The research team at Amplifying Global FX Capital suggests that while the US administration is making broad tax proposals that impact on personal income tax, the most significant part of this reform is on corporate tax and there are several aspects of the corporate tax that appear to boost the USD.
“The size of the cut, down to 15%, would make the USA internationally competitive. Such a low tax rate might encourage US and foreign companies to set up operations in the USA. The USA might, therefore, attract direct investment and more revenue as a new tax-haven.”
“Secondly, the administration tax plan includes a one-time tax break to repatriate accumulated earnings. This could generate a surge in capital inflow after the policy was enacted. It would also help provide a boost to tax revenue at least for that first year.”
“More generally, a fiscal stimulus would tend to boost domestic demand and lift US interest rates.”
“The global and longer-term implications of big unfunded tax cuts are far less obvious. Higher government debt and inflation in the US pose risks, especially if potential growth does not rise with demand. Tax cuts in the US may pressure other countries to cut taxes too to compete, boosting global demand but increasing global government debt and inflation risks with uncertain fallout to asset prices. Nevertheless, the immediate impacts in the first year or two appear quite clearly positive for the USD and US bond yields.”
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