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16/10/2018

The truth about the Tax Reform approved by the US Congress

By mid January, the astounding news about the early effects of the US tax reform count more than 125 corporations announcing plans for substantial bonuses and salary increases to their employees in response to the corporate tax rate cut from 35% to 21%.  

In fact, Walmart boosted the minimum wage to $11/hr, and handed out bonuses up to $1,000 for hourly workers. AT&T, Comcast, Wells Fargo are promising substantial bonuses and pay hikes soon. Just these four companies employ a total of more that 500,000 workers, but other large corporations are adding to the good news for their workers, such as Alaska Airlines, American Airlines, Bank of America, BB&T, Disney, FedEx, Fifth Third Bank, Home Depot, Jet Blue, Nationwide, PNC Financial, Sinclair Broadcast, Southwest Airlines, Starbucks, Travelers, U.S. Bancorp, and many other smaller ones.

In addition, some multinational corporations are taking the first steps to relocate their headquarters back in the United States.  

Given that these tax cuts will be taken into effect in the 2019 tax declaration, such a positive reaction was not expected so soon. This is a clear sign of economic optimism, fueled by such a low unemployment rate that it can be considered indeed as "full employment", a situation that requires more competitive salaries to be able to employ qualified employees from a shrinking labor market.

This tax reform bill already approved in the US Congress, is a major update of the corporate tax code, not only by lowering the highest corporate rate of the industrial world from 35% to a more competitive 21%, but following the norm in most other countries by adopting the “territorial” system of taxing foreign subsidiary profits, thus ending the tax penalty on repatriation of foreign profits. It also benefits lower income taxpayers doubling the child tax credit to $2,000 per child, and doubling as well the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018.

Other important measures are: Retains the charitable contribution deduction, and limits the mortgage interest deduction to the first $750,000 in principal value.– Limits the state and local tax deduction to a combined $10,000 for income, sales, and property taxes. Taxes paid or accrued in carrying on a trade or business are not limited.– Limits or eliminates a number of other deductions.– Effectively repeals the individual mandate penalty, by lowering the penalty amount to $0, effective January 1, 2019. Raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phaseout threshold to $1 million.

According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly lower marginal tax rates and the cost of capital, which would lead to a 1.7% increase in GDP, 1.5% higher wages (already happening), and an additional 339,000 full-time equivalent jobs.

The Tax Cuts and Jobs Act is a pro-growth tax plan, which would spur an additional US$1 trillion in federal revenues from economic growth, with approximately US$600 billion coming from the bill’s permanent provisions and approximately US$400 billion from the bill’s temporary provisions over the budget window. These new revenues would reduce the cost of the plan substantially. Depending on the baseline used to score the plan, current policy or current law, the new revenues could bring the plan closer to revenue neutral.

Even the liberal Harvard Business Report is quite optimistic:

"... the reduction in tax liabilities is only part of the benefit that most households will enjoy. The lower corporate tax will induce American corporations to invest in the United States instead of shifting capital abroad and will induce foreign companies to invest in the United States. The new rule on the taxation of the profits of foreign subsidiaries of U.S. firms will induce companies to bring back those profits as well as some of the $2.6 trillion in profits that are now trapped abroad. The increased corporate capital will raise productivity and real wages. If the combined sources of increased capital raise GDP at the end of ten years by $500 billion – equivalent to an extra annual growth of less than 0.2% — the average increase in annual income per household would be $3,500. So even a very moderate rise in the growth of GDP would raise average incomes substantially."

It seems that US economy faces a rosy future up to and including the next decade.