation, and the latter, in my opinion, includes the cost of healthcare and pensions. 

Apple's announcement is the good news. And President Trump does deserve credit on this.  But tax holiday alone won't fix the problem of economic sclerosis that has plagued the U.S. economy for a good part of two decades now.