Trump’s tax reform explained

YU Yongding1,2

(1.Member of Chinese Academy of Social Sciences)
(2.Researcher at Institute of World Economy and Politics, Chinese Academy of Social Sciences)

【Abstract】US President Donald Trump signed the Tax Cuts and Jobs Act into a law on December 22, 2017. Chinese academia was impressed by the US government’s determination in pushing through what the president called the largest tax cut in the history of the United States, and responded to the tax reform very positively. However, generally speaking, Chinese scholars’ knowledge of the US tax reform is rather sketchy and imprecise. This paper aimed to depict a more detailed and accurate picture of the US tax reform and explain the underlying causes for the reform measures. Because the 70, 000-page US tax code is extremely complicated, this paper has to be focused on the corporate tax reform, which contains three main elements. The first is a sweeping cut of corporate income tax from 35% to 21%, which is what Chinese economists are concerned most about. Unfortunately, many Chinese economists have taken the tax cuts as an equivalent to the US’ tax reform. The second is the switch from a worldwide taxation system to a territorial one, which is a key component of the tax reform. The third is to create some new types of taxes, in response to the new situation under the territorial system. Among them are global intangible low-taxed income (GILTI) tax, foreign-derived intangible income (FDII), and base erosion and anti-abuse tax (BEAT). This paper explained in details how those taxes are collected and what are their functions as well as their impacts on the US economy. Based on a better understanding of the functions of the US’ new taxation system, this paper concludes that although the tax cuts will boost US’ economic growth, its growth-boosting effect will be limited due to the fact that the US economy currently is growing at full capacity and the US’ public debt will increase materially as a result of the tax cuts. The impact of the tax reform on US international balance of payments is not clear-cut, and hence the US dollar can either rise or fall in the future. Although China should pay close attention to the impact of the US’ tax cuts both in the short and long run, it should avoid over-exaggerating the impact of the tax reform on both the US economy and the Chinese economy. China should implement its macroeconomic policies in accordance with domestic and international situation and carry out institutional reforms, including reform of its tax system, based on its own agenda.

【Keywords】 Trump’s tax reform; new taxation system; tax reform;

【DOI】

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(Translated by Juanli)

    Footnote

    [1]. [1] Payroll taxes are withhold from employees’ wage or paid from the employer’s own funds, but the economic burden of paying taxes falls entirely on the employee. The charges cover social security insurance, medicare insurance, unemployment insurance, disability insurance, etc. Payroll tax is different from individual income tax. First, it is used for social security, medicare and unemployment insurance. Second, employers are subject to part of the payroll taxes. [^Back]

    [2]. [1] The Act will be “implemented immediately” to prevent enterprises from using the time lag before implementation to understate their income and delay the reporting of such income until after the implementation of the tax cuts. Enterprises can make the best use of the benefits of tax cuts, but government revenues will be reduced. [^Back]

    [3]. [2] Bakerbotts, “Tax Reform Act-Impact on Taxpayers with International Operations”, 20 December 2017, Baker Botts L. L. P., http://www.bakerbotts.com/ideas/publications/2017/12/tax-reform-act-international/[2018-04-10]; Cordasco, “710 Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation”, New Law, Explained, Cordasco, https://www.cspcpa.com/wp-content/uploads/2018/01/Deemed-Repatriation-at-Two-Tier-Rate.pdf/[2018-04-10] [^Back]

    [4]. [3] A company’s taxable profits are the excess of its receipts over all deductions permitted by law. These deductions include the cost of goods sold, wage and other employee compensation expenses, interest, non-federal taxes, depreciation and advertising fees. [^Back]

    [5]. [4] These corporations registered in the United States are mainly C corporations or the so-called limited liability companies, with sustainability and no limit on the number of shareholders. From the perspective of tax payment, the biggest characteristic of C corporations is double taxation. At the company level, the undistributed profits should be taxed. After the profits are distributed, at the individual level, each shareholder should also pay taxes for the dividends. [^Back]

    [6]. [5] Holding refers to the fact that all US shareholders hold 50% shares of the overseas subsidiaries, but each of them needs to hold more than 10% shares of the overseas subsidiaries. The new tax law made some minor adjustments to the definition of “controlled overseas corporations (CFCs).” Lowell Yoder, David Noren and Elizabeth Chao, “Tax Reform: Taxation of Income of Controlled Foreign Corporations”, Bloomberg BNA Daily Tax Report January 22, 2018, https://www.mwe.com/en/thought-leadership/publications/2018/01/tax-refor-taxation-of-income/[2018-04-10] [^Back]

    [7]. [1] Alexia Fernández Campbell, “The Cost of Corporate Tax Avoidance”, The Atlantic, April 14, 2016, https://www.theatlantic.com/business/.../corporate-tax-avoidance/478293/[2018-04-10] [^Back]

