Trump promises US tax overhaul

On January 20 the US will inaugurate Donald Trump as its 45th president, ushering in major changes in trade policy and the treatment of US multinationals.  Here is our look ahead at what to expect.

As president, Mr Trump desires to cut US taxes for corporations operating in the US, thereby making the country more competitive for foreign direct investment and a more attractive manufacturing destination. A new tax scheme would slash tax rates on businesses, simplify and cut individual taxes, and allow companies to bring overseas profits back to the US at a low tax rate.

Currently, multinational companies keep their foreign earnings overseas to avoid paying the 35% US corporate tax rate. Those foreign earnings are estimated at about US $2600bn, an amount that has doubled since 2008 and is six times higher than it was in 2002. President-elect Trump proposes a one-time repatriation corporate tax reduction to 10%, and a permanent reduction of the US corporate tax rate to 15%.         

Territorial tax

The Tax Foundation in Washington, DC estimates that Mr Trump’s corporate tax plan would add 4.5% to US GDP over the next 10 years, although it would add more than $2000bn to the national deficit. 

Reuters recently reported that Apple, Pfizer, Microsoft and General Electric are among the companies with the greatest profits held overseas. March estimates by Citizens for Tax Justice places those profits at $200bn, $194bn, $108bn and $104bn, respectively.       

The Tax Foundation reports that most Republicans and some Democrats would rather move to a ‘territorial’ tax system that exempts foreign profits from the additional US tax altogether. This would be more consistent with the systems employed by the rest of the developed world.        

Regarding trade agreements, the Trans-Pacific Partnership looks to be over. President-elect Trump promises to label China a ‘currency manipulator’. What will result, political pundits say, is limitations on Chinese foreign direct investment in the US and/or tariffs and trade barriers against China. Mr Trump suggests that the US might pull out of the World Trade Organization and ought to selectively tax companies that move manufacturing plants out of the US.