The US President Donald trump called his tax reform “historic victory”, and democratic Senator Elizabeth Warren — “a robbery”. Over the past year reflected the economic impact of lowering taxes by $1.5 trillion: having worked in the short term, the reform may make things worse in the long term, said the Financial Times.
Reducing the tax burden gave an additional stimulus and without that confidence the U.S. economic recovery, and GDP growth exceeded in 2018 to 3%. However, this forced the Federal reserve to change the long-term growth forecast is -1.8%. The promise of business to increase investment is not realized in full measure, and the cause is largely a trade war, which began trump, raising import duty on aluminium and steel, as well as on goods from China. In addition, the company, as in 2005, when then-President George Bush gave them the opportunity to return to the country of foreign profits at reduced tax rates in the hope to increase investment, spent significant amounts on redemption of their shares.
Meanwhile, the growing budget deficit, which increased further as a result of tax reform and increasing public spending, in the long run can cause the economy serious damage. “There was a strong fiscal stimulus is much increased government spending and budget deficits due to tax cuts,” says Alan Auerbach, Professor of Economics at the University of California at Berkeley. Despite the current growth prospects of the economy seem not so inspiring, he told the FT: “We chose a very unstable fiscal policy.”
The company made a very bold statement, after tax cuts and promised to invest a total of $194 billion, and increase the salaries of some 2 million staff and spend $7 billion on the payment of one-time bonuses. But, if you allocate these costs for five years, they will accelerate economic growth not so much — only a few tenths of a percent, according to estimates by The Peterson from Citigroup.
Wages rose more than 3%, but it is difficult to assess whether this is associated with tax reform, notes the FT. In many ways, the wages are rising due to low unemployment, companies increasingly difficult to attract the necessary employees.
Contradictory and results in the field of investment. If in I quarter of 2018, they grew by more than 11% in annual terms in the third quarter — only 2.5%. The level of investment remains too low to accelerate the economy in the long term, as promised by the Minister of the Treasury Steven Mnuchin, say analysts at Barclays. They estimated that growth for a long period of time remained at 3% due to only this factor, corporate investment is expected to increase by 30%.
In January at the summit in Davos trump was told that due to tax reform, Apple will return to US $350 billion, “He [CEO Tim cook] said that they would return to 350 — and I began to think that millions of dollars (in the end, they can build a good plant), but they said it was 350 billion dollars,” said trump.
He also promised that the company will quickly return to the U.S. “more than $4 trillion, almost $5 trillion” and it will accelerate the growth of the economy. The Institute of taxation and tax policy of the United States decided in September that since the beginning of 2018 108 public American companies stored abroad about $2.7 trillion from the profits, returned only $143 billion of this amount, two-thirds had only two corporations — Cisco Systems pharmaceutical and Gilead Sciences.
The ransom money
Cisco has announced that it has recovered more than $70 billion — but $25 billion plans to spend on share buybacks in the next two years.
Apple in January announced that it expects to pay about $38 billion in taxes on repatriated profits; it meant that she could return the $250 billion But in may the company announced a stock repurchase program to $100 billion
A significant portion of the funds released as a result of lower tax and returned to the country, the company spent on share buybacks and debt repayment. In the first half, according to calculations by Moody’s, 100 companies with large cash reserves repaid the debt at $72 billion and returned investors $81 billion According to the estimation of FT, five tech companies — Apple, Google, Cisco, Microsoft and Oracle have bought their shares during the first three quarters to $115 billion
These actions are largely supported by the growth of the stock market and, in particular, shares of technology companies, which before the collapse in the last months of last year were the leaders in terms of growth, said Jon trice, co-editor of the investment newsletter Fuller Treacy Money. Now the volume of purchase may be reduced: the effect of tax reform faded, the cost of borrowing is growing (many companies are buying back shares, taking on debt). In addition, companies “usually do not redeem shares during periods of stress liquidity that we have now” as a result of the tapering of monetary stimulus programs by Central banks, adds trisi.
The budget deficit
In the short-term effect of fiscal stimulus no doubt. According to estimates by Citi, the growth rate of GDP in 2018 increased by 0.7 percentage points thanks to lower taxes and big government spending. Budgeted in 2018, spending on infrastructure can continue to stimulate the economy in 2019 ; trump also can knock out Congress for $5 billion for the construction of the wall on the border with Mexico, But if Congress does not take action, the reduction in government spending will contribute to slower growth by 2020
Mnuchin and trump argued that the tax reform will pay for itself due to the acceleration of the economy, which will grow at least 3% more than one year. But this is unlikely (the fed left the long-term forecast at the level of 1.8%).
Moreover, there was a strange situation: budget deficit increased on the back of strong economic growth. In this fiscal year (from October 2018 to September 2019) the deficit will reach $970 billion, according to estimates by the congressional Budget office (CBO). Thus, it would be less than from 4 to 4.6% of GDP. Never before in U.S. history, the deficit was not so large, with the exception of periods of recession and war and postwar years. According to estimates by CBO, while maintaining such a fiscal policy, public debt will increase from the current 78% to 148% of GDP by 2038
To 2028, as predicted by CBO, only interest payments will increase to $915 billion, which is equal to 13% of total expenditure and 3.1% of GDP. As a result, after 10 years, interest costs can exceed all other pobranie spending budget. The worsening budget situation will begin to slow the growth since the beginning of the next decade, the growing debt will begin to crowd out private investment.
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