this post authored by Mark
"In December 2017, U.S. President Donald Trump signed into
law his country's first major tax
reform since the Reagan era. It will have important
ramifications itself, and it will inform the wider trends that occur over
decades. It will
1, lead to a repatriation of
sizable amounts of cash by U.S. corporations,
2. provide a stimulus for the domestic economy
3. increase the country's debt.
1. Melting the
Under the previous system, U.S. corporations had incentives
to hold their spare cash offshore in tax havens. Technology firms
found they could choose where they booked their profits because the
product was not physical, making its location harder to pinpoint. opted
for tax-efficient locations. Biggest gainers Netherlands, Bermuda,
Singapore and Switzerland and The main beneficiaries of this trend have
been companies that rely heavily on intellectual property, such as
technology firms like Apple, with an offshore stash of an estimated $216
billion, and Microsoft at $109 billion.
A new tax law implemented after the December 2017 was
designed to close these loopholes. Lawmakers sweeten the change by
allowing a reduced tax repatriated earnings of between 8 and 15.5 percent.
Apple will need to pay a one-off $38 billion bill. Change will be
relatvely painless- except for, naturally, the countries that have been
playing host to these vast sums of money.
2. Positive domestic economic
from lower corporate tax rate from 35 to 21 percent.
A. United States competitive
increases as more foreign companies with small markets
move production to US.
B. Profit windfall from lower taxes can
use extra funds to buy back their own shares,
driving up stock prices, increase
production efficiency, invest in new in new technologies,
and increase in research and
development investments. Apple recently pledged an extra
$30 billion in its U.S. operations.
Decreased tax revenue
means more borrowing.
A. Increased spending
on entitlements and defense also increases debt.
Debt-to-GDP ratio, currently
around 77 percent, is predicted by Goldman Sachs
to be 85 percent by 2021,While
high by historical U.S. standards, it is modest
compared to some other advanced
B. Dollar privilege
softens debt cost as it creates lower interest rates.
Debt's danger is always doubt debtors' ability to pay
higher interest rates to cover
Is this effect is already evident
as interest rates on U.S. bonds
have jumped from 2 percent in 9/17 to
nearly 3 percent in February)
Is this a new debt outlook implied by the
tax reform and increased
Economic growth a trickle down
will determine the answer.