Initial Effectiveness of the US Tax Cuts

Trump took office in January 2017, and then introduced tax reform policies and pushed for large tax cuts in both Houses of Congress in November and December. The purpose of Trump’s tax reform can be summarized into two points: First, to promote employment and economic growth. By cutting corporate income tax and personal income tax, increase corporate profits and personal income, expand corporate investment and personal consumption, expand employment and stimulate economic growth; second, revitalize the US manufacturing industry. Through tax reductions, the return of funds from U.S. overseas multinational corporations and the inflow of foreign funds have helped boost the “reinvigorating manufacturing” strategy. For more than two years since the implementation of the tax reform, various indicators can be said to be mixed.

The overall impact of tax cuts
For businesses, there are three main provisions that affect the company’s business income under the 2017 Tax Cuts and Jobs Act.

One-time Deemed Repatriation Tax on Accumulated Foreign Earnings. Under the new law, US multinational companies are deemed to have been repatriated regardless of whether they have repatriated foreign accumulated income. The tax rate is 15.5% of cash and cash equivalent income, which is 8.0% of non-current asset income. The parent company can choose to The tax is paid in installments during the year. Repatriation tax is considered a national income and product account and is classified as a transfer of business to government capital.

Decrease in Corporate Tax Rates. Starting from the first quarter of 2018, the tax law changed the domestic nominal corporate tax rate from 35% to 21%, which will reduce the tax paid by enterprises, but will not affect total national income (GDI), as pre-tax profits are included in GDI .

Taxation of US Multinational Companies. For US multinationals, the new tax law shifts the tax system from a global system to a local system. Under the global system, all company profits overseas are taxed at the U.S. statutory corporate tax rate, and these taxes are deferred until profits are repatriated to the United States; in national income and product accounts, repatriated profits are classified as coming from the world Dividends from other regions. Under the newly revised domestic tax system, companies no longer levy taxes on repatriated U.S. funds, but they may need to pay new taxes: First, the global intangible low tax income tax (GILTI), which is a levy on foreign subsidiaries ’excess income A minimum tax of 10% is levied on the excess of the tangible business asset return rate; the second is the basic erosion anti-abuse tax (BEAT), an alternative minimum tax applicable to companies that pay excessive interest or service payments to related parties.

The above three clauses show that the new tax law will help reduce corporate taxes, increase corporate profits, prompt profits from US overseas companies to return to the United States, and help attract foreign direct investment in the United States.

Corporate related taxes fall
After the tax rate is reduced, the first is the reduction of the total US corporate income tax. In 2017 and 2018, U.S. corporate income taxes decreased compared to the previous year. Among them, the reduction in 2017 was US $ 58.2 billion and the reduction in 2018 was US $ 99.6 billion. The rates of change were -15.4% and -31.2%, respectively. Corporate income tax in the first quarter of 2019 decreased by $ 3.1 billion, or 1.4%, compared with the fourth quarter of 2018.

The tax cuts in the United States have reduced corporate income tax and the corresponding corporate profits should have increased. However, based on the company’s profit adjusted by inventory valuation, it decreased in 2017, and the reduction in 2018 further expanded. In 2017 and 2018, the total profits of U.S. companies decreased by $ 32.4 billion and $ 72.2 billion from the previous year, respectively. Among them, the total profit of domestic industrial companies decreased by 4.4% and 7.3% respectively from the previous year; the total profit of companies from other regions of the world increased by 10.2% and 10.5%, respectively. In other words, the decrease in the total profit of the company comes from the decrease in the profits of the domestic industry, including financial and non-financial companies. The profits are decreasing, but the profits of overseas companies are increasing. The company’s profit in the first quarter of 2019 decreased by 1.5% compared with the previous quarter (the fourth quarter of 2018), of which domestic company profits fell by 2.5%.

If the capital consumption adjustment factor is added, the company’s profit is calculated based on inventory valuation and capital consumption adjustment. In 2018, the company’s total profit was US $ 20746 billion, an increase of US $ 68.7 billion over the previous year. Among them, the profits of the domestic industry and the rest of the world have increased compared with the previous year. Further observe the situation in each quarter, the fourth quarter of 2018 and the first quarter of 2019 continued to decline sequentially, -0.9% and -3.8%, respectively.

Personal disposable income growth
The total personal income of the United States in 2018 was 17.8 trillion US dollars, an increase of 5.6% over the previous year, of which employee compensation and total owner income increased by 5.0% and 4.7%, respectively. After deducting taxes and social insurance payments, the total disposable income of individuals was US $ 15.7 trillion, an increase of 5.6% over the previous year. Excluding the rise in prices, the actual personal disposable income for the year was calculated at US $ 14.6 trillion in 2012, an increