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hasty decisions are probably not the best policy

Kitty Miv, Editor
23 October, 2018

The US tax reform legislation might not be perfect, as anyone grappling with the transition tax and the alphabet soup of acronyms and abbreviations, such as BEAT, GILTI, and FDII, would attest. But if the repatriation of the huge pile of stock and cash accumulated offshore by US corporations was a major goal of tax reform, then it appears to have worked. At least, that 's the conclusion to be drawn from the United Nation 's latest report on global foreign direct investment flows.

For the administration of President Donald Trump and the Republican lawmakers who pushed the Tax Cuts and Jobs Act through, these statistics must have seemed like a godsend. As James Zhan, Director of the Investment and Enterprise Division at the United Nations Conference on Trade and Development, observed the agency had said back in early January that there was "about USD2 trillion of stock in the form of cash or in the form of reinvested earnings of retained earnings outside the US," which may be repatriated in some form, following wholesale tax reform. "And indeed, it's happening," he said. "We have seen that outward FDI from the US was from USD147bn last year to a negative USD247bn this year."

Nevertheless, as Newton 's Third Law dictates, every action has an equal and opposite reaction. And as capital now appears to be pouring into America, it is pouring out of some of the world 's other major economies. Indeed, Zhan went as far as to describe the global FDI environment as "gloomy." So you can take your pick of the antonyms available to describe the investment environment in the US. Bright? Optimistic? Upbeat? Sunny?

On the other hand, clouds appear to have descended on western Europe in particular, the region that has felt the impact of this tax-driven shift in the global investment landscape most negatively. Indeed, the UN 's report must have been worrying reading for the Irish Government, given the finding that inward investment declined by USD81bn. Maybe it should have slashed taxes in the 2019 Budget, announced earlier this month, after all. Although, when facing uncertainty from almost every conceivable angle, as poor old Ireland is at present, hasty decisions are probably not the best policy.

The finding that Switzerland saw FDI inflows decline by an equally worrying USD77bn has probably given the Swiss Government much food for thought too. It 'd better get a move on with those economy-saving corporate tax reforms then.

Tax Plan 17 (TP17) is its second stab at these essential corporate tax reforms. Voters rejected the first attempt, Corporate Tax Reform III because they preferred the Government to do nothing than to accept those proposals. TP17, which must also be put to a referendum, could well suffer the same fate. The Swiss Government, it seems, can 't do right for doing wrong. There 's no pleasing some people.

Some feared that the US tax reforms would accelerate a perceived race to the bottom on corporate tax. But while it is true that governments around the world are still seeking to reduce corporate tax and widen tax bases, the reductions are being made more at a stroll than a sprint. Although, the US corporate tax cut probably has prompted a few to break into a jog.

Certainly, the ten-point plan reportedly drawn up by German Economy Minister Peter Altmaier to alleviate the tax burden for businesses, in one of the US 's main economic competitors, isn 't going to set the White House quaking with fear any time soon. It 'll take more than trade tax deductions, a solidarity tax cut and reduced interest on tax underpayments to do that, one suspects.

Unsurprisingly, representatives of German businesses were said to be unimpressed by Altmaier 's proposals. As was, reportedly, Finance Minister Olaf Scholz, but for entirely different reasons. He 's not in favor of cutting tax that much anyway. Indeed, the German Government generally has an aversion to the idea of loosening the fiscal reins, despite record tax revenues and budget surpluses. Not so much an equal and opposite reaction to tax cuts as an allergic reaction to them.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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