With the continued call for America’s tax reform, it will be in the best interest of emerging economies to be prepared for the worst. Whether Trump or Clinton wins at the polls, this policy may be implemented anyway. With the report of China overtaking America as the World largest economy…the United States will be making all frantic efforts to reclaim their position.
It is no longer news that the world is now a global village, with the effects of the internet shown in the greater ease of conducting business across different geographical boundaries and nations, the availability of international financial institutions that enable cross border investments, and not forgetting apt and timely international financial research and analysis, which have interlinked different economies together than ever. This has, therefore, made it imperative that what happens in a distant nation affects the other nation directly or indirectly.
The United States is the world’s largest national economy in nominal terms and second largest according to purchasing power parity (PPP), representing 22 percent of nominal global GDP and 17 percent of gross world product (GWP). The United States’ GDP was estimated to be $17.914 trillion as of Q2 2015, with a per capita income of $54,000.00 according to IMF. American businessmen have investments estimated to be over $2 Trillion outside the shores of US. The United States is a major business partner with different emerging economies of the world.
Emerging economies are economies progressing towards development but are not yet developed. They have institutions that are yet to be standardised like the ones in their developed counterparts. The foremost emerging economies, as classified by the IMF, are Brazil, Russia, India and China (BRIC), and these countries are progressing towards a developed status but are still lacking in certain crucial areas when placed side by side with other developed economies. After BRIC, other frontier or second stage emerging economies include Colombia, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, South Africa, Thailand, Nigeria and Turkey. All these economies are directly linked to the economy of the United States. This link therefore makes it possible that whatsoever policy is made in the US will have a multiplier effect in some of these countries.
On November 8, 2016, the United States will head to the polls to elect a new president after the eight year term of the Barack Obama regime. During the presidential campaign, Donald Trump, the Republican flag bearer, proposed a strategic policy on corporate tax reforms. According to Justin Haskins, “Trump plans to lower the corporate tax rate from 35 percent to 15 percent and, most importantly, he has said he will encourage businesses with funds overseas to bring their assets back into the country by allowing them to do so without being taxed at the current corporate tax rate (or even Trump’s proposed rate). Businesses would need to pay only a 10 percent tax, a bargain, to bring their money out of hiding and back into the U.S. economy.”
Most analysts estimate there is currently at least $2 trillion sitting overseas belonging to U.S. businesses looking to avoid America’s highest-in-the-world corporate tax rate, a 10 percent tax could yield as much as $200 billion in additional tax revenue. Not only could the proposal have a significant impact on the economies of states such as Michigan, Ohio and Pennsylvania.
It is on record that Detroit, the South Side of Chicago, Cleveland, Buffalo, Erie, Toledo and many other areas in the US see tens of thousands of job lost to competing states or to foreign countries, mostly China and Mexico. Many inner-city areas have never experienced the kind of growth enjoyed by other areas, and not much has changed over the last decade. According to Justin Haskins, the most recent available government data shows about 46.7 million people live in poverty, including 21 percent children, which were about 3.8 million in 2009.
A lower corporate tax rate would provide significant benefits to the US economy and American households. According to Robert Carroll and Thomas Neubig (Ernst & Young LLP), a lower corporate tax rate would enable the United States to encourage additional domestic investments, attract foreign investments, and compete in the global economy. More investments made by companies mean more capital flowing into the US economy. In turn, workers have more capital, newer computers, updated facilities and technologies, and additional research with which to work. This translates into more jobs, higher worker productivity and ultimately, higher living standards.
Empirical evidence has shown that the corporate tax rate is a direct incentive that drives foreign direct investment in different countries and economies, and which most time affects the income/investment shift between one country and the other.
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The implications on emerging economies will include the facts that:
• There will be mass exodus of US Companies from emerging economies such as Mexico, China, India, Brazil, Russia and a host of African Countries. This is expected to affect the economy of such countries, hence they need to brace up and develop some counter policies ahead to reduce the negative impact of this policy;
Continued improvement on the economic fundamentals and outlook of emerging economies will help stabilise any possible shock. Managers of emerging economies should get prepared to reduce their corporate tax rates or introduce more proactive tax incentives in order to remain competitive.
• Relocating companies would cause a stir in these countries’ economies, which may lead to economic shocks, by way of falling stock market prices and the devaluation of some local currencies, etc;
• Increase would occur in expected returns, as it is expected that the reduction of the corporate tax rate as proposed by Donald Trump would make investments in the US more profitable. This will inevitably increase the premium expected, before investing in emerging economies;
• Possible job losses will probably increase, as fleeing companies will need to lay off a huge number of staff, hence compounding the already worsening unemployment position in so many countries, with the continued fall in commodity prices which has before the current fall in commodity prices in the international market, been driving growth in many of these emerging economies;
• There would be difficulty in attracting foreign direct investments, as it is believed that most emerging economies depend heavily on foreign investments. The IMF says that between 2009 and 2013, emerging markets received about US$4.5 trillion of gross capital inflows, representing roughly half of all global capital flows in that period. Investments, consciously or unconsciously, move towards economies that are more favourable to little or no increase in risk. Reducing the corporate tax rate, leaving other things equal, will make investments in US comparatively favourable to a host of emerging economies;
• It is projected by the IMF/World Bank that emerging economies’ contribution to the global GDP may not be attainable any more, as the massive exodus of US companies will drive GDP lower.
It is therefore imperative that emerging economies should brace up for any possible shock. Diversification of economies and the increase in contribution of the service industry and tourism will help to ameliorate possible shocks. The introduction of circuit breakers, as introduced in Chinese stock market during the January 2016 stock market volatility, will also benefit emerging economies, helping them restrict mass sale offs of such investments, hence reducing the negative effects on their respective economies.
Continued improvement on the economic fundamentals and outlook of emerging economies will help stabilise any possible shock. Managers of emerging economies should get prepared to reduce their corporate tax rates or introduce more proactive tax incentives in order to remain competitive.
With the continued call for America’s tax reform, it will be in the best interest of emerging economies to be prepared for the worst. Whether Trump or Clinton wins at the polls, this policy may be implemented anyway. With the report of China overtaking America as the World largest economy, after US has held this position for 150 years, the United States will be making all frantic efforts to reclaim their position.
The ability of the United States to achieve the desired benefit of this proposed tax reform however, will be directly related to the favourable working conditions of other economic determinants.
Eziukwu Princewill, a development finance analyst, can be reached through eziukwup@yahoo.com.
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