U.S. tax reform: economic impact and countermeasures

ZHENG Liansheng1 CHEN Xu2

(1.Institute of Finance of the Chinese Academy of Social Sciences)
(2.Chinese Academy of Fiscal Sciences)

【Abstract】The tax reform of the Donald Trump administration is one of the most important tax reforms of the U.S. government since 1986. The core objective of the tax reform is to reduce corporate income tax and improve the international competitiveness of the U.S. companies. The U.S. tax reform aims to promote re-industrialization, ease political pressure and consolidate the foundation for sustainable economic recovery. It is implemented by carrying reform to simplify the tax system, lower corporate tax burden, and ensure household income. The corporate income tax rate is reduced from 35% to 21%, which is the largest policy dividend for large U.S. multinationals. The U.S. tax reform has a positive effect on economic growth. However, its overall impact on fiscal deficit and public debt is negative. In the future, the Trump administration will face significant pressures from fiscal budget and public debt ceiling. The tax cut, together with the Fed’s interest rate hikes and balance sheet contraction, will produce new spillover effect on the world economy. It may have a significant and complicated impact on China’s direct investment, capital flow, exchange rate stability, foreign exchange reserve security, financial stability and international competitiveness. It may be the optimal policy for China to rethink the intrinsic root causes of the relatively high tax burdens of its enterprises, review its tax revenue system that is supported by corporate taxes, build a modern fiscal system, and comprehensively deepen economic and financial system reforms to use market-oriented reforms to mitigate external shocks.

【Keywords】 tax reform; corporate income tax; spillover effect;

【DOI】

【Funds】 Youth Project of National Social Science Fund of China (14CJL017) Major Project of National Social Science Fund of China (13AJY018) Fund of China Scholarship Council

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    [16]. [1] There are differences between the Senate version of the act and the officially passed Tax Cut and Jobs Act. But the basic content is similar. So the impact of neutral institution JCT on economy should be basically similar to that of the final plan. For example, the Senate version of the act will reduce the maximum corporate income tax rate from 35% to 20% and formally implement it in 2019. However, the Tax Cut and Jobs Act lowered the maximum corporate income tax rate to 21% and formally implemented it in 2018. [^Back]

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    [32]. [1] The original statistics is from National Statistics Bureau and the ratio is calculated by the author. [^Back]

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This Article

ISSN:1007-0974

CN: 11-3799/F

Vol , No. 03, Pages 26-46+5

May 2018

Downloads:3

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Article Outline

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Abstract

  • Economic background of Trump administration’s tax reform
  • Core content of the tax reform of the Donald Trump’s administration
  • Analysis of the impact of U.S. tax reform on American economy
  • Impact of tax reform on the world economy and the Chinese economy
  • Conclusion and suggestions
  • Footnote