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It's those tax cuts again

John Redwood, Charles Stanley’s chief global strategist, on US tax reforms.

John Redwood

in Features


There was a sigh of relief in the White House when the Republican candidate saw off an expensive challenge in a House special election (by election) from the Democrats. They turned a normal House race into a self-styled referendum on the Trump Presidency. The seat has a prosperous middle class electorate of the kind that the Democrats hoped might dislike their President. The Democrats lost, though they did get a favourable swing to their candidate. Republicans also held their seat in South Carolina in another special election, again by a narrow margin.

Meanwhile the Republican Leader of the House, Speaker Ryan, was sharing his thoughts on tax reform with a wider audience. The Speaker wanted to reassure that the Republicans would agree a tax plan to cut both Corporation Tax and personal Income Tax. He aims to place a bill before Congress this autumn and get it through by the end of the year. The President and Mr Ryan have always agreed about the general principle of tax cuts for individuals and companies. They have agreed much of the detail over the personal tax cuts, reducing the top rate to 35% and changing from seven rates to just three. They have disagreed about Corporation Tax, with the President favouring a cut from 35% to 15% and the Speaker thinking 20% is as low as they can go given the need to raise enough revenue.

Mr Ryan stated that he would be delighted to go to just 15% if they could get the numbers to add up. There must be negotiations and research underway to see what is a credible and acceptable revenue line for the US budget with the tax cuts they want. There is also the issue to resolve of whether they want to go for differential tax for exports and imports. Under one of the models being considered, a 20% tax would be levied on all imports whilst exports would be tax free. Some think this would be against world trading rules as it treats home and foreign output differently, whilst Mr Ryan thinks it is similar to VAT levied by the EU.

The Republicans will see from the recent election results that they have work to do to reassure their voters and to win new friends. It is likely to intensify the wish to put through favourable tax reforms in good time before the midterm Congressional elections. The surprise this time might be the President and the Congressional leaders have a common interest and find a way to get something through. Their sense of their own political vulnerability could help bring that about. The battle with the Democrats will be intense over tax. They will see the Trump/Ryan proposals as tax cuts for the rich, as of course the rich pay most Income tax. They will be sceptical of Administration claims that lower rates will raise more money, and will be urging a Budget assessment which is cautious on the revenues that will follow. This will reinforce the Republican wish to do something before the end of the year.

If they had lost in Atlanta it might have caused more dissent, with Congressional Republicans moving more rapidly to distance themselves from their President.

Markets doubt the President’s capacity to push through tax reform. This might be a boost to the share market if Mr Ryan is right in thinking he can now achieve something. Somehow the Republicans have to take action to boost the growth rate. They raised expectations by President Trump’s statements in the campaign that the US economy could shift from around 2% growth to 4%. That would require a lot of tax cuts, and a great deal to go right.

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