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Robert Gottliebsen

US to boom if Trump gets his way on tax

Robert Gottliebsen
A new Trump tax plan has plenty of handouts. Pic: AFP
A new Trump tax plan has plenty of handouts. Pic: AFP

Suddenly Wall Street is taking the new Donald Trump seriously. And if the US president succeeds on tax --- and my US people say there is a good chance he will --- then America and the world will be transformed.

I introduced Australia to the new Donald Trump earlier this month — “Donald Trump of today very different from man who was inaugurated” — but the combination of Trump’s afternoon address in the Indiana State Fair Grounds in Indianapolis, plus the speech from Federal Reserve chief Janet Yellen, caused Wall Street to realise that the US game is changing rapidly.

After Indianapolis not only did the Dow break a four-day losing streak and Nasdaq surge but US treasury bonds were heavily sold in the anticipation of higher interest rates as the US economy is likely to boom if Trump gets his way.

It’s not that the Trump plan is radically different from what he proposed on the campaign trail.

What is different is the way Trump is promoting it in Congress. He and his people have worked hard marketing tax cuts to key Democrats and that panicked the Republicans, who now look like they may be aboard (nothing is certain in US politics).

So let’s look at the Trump plan and then at what it means for Australia. Like those in Australia, middle-income Americans are being kicked and kicked hard. Their voice is not heard in the bastions of political correctness, which control most of the media, but Middle America still has hope that Trump will deliver for them.

The Trump plan would collapse their tax brackets from seven to three, with tax rates of 12 per cent, 25 per cent and 35 per cent. The current top rate is 39.6 per cent and the lowest rate is 10 per cent.

The framework also gives Congress the option of “taxing the rich” by creating a higher, fourth, rate above 35 per cent, but Trump does not specify what income levels would receive the higher rate.

And there are a whole lot of goodies for the middle class like doubling the standard deduction to $12,000 for individuals and to $24,000 for married couples, which would allow people to avoid a complicated process of itemising their taxes to claim various credits and deductions.

Trump would also increase the child tax credit from $1000 to an unspecified amount and create a new $500 tax credit for dependants, such as the elderly, who are not children.

Trump also throws out estate tax and a tax on inherited wealth.

Americans are going to find this very attractive and they will spend. If all goes to plan with that US spending will come an economic resurgence but inevitably higher interest rates and a higher US dollar.

Then we go to companies and the changes to taxation for companies would be equally dramatic.

The proposal aims to reduce the corporate tax rate from 35 per cent to 20 per cent.

Like Australia it is small business that drives the US and about 95 per cent of businesses in the United States are structured businesses, partnerships and sole proprietorships whose profits “pass through” to their owners. A new tax rate will be created for them at 25 per cent, not the individual rate of their owners which currently applies.

And there will be incentives for American companies to bring back their overseas dollars.

Under the original Trump plan the tax cuts would be paid for first by the extra revenue created with higher growth; second by tariffs and/or other measures to put a charge on imports and thirdly the reduction in government expenditure led by Obamacare.

China was to be the big target but the Korean crisis has deferred that.

Instead, at the moment, it’s Canada and the NAFTA trade agreement that are the biggest targets.

Trump has taken steps to impose duties of up to 33 per cent on most Canadian lumber — one of Canada’s top exports. Trump also plans a 220 per cent tariff on a new jetliner from Canadian manufacturer Bombardier and an attack on Canadian diary exports.

But Trump is targeting specific areas rather than making an overall tariff. This will be his approach to China. A trade war remains a danger but it is less likely if the measures are targeted. And Trump has made inroads on US government waste.

As for Australia’s response, there will be the usual cries for lower company taxes but most of the arguments, like those from the Business Council, have been badly thought out.

Because of dividend imputation Australia’s tax rates are not that far above the US but they are much higher for overseas investors who don’t benefit from imputation. Any measures Australia takes needs to take into account imputation.

And for small business, given what is happening in the Australian Taxation Office, an independent appeal system is more important than tax rates.

Read related topics:Donald Trump
Robert Gottliebsen
Robert GottliebsenBusiness Columnist

Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award. He has a place in the Australian Media Hall of Fame and in 2018 was awarded a Lifetime achievement award by the Melbourne Press Club. He received an Order of Australia Medal in 2018 for services to journalism and educational governance. He is a regular commentator for The Australian.

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Original URL: https://www.theaustralian.com.au/business/opinion/robert-gottliebsen/us-to-boom-if-trump-gets-his-way-on-tax/news-story/9d6b9f3a1e4f8da9e0f4411e5569dcfd