US tax cuts to have limited immediate impact on trade and capital, say analysts

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China said it is keeping a close eye on the unfolding impact of tax overhaul in the US, which was passed by the Senate on Saturday, calling for more tax policy coordination under the global governance framework.

Analysts and administrators expressed belief that the bill's impact on trade and capital flows may not be as evident as the US government presumes.

Zhu Guangyao, vice-minister of finance, said at a forum on Sunday that China will "take proactive measures" in response to the US tax move, as the world's largest economy's tax policy adjustment is expected to have a major impact on other countries, including China.

The international community needs to pay close attention to the implications of the US tax changes for competition, labor productivity and wages, noted Zhu. He stressed that members of the Group of 20 (G20) had agreed to set international tax policy coordination as one of the important issues to discuss at the 2018 summit, to be held in Argentina.

The bill, if passed, will not create large cash flows out of China and into the US, said Liu Shangxi, head of the Chinese Academy of Fiscal Sciences. Many factors other than the tax rate shape the overall US business environment.

"There is no need for China to make immediate tax cuts and blindly follow what the US does, but it should adjust macroeconomic policies based on an assessment of the real domestic situation," Liu said.

"One of our current priorities is to deepen value-added tax reform that targets a more market-oriented scheme for resource allocation and build a fair investment environment for enterprises."

Protest signs are seen during a rally against the Republican tax bill on Capitol Hill in Washington, US, November 15, 2017. / Reuters Photo.

The US Senate passed a major bill on a party-line vote on drastic tax cut for corporations, slashing rates down to 20 percent from 35 percent, the lowest level in decades. Taxes for individuals would also be eased modestly in the short run, but would quickly rise for middle- and low-income earners.

The bill still needs to be reconciled with the version passed by the House of Representatives – a final hurdle since some provisions may raise new objections from lawmakers.

Willem Buiter, an economist with Citi Research, calculated that a cut in the tax rate on corporate profits in the US "has no impact on the incentive to invest," which implies "a zero impact" on the capital intensity of production and real wages.

The tax cut will send the US budget deficit skyrocketing by up to 1.5 trillion US dollars, which is expected to add a further burden to the already high debt level of the US government.

"Government revenues and social welfare expenditures may be under great pressure in the coming months if the bill is passed," Liu said.

Source(s): China Daily