How Trump’s Massive Tax Cuts Can Make America Capitalist Again

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By Harry Phibbs | 6:00 am, April 27, 2017

Many traditional conservatives were worried about the election of Donald Trump because of doubts about his economic policies.

Would he follow a free enterprise course of reducing the burden of the state on the wealth-creating sector? Or would his erratic and egotistical character result in big government projects and corporatist meddling?

It is a bit early to give a verdict and when it is reached, it could be rather complicated. However, the early signs are that he will press for bold tax cuts. They are badly needed.

Many people the world over imagine that America is synonymous with capitalism.

Yet the current level of corporation tax in the USA is 35%. That compares with 19% in the United Kingdom (due to fall to 17% in 2020). In Germany it is 29.65%. Even in France the maximum rate is 33%. Ireland has flourished with a rate of 12.5%.

President Trump has proposed cutting the rate to 15%. Some have expressed concern about the affordability of the proposal, given the need to reduce the budget deficit.

But there is a difference between cutting a tax rate and cutting the tax revenue obtained. Trump can take comfort from the British experience.

An analysis by the Centre for Policy Studies has found that corporation tax receipts have actually gone up by more than a quarter since the rate was first cut. The revenue has grown by 28% since 2011.

Trump might also note that Ireland has flourished with its low-tax policy. The performance of the “Celtic Tiger” has been extraordinary.

The truth is that in the modern, globalized age, large multinationals will be smart enough to relocate to countries where governments will not fleece them of their hard-earned profits.

Thus we have a perverse reality whereby the greedier finance ministers become in hiking tax to extortionate levels, the lower the amount of money that actually arrives in their coffers.

In the election campaign currently underway in Britain, the Labour Party are promising to fund assorted spending commitments via a corporation tax hike.

I have yet to hear a BBC interviewer challenge them that this would result in less money to spend rather than more. This may be left-wing bias, or simply that the notion seems counter-intuitive. Either way, it leaves the public poorly informed.

It follows that the prudent course is not to ignore the rest of world when it comes to tax policy. A more responsible approach to deficit reduction is to reduce tax to allow strong and sustainable economic growth – which is politically much easier to obtain than the big reductions in state spending which would be necessary for a balanced budget.

In cutting tax for American business, Trump has a strategy for bringing home companies driven abroad during the hostile Obama years.

The response from other countries is easy to predict. In cutting tax in the US, the impact that Trump will achieve will be to lower taxes for Australians, Germans and the Japanese. Around the world, finance ministers will have to adjust to the new reality.

That does not just mean that wealth will be shifted about – although it is feasible to do that with ever increasing agility. It means that more wealth will be created.

Tax and red tape represent sand thrown into the engine of the economy. Allowing the free market to motor will mean the entire planet can become more prosperous.

Some of us may even end up being grateful to Trump after all.