    [8]. [1] Kitty Richards and John Craig, “Offshore Corporate Profits: The Only Thing ‘Trapped’ Is Tax Revenue”, Center for American Progress, Posted on January 9, 2014, 9:00 am, https://www.americanprogress.org/.../offshore-corporate-profits-the-only-thi../[2018-04-10] [^Back]

    [9]. [2] Ernest & Yong, “JCT Releases Explanation of International Provisions of Senate Tax Reform Proposal”, 20 December 2017, Global Tax Alert, EY Global Tax Alert Library, www.ey.com/taxalerts/[2018-04-10] [^Back]

    [10]. [3] Companies of certain category can delay tax payments and do not make one-time or installment payments within eight years not until certain trigger event (tax reform). Mike Smith, “A Comment Tax Reform and Deferred Foreign Income: What You Must Know by April 15, 2018”, 1/22/2018. [^Back]

    [11]. [1] Davis Polk, “GOP Tax Cuts and Jobs Act: Preview of the New Tax Regime”, December 20, 2017, https://www.davispolk.com/files/2017-12-20_gop_tax_cuts_jobs_act_preview_new_tax_regime.pdf/[2018-04-10] [^Back]

    [12]. [1] IRS, “Effectively Connected Income (ECI) |Internal Revenue Service”, www.irs.gov/.../effectively-connected-income-eci, Feb 16, 2018/[2018-04-10] [^Back]

    [13]. [2] Lowell D., Yoder David G. and Noren Elizabeth Chao, “Expansion of Subpart F under the Tax Reform Act Mcdermott”, Will & Emery, https://www.mwe.com/.../expansion-of-subpart-f-under-the-tax-reform-act, February 6, 2018/[2018-04-10] [^Back]

    [14]. [1] Lowell D., Yoder David G. and Noren Elizabeth Chao, “Expansion of Subpart F under the Tax Reform Act”, February 6, 2018. [^Back]

    [15]. [2] Joel Nagel, “Foreign Base Company Income”, 05/05/2017, http://premieroffshore.com/foreign-base-company-income/[2018-04-10] [^Back]

    [16]. [1] David Fisher, “How to Calculate Your Modified Adjusted Gross Income, Balance”, Updated August 31, 2017, https://www.thebalance.com/how-to-calculate-your-modified-adjusted-gross-income-4047216/[2018-04-10]; Lewis Saret, “Deductions You Can Take for Net Investment Income Tax Purposes”, Forbes, https://www.forbes.com/sites/lewissaret/2014/07/16/deductions.../[2018-04-10] [^Back]

    [17]. [1] Heather Cooper, Martha Groves, Pugh Philip, Tingle Madeline, Chiampou Tully and Bradford E. La Bonte, “The Senate’s New Base Erosion Tax: Highlights for Renewable Energy”, December 5, 2017, https://www.mwe.com/en/thought-leadership/publications/2017/12/senate-base-erosion-tax-renewable-energy/[2018-04-10] [^Back]

    [18]. [2] The corporates may enjoy a series of allowable income tax credits, such as investment tax credit and production tax credit. If these allowable income tax credits are taken into account, it is more likely that 10% of the modified taxable income be less than the sum of the items on the right side of the inequation, and the BEAT is more likely to be imposed. [^Back]

    [19]. [1] John Thune, “Tax Reform Will Increase Economic Growth, The White House Council of Economic Advisers Estimates that the Tax Reform Framework Republicans Have Presented Will Boost Economic Growth by Between 3 and 5 Percent”, November 7, 2017, https://www.thune.senate.gov/.../thune-tax-reform-will-increase-economic-gr...[2018-04-10]. Former Treasury Secretary Larry Summers called the CEA’s analysis “some combination of dishonest, incompetent, and absurd.” [^Back]

    [20]. [1] Heather Long, “Trump Administration Explains Details of How Tax Plan Would Pay for Itself, Immediately Gets Attacked for Assumptions”, December 11, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/12/11/the-treasury-has-finally-explained-how-the-trump-tax-plan-would-pay-for-itself-and-its-already-being-attacked/?noredirect=on&utm_term=.3601364a14a7[2018-04-10] [^Back]

    [21]. [1] Tax Policy Center, http://www.taxpolicycenter.org/statistics/amount-revenue-source/[2018-04-10] [^Back]

This Article

ISSN:1007-0974

CN: 11-3799/F

Vol , No. 03, Pages 9-25+4

May 2018

Downloads:4

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Article Outline

Abstract

  • 1 Main content of the US tax reform
  • Three new taxes in TCJA
  • 3 Impact of US tax reform on US economy
  • 4 Summary
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