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Trump's challenge to Ireland and other low/no cost tax regimes.

Publication: 
Editorial Staff
chiefofficersnet

Socialists in the USA and elsewhere will be getting ready to slash their wrists and there will be millions of bits and bytes spent in haranguing US President Donald Trump for the corporate tax strategy he revealed yesterday. But wait: he's done what everyone should do - he's followed the money and found a way to bring it back on-shore and, therefore, subject to US tax and to be available for domestic investment. Someone, somewhere, has been thinking long and hard and Trump has been listening to those that understand that economics is not about money, it's about people. The plan is not disruptive, it's seismic.

It took minutes for the left leaning media to start to build antithesis for the idea. In the UK, The Guardian's headline was "Trump under fire over 'huge tax cut for the rich'" and there is only a token supporter of the idea who gave a vacuous sound-bite. Then, almost as an afterthought, they got a quote from someone who actually understands, Chris Edwards of the Cato Institute who pointed out "There is a huge amount of [tax] avoidance right now and a huge effort to park overseas. That money would come back if rates fell." The Guardian even quotes "non-partisan pressure group Americans for Tax Fairness" which is actually a left-wing, high-tax, anti-capitalist group that is non-aligned so far as party politics is concerned but is an instigator of criticism of centrist and business-friendly tax policies. So, not fair at all, then.

In the light of all the media hype as to why Trump is wrong, we don't need to explain that side of the argument. We can redress the balance rather than report in balance. Here's why Trump (are we really saying this?) is right and so is Edwards.

First, let's address one criticism that does have merit and relates to a proposal that should be examined more carefully. There is a tax called the "Alternative Minimum Tax" which, basically, curtails the tax reliefs available to the very rich so that they cannot, by claiming reliefs, pay vastly reduced taxes and, in some cases, nothing. This provision puts a ceiling on the amount of tax that can be avoided. Applying it to Trump in 2005 reportedly resulted in him paying USD31 million in tax. That, various reports say, was about 85% due to the Alternative Minimum Tax.

However, Trump has made much of his intention to simplify tax matter by the abolition of a raft of allowances and set-offs.

The headlines from yesterday's announcement are simple:

- Corporation tax down from 35% to 15%.

- Reduce individual income tax brackets from seven to three (10%, 24% and 35%)

- There was no mention of the withholding tax for e.g. writers and artists who earn in the USA but do not have the benefit of tax treaties: the USA rips them off to the extent of 30% on gross earnings, not profits.

Perhaps the proposed corporate rates will stop US IRS and high-tax lobbies moaning at Ireland for its corporate tax rates - and encourage the EU to do the same. In fact, the proposal would be the biggest threat to Ireland's offshore economy : companies will set up structures to save 25% (US v IE difference in rates) but many won't bother for 5%, given the offset in savings of associated costs.

The simple fact is that most people don't mind paying some tax. They just object to paying more tax then they receive after all the deductions have been made from income. If the plan is to reduce tax rates and simultaneously reduce allowances, reliefs and offsets, then that is a very good thing except for economists and accountants who will, largely become redundant.

There will be no need for, or even opportunity for, creative accounting. Economists who have long failed to understand that economics should be a study of philosophy and psychology not, primarily, mathematics and statistics. People move economies, not numbers.

In July, Apple was reported to have USD181,000 million in cash offshore. Last year, the company said it would "repatriate" much of that cash stash and that it would cost hundreds of thousands of millions of dollars in tax when it does so. Then later it said it wouldn't. Then it said it "could." A year ago, CNN reported that there was approx 1.4 billion (real ones, millions squared, not those dinky little American billions that are really milliards) held, in cash, offshore by American companies.

Clearly Trump has his eye on those sums. The question is whether he can tax them at the rate when they were earned, at the rate when they are repatriated or whether, as many other countries have done, he declares an amnesty for offshore deposits so long as they are declared and returned onshore within a short time.

US Republicans have long hankered after a flat tax but hardly anyone, anywhere in the world, has come up with a working proposal. Hong Kong used to be close but it's moved away from it. The fact is that a flat tax, with no allowances claimed, is a very good idea, administratively. But socially, it does not pander to the jealousy of those who keep shouting about "fair share" and "fair tax" - they are the people who don't pay much tax and think others should pay more. Rick Santorum proposed it in 2015 and so did Ted Cruz, both presidential hopefuls.

Trump, in relation to corporate taxes, if he does, as he has said, eliminate many allowances, reliefs and offsets, is heading in broadly that direction but keeping, for individual taxes, at least some marginal tax rates.

It has to be noted that Trump can affect only federal taxes. States remain in control of their own tax affairs. Some charge no corporate taxes, some charge no income tax, some charge only minimal or no sales tax. See https://taxfoundation.org/stat... for more information on state taxes.

If Trump is successful in reducing tax rates but increasing tax take by regenerating the US economy, then he will have pulled off a remarkable turnaround, but he also has to protect public services, fix infrastructure and ensure effective education, healthcare and security at affordable cost. It's not easy but there is no doubt: low tax economies do thrive. Yes, some people get rich but everyone benefits, as Ireland demonstrated before the US sourced Global Financial Crisis.

Contrary to the bleating stage left, it is not the American working people who are going to suffer from this policy. It's the offshore centres that have housed US operations where moneys have been accumulated. The cost of running an offshore operation are high, in addition to staff and premises there are also many legal and accounting hurdles to be overcome and the advisers who put such schemes in place do not come cheap. For those companies that use inward investment incentives which have now expired, there is little reason to stay offshore if the local tax rates and employment conditions can be managed in a cost-effective manner.

So it's not just low and no tax jurisdictions that the plan puts under threat, it's anywhere that has effectively sponsored American companies to open offices or manufacturing plants in their countries.

That means that developing countries plus countries such as Singapore have much to fear from this proposal.

And if Trump removes tax relief from all offshored operations, that will immediately spark a rush for the exits from India, the Philippines and many other countries.

The impact of Trump's announcement is far, far more complicated and far reaching than those obsessed with the politics of envy have realised.

And, unlike decades of failure to understand people, focussing on financial data, Trump's team have just come up with something that redefines disruptive. It's seismic.