|What should we expect from the tax bill?||What should we expect from the tax bill?||Luis Torres||Torres||2018-01-18T06:00:00Z||Economy|
|Despite an unprecedented period of moderate economic growth in the years after the Great Recession, the average person has fallen further and further behind economically, not feeling the recovery. The recent tax bill passed by the government seeks to create incentives for private firms to invest in capital equipment that would lead to productivity growth and wage gains.|
Its authors and supporters believed that the focus should be on corporations to correct the economic wounds the U.S. has inflicted on itself in the absence of tax reform. So what should we expect now?
- Repatriation flows. The last time there was reform that affected repatriation (conversion of foreign currency into currency of one’s own country) was 2004, and a lot of companies brought money back to the U.S. While companies lobbied for it, saying they would invest and create jobs, almost none of that money came back to incremental investment and jobs. Approximately $0.90 out of each $1 brought back was spent on buybacks and dividends. Companies are not currently financially constrained. If there were investment opportunities, companies would have taken advantage of them already. Repatriation could have implications for the U.S. dollar (USD) if those dollars were held in non-USD-denominated assets, which is not the case. Changes in monetary policy could have bigger effects on the foreign exchange than this repatriation bill. If approximately $2.5 trillion is back in the U.S. financial system, where is it coming from and what are the implications for those institutions? Most of the money is held in European Union institutions, and some problems could be created if those institutions are not well capitalized.
- Trade deficit. Look for a possible reduction in the trade deficit, not because of changes in production patterns (in other words, companies will not be moving plants back to the U.S.), but because of changes in how companies report foreign transactions like transfer pricing, intercompany lending, and industry profits abroad. These accounting maneuvers could be reduced, shrinking the trade deficit by up to 0.5 percent.
- Monetary policy. Given that the U.S. economy is close to full employment, there is concern that higher economic growth could cause inflation to rise at a faster rate than predicted. This could lead to tighter monetary policy, speeding up the pace of rate hikes. Historically, the pace of rate hikes has been very slow. It might accelerate a bit, but we will not push it to an unprecedented pace. This might give the Fed confidence to continue normalizing rates.
- Fiscal deficit and debt. Estimates show they will rise. When should we start to worry? A while ago, more than a 3 percent deficit as a percentage of gross domestic product (GDP) would have worried people; and for debt, 60 percent of GDP. These thresholds have been thrown out the window. There is much less concern about fiscal deficits now than in the past, and that should worry us because it will have an impact on the future.
- Productivity growth. It’s hard to know if the tax bill will lead to higher productivity growth. If it does, we will be less worried about fiscal trajectory because we will be generating more income and tax revenue.
The tax bill is an accomplishment but not as positive as has been suggested as it will not bring the U.S. growth to sustainable levels (4 percent). Some argue that tax reform is needed now more than ever to fund the government.