THERE is a constant whining from many on the left about how little legislation Trump and the GOP have managed to pass through Congress. This obsession with legislation ignores the fact that so many of Trump’s promises to his electorate do not require legislative changes.
One exception to this is the tax bill that is due to pass and be signed off by the President before Christmas. This bill generally delivers many of the key changes that Trump promised, while at the same time being in-effect a repeal of ObamaCare, by abolishing the mandate which penalises anyone who decides to drop out of the system.
The tax bill will achieve some key Trump objectives: It lowers tax rates for many working people, with reductions in rates and improved thresholds. It simplifies the system, so that many will be able to submit their tax returns on a single sheet of paper. It makes the corporate tax rate more competitive by reducing it from 35% down to 21% (the lowest since 1939).
These will all have an impact, but many commentators have missed two of the most important changes. Firstly companies will be able to bring their foreign cash piles back to the US and pay a tax rate of just 15.5% on these transfers. As well as being a boost to the economy, it could also bring in a few hundred billion dollars of tax revenues – the cash pile is estimated to be between $2.6-$4 trillion.
The other big change is the fact that up until 2023 businesses will be able to invest in new equipment and deduct that as a cost in one year, instead of depreciating it over several years. This will be a massive incentive for investments into factories, manufacturing and other facilities that will boost the economy and create jobs.
But it’s the impact of these tax changes in conjunction with some other moves that Trump may make that could send the economy into a boom.
Generally, Trump seems to try and keep his promises. Quite often when he is prevented from doing so, it’s because the GOP fails in Congress, such as with the Obamacare Repeal & Replace earlier this year, or because the courts do their best to thwart Trumps executive orders.
Many of his promises were regarding international trade, and that is one area where he has a great amount of power to do as he wishes without Congress or the Courts getting in the way.
Throughout the campaign, Trump promised again and again that he would renegotiate NAFTA, as it has caused way too many manufacturing jobs to move abroad – mainly Mexico. This re-negotiation has been going on behind the scenes, but rumours persist that they have not made much headway.
If these NAFTA talks fail it is very likely that Trump will pull the US out of NAFTA and then place tariffs on imports from Mexico and Canada. These tariffs could target specific industries (eg. manufacturing) or be a general tariff that is placed on all imports. He may also use a high tariff on Mexico as a technique to pressure them to pay for his wall – maybe in return for the tariff then being reduced a little.
The other issue that Trump talked about throughout his whole campaign was China and how the US deficit with China is running at $485 billion dollars while at the same time China is stealing intellectual property and unfairly subsidising key strategic industries such as steel, microchips, robotics and motorcar production.
Trump has held off on any talk of Chinese tariffs because he was hoping that China would help him with North Korea, but they have failed to make an impact. It bought them some time but with 2018 just ahead of us and the U.S. Midterm Elections only a year away, it is a perfect time for Trump to deliver on some more of his promises.
If Trump places tariffs on Mexico and China, and their manufactured goods, it will make many businesses calculate that they could be better off moving production back to the US. With the tax incentives on equipment investments and the 15.5% rate on profits moved back to the US, it will be the perfect recipe to create a manufacturing boom in the US. It will also create jobs and wealth in those states that won him his Presidency, the same ones he will need to win again if he wants a second term.