US President Donald Trump’s plans to slash corporate taxes in the US have sparked concerns of a new global fiscal race to the bottom, possibly involving a wave of negative social consequences, experts say.
In what Trump’s economic adviser Gary Cohn described as “the most significant tax reform legislation since 1986, and one of the biggest tax cuts in American history,” the White House plans to dramatically cut taxes for US businesses and individuals, slashing the corporate tax from a top rate of 35 percent to 15 percent.
The aim, according to US Secretary of the Treasury Steven Mnuchin, is to “bring back trillions of [US] dollars that are offshore to be invested here in the United States” and create jobs.
Trump’s goal is for the reforms to propel the US economy to 3 percent annual growth.
However, the long-anticipated overhaul — details of which remain unclear beyond a handful of headline measures — could face stiff opposition in the US Congress, including from some Republicans, with lawmakers sharply divided over the prospect of fuelling already-rising deficits.
The plans have also raised eyebrows at non-governmental and non-profit organizations.
They could accelerate “the race to tax competition on an international level and all of us will pay the price,” Oxfam spokeswoman Manon Aubry told reporters.
“When the world’s most powerful country decides to slash tax revenues as much as this, a number of other countries may follow suit, bringing with it imbalances that will have enormous impacts on our societies,” she said.
Falling tax revenues would make it harder for governments to pay for welfare, healthcare and other benefits without going too deep into the red, she said.
To make up the shortfall, governments could be tempted to hike valued-added tax, often criticized for placing a disproportionate tax burden on the less well-off, Aubry said.
“The cut in corporate taxes in the US will fuel tensions between countries,” said Jean-Pierre Lieb, a tax lawyer at consultants EY.
Corporate taxes in the US are the highest in Organisation for Economic Co-operation and Development (OECD) countries, followed by France with a rate of 34 percent, Belgium with 33 percent and Australia with 30 percent. The OECD average is about 24 percent.
However, to become more attractive, a number of countries have decided to lower their corporate tax rates.
Britain is planning to cut its rate from 20 percent to 17 percent in 2020, a decision that predates Trump’s move and was strongly prompted by fears that corporations might find the UK less attractive place after it leaves the EU.
There were even plans to cut the rate to 15 percent to help with Brexit woes, British papers have reported, but British Prime Minister Theresa May appears to have ruled out such a deep cut for now.
France, meanwhile, is poised to take its corporate tax rate from 34 percent to 28 percent in 2020.
Other countries, including Italy and Israel, have similar ambitions.
“What we’re seeing is a headlong rush” said Lieb, pointing to the case of Hungary where the corporate tax rate is to be slashed from 19 percent to just 9 percent.
However, even if Trump succeeds in pushing through his planned cuts, countries such as Ireland, which have used their low tax rates to woo foreign companies like Google and Apple Inc, still expect to remain attractive.
Ibec, Ireland’s main business lobby group, said that the latest proposals “could provide some competitiveness pressure for Ireland.”
“Even if the US succeeds in delivering a substantial rate cut, the proposition for US firms to invest in Ireland remains compelling,” the lobby group said.
The Irish Ministry of Finance agreed.
“Ireland’s membership of the EU is, and will remain, a key factor in attracting foreign direct investment from the US and elsewhere,” a ministry source said.
Nevertheless, there is sufficient doubt as to whether Trump will actually be able to get the cuts past the US Congress.
According to the Tax Policy Center, a US think tank, Trump’s plans could reduce Washington’s budget by as much as US$6.2 trillion over the next decade and massively push up the US public debt by US$20 trillion by 2036.
Many Republicans who are traditionally opposed to increasing public debt would be unwilling to accept such an explosion in debt.
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