In any one of the past years, Trump finally made a beautiful comeback.
In the early hours of December 3, local time, in a lasting game between the parties, the Senate passed the Republican Party’s tax reform plan of more than 500 pages with 51 votes in favor and 49 votes against.
In the eyes of the public opinion in the United States, this not only means a major victory for Trump and the Republican Party, but it is also the biggest adjustment of the US tax law for more than 30 years. According to the newly passed tax reform bill, the corporate tax rate in the United States will be reduced from 35% to 20%, and individual income tax will also be adjusted downwards at different levels.
The United States, the world’s largest economy, and the core hinterland of the global capital market, its massive fiscal and tax reforms will undoubtedly have a tremendous spillover effect on the world economy.
The most direct influence of the US tax reform is, of course, the U.S. economy.
As we all know, at this stage, there are two main means for macroeconomic regulation and control by the state: First, fiscal policy, which affects the amount of cash in the market by increasing/reducing taxes, in order to curb economic overheating or stimulate economic development; second, monetary policy The main reason is that the central banks of various countries have adjusted their exchange rates by raising/lowering the exchange rate of their currencies, affecting the production costs of enterprises, and adjusting their economic activity.
And in Japan, Europe and other countries long-term zerointerest rateEven negativeinterest rateWhile the monetary policy is still difficult to stimulate economic development, the United States’ fiscal and taxation reforms are expected to have high hopes.
The most direct understanding is that the reduction in tax burden also means that the disposable income of residents and the production and operation costs of enterprises have fallen. This will undoubtedly stimulate household consumption, increase corporate profits, and promote reinvestment of enterprises and enhance economic vitality.
The U.S. tax fund has estimated that this plan will increase the U.S. domestic gross domestic product by more than 9%, real wages by 8%, and create at least 2 million new permanent full-time jobs. Trump is even more bold: "This is a Christmas gift for all Americans this year! To save an average of $1182 a year for each American family!"
Of course, the reform of the tax system is very complicated and it can be said clearly in a few words. In general, the United States has this tax reform with a few major points:
First of all, the "personal system" has changed to a "territorial system," which means that as long as overseas taxes have been paid, U.S. companies will not need to pay more when they transfer back to their home countries. This move is widely believed to stimulate the return of U.S. corporate profits.
In addition, tax rates have been greatly simplified, and multiple taxes have been eliminated, including inheritance taxes, alternative minimum taxes, and ATMs. It can also encourage more economic activities.
At the same time, some voices, including some US lawmakers, also believe that tax cuts will bring a huge fiscal deficit to the U.S. government. Earlier, according to estimates from the Independent Tax Policy Center, the House of Representatives version of the tax reform bill will increase the United States’ $1.3 trillion deficit over the next decade. Whether the U.S. government can withstand this, there is still great uncertainty.
However, these are just some people's judgments. There are also many disputes surrounding these judgments. In fact, the current version is not the final version. There is still a certain difference between the bill passed by the Senate and the bill passed by the House of Representatives last month. What changes will happen in the future and when it will be implemented, it still needs to wait.
It is very important that, as the process of globalization of the world economy continues to accelerate, no country can be independent of the economic activities of other countries. The fiscal and monetary policies of a country will also have a far-reaching impact on the economy of other countries. For countries such as the United States that have a highly open financial market and strong currency, the impact is even greater.
As the world's second largest economy, with up to 3 trillion US dollarsforeign exchange reservesIn countries with high levels of economic and trade reliance, China is undoubtedly one of the countries most concerned about this wave of tax spillovers.
Mei Xinyu, a renowned economist and researcher of the International Trade and Economic Cooperation Research Institute of the Ministry of Commerce, believes that in theory, the impact of the US tax reform policy on China is mainly two-fold. One is the impact of capital flows, and the other is the introduction of monetary policy. The subsequent impact.
First of all, according to its latest tax reform plan, the U.S. corporate income tax will be lowered from 35% to 20%, which means that the operating pressure of the company will be greatly reduced, which, to a large extent, will drive U.S. overseas retention. The large-scale return of profits to the domestic market has stimulated the withdrawal of US companies from the Chinese market. The potential impact on China’s balance of payments, foreign exchange reserves, and exchange rates of the RMB will be significant.
Secondly, it must be pointed out that the US tax reduction policy is based on the United States’ fiscal policy of “increasing interest rates and contracting”, and this combination of punches will undoubtedly affect the base money supply of other countries. How to understand? The so-called rate hike is to increase the exchange rate of the U.S. dollar and the U.S. appreciates. Then the yuan will depreciate in disguise. The principle of shrinking the table is similar: the Fed has to recover too many dollars from the market. All in all, the already very strong dollar has become stronger, and objectively it has also caused devaluation pressure on the renminbi.
