Thursday, 24 November 2016

Trumpolicy and the likely effect on real investment

Jim Stewart: The effects of "Trumpolicy" on real investment are difficult to understand. Corporate investment and flows of FDI to Ireland and other countries are extensively influenced by factors other than tax, as revealed by annual investment surveys.

The most recent Ernst and Young European Attractivness Survey indicates that over 75% of firms consider telecommunications, labour skills and transport and logistics infrstructure are the main attractions to investment. A minority of firms consider taxation as an impediment to investment.

Other announced economic policies such as expenditure on infrastructure, increased military expenditures and policies on tariffs  (and non-tariff barriers) may be more important (depending on implementation) than tax changes to increased U.S. investment (from U.S. and non U.S. firms) rather than changes in tax rates.

Reaction of other countries to U.S, corporate tax cuts
Of significance is the reaction of other countries in particular if U.S. reductions in corporate tax rates result in a race to the bottom.  The UK Government has already announced that they will seek to have the “lowest corporation tax rates in the G20” and will also support innovation through the tax system.

Many U.S. firms  need a base in Europe, but it does not have to be Ireland.  Given the difficulty of imposing tariffs on the digital economy, country location decision of firms such as Google may not be determined by membership of the EU, as in the recent Google decision to expand employment in London “ in an effort to recruit engineering talent and entrench itself more widely outside the US.” or in the Facebook example of creating new jobs in the UK.

Policies of the new U.S. administration and the EU in relation to regulation, privacy of data, and the ability to recruit internationally are important determinants of real investment in the digital and other sectors, rather than tax rates. For example digital economy firms in the U.S. are highly dependent on visas to recruit highly educated employees to the U.S (H-1B visas) and these may be restricted under a Trump administration, according to a recent report in the Financial Times (paywall).

Apart from proposed changes in tax, changes in regulation of energy companies, banks and pharmaceutical companies have led to large stock market gains and may lead to possible ‘reshoring’ of some U.S. investment.

What is driving Trumpolicies?
Trump policies are driven by many factors. One important reason is the many that have not benefitted from globalisation and what have been described as ‘neoliberal’ economic policies, the rhetoric of ‘market based solutions’, and an emphasis on balanced budgets resulting in retrenchment of  State spending on welfare, education, etc.

It is very likely that many of the proposed solutions will fail (Kentucky coal mines and  steel plants that were shut down will not reopen).  Hence policy will evolve, for example spending on infrastructure may be required to have a far higher level of domestic inputs, for example steel.  There may be incentives (threats?) to ensure R & D, new product development and key functions are located in the U.S.

What is certain is that reducing taxes on corporations and individuals will exacerbate income inequalities.  Nunns et al have estimated that those earning more than $3.7 million  (top 0.1% of tax payers) would  benefit from a tax reduction of $1.1 million.

The bottom 20% of income earners would benefit from a tax reduction of $110. Of interest is how  the base of Trump supporters react to even greater wealth inequality and whether this matters to a Trump Administration.

Jim Stewart works at the School of Business, Trinity College, Dublin.

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