In general, such "double killing" of monetary and fiscal policies will have a "tightening" effect on other countries. This double tightening will not only cause great downward pressure on the prices of primary products (unprocessed original products), but will further increase the pressure on capital flight and generate a great deal of balance of payments and foreign exchange reserves. Impact.
We must be vigilant about this wave of shocks.
With regard to this, everybody must have jumped out of Lenovo's mind: In the mid to late 1980s, the "Plaza Accord" led by the United States, a consternation that many people thought was the cause of the Japanese economy's slump for decades.
What protocol can be as legendary?
This must be said back to the United States in the 1980s. At that time, the United States faced a crisis of the high exchange rate of the U.S. dollar, foreign trade deficit, and the continuous expansion of the government’s fiscal deficit. The trade deficit accounted for the timeGDP3.6% of the economy is extremely unhealthy. What about Japan at that time? In 1985, it replaced the United States as the world’s largest creditor country, and its manufactured products flooded the world with a frenzied expansion of capital.
Thus, in order to boost exports, there has been a voice in the United States that uses administrative means to lower the exchange rate of the United States dollar and save American exports. Things went on smoothly beyond imagination. In 1985, the finance ministers of the United States, Japan, the former Federal Republic of Germany, France, and the United Kingdom gathered at the New York Plaza Hotel and reached a "great appreciation of the yen and mark to restore overvalued dollar prices. "The agreement.
Since then, everyone has been familiar with the history. The yen has appreciated sharply. From the first quarter of 1985 to the first quarter of 1988, it has appreciated by 54%. Then the huge economic bubble has been punctured and the Japanese economy has been stuck for decades. This is the famous “lost decades” in economics textbooks.
So is the case of Japan comparable to today’s China? This time, as news of the US tax reform came out, many people began to mourn that "winter is coming, capital is coming, and the good days are over." Is that really the case?
To a certain extent, as the world’s second largest economy and the world’s most important exporter of products, China’s foreign exchange reserves have leapt to the top in the world, and the renminbi is facing great pressure for appreciation. This situation is very similar to Japan in the mid-1980s.
But the question is, is this logic reasonable?
Not to mention that under today's increasingly free market economy, it is totally unrealistic to rely on a single administrative force to cause a heavy blow to the economy of other countries. Even in the case of the "Plaza Agreement," the biggest impact of exchange rate changes is not the output or input of products, but the flow of capital and the corresponding wealth effect.
Therefore, it is far-fetched to many economists that Japan's "lost decades" are completely attributed to the "Plaza Agreement." It is also wrong to treat the fiscal and taxation policies of a single country in the United States simply as a scourge.
We certainly cannot underestimate the US tax reform policy. However, the situation is far from being as bad as it seems.
Imagine if the United States drastically reduced taxes and further widened the tax burden gap with developing countries. Will other countries be forced to make adjustments to other fiscal and tax policies such as tax cuts under a series of pressures such as capital flight? In fact, Britain, France and other major developed countries have already promoted tax reduction legislation. If this idea is really realized, this round of global tax cuts will undoubtedly, to a certain extent, reduce the policy effect of the US tax cuts.
In addition, it is very important that the analysis we have made before is based on the judgment of general economics and common sense, and that economic activities in reality are far more complicated than theoretical complexity.
From the inside of the United States, will the US tax cuts really push back the return of multinational corporations? Not really. Tax rate is only one of the factors that affect corporate investment. Other factors, including macroeconomic policies, business environment, and talent conditions, will have a great impact.
In Mei Xinyu's view, a single fiscal policy can hardly boost the U.S. economy. It also needs to be combined with a series of social reforms such as the following benefits to play its best role. This point, of course, is also a matter for transnational capital to consider carefully.
Mei Xinyu pointed out that it is very important that “from the visit to China by Trump that China’s government is suitable for the Chinese people, to the recent series of moves, he prefers to reduce intervention in the outside world and concentrate on domestic economic reforms. Incentives for production and labor ... This concept is not a bad thing for China and the outside world. China and the United States are not enemies. The United States is focusing on domestic economic development and boosting its economy. It is not a bad thing for China.
According to Mei Xinyu, what China should do most at the moment is to focus on its own set of reforms and not be distracted by outside actions. The US tax reform may have some impact on China, but this can also be transformed into an opportunity for reform.
There are still some potential problems with the current fiscal and taxation in China, such as high tax rates, transfer payments and excessive reductions. If this can be used as an opportunity to reduce the number of deductions and exemptions, transfer payment concessions to a certain extent, reduce unnecessary fiscal expenditures, and at the same time reduce the tax rate, China’s fiscal reform will also embrace a broad space.
In this process, focusing on one's own feet, broadening the tax base, winning more fair, safe and sustainable fiscal and taxation policies, and revitalizing the economic activities of the country and society are the most important ideas for China today.
(Original title: Knightship Island: Great Tax Cuts in the United States How Should China Respond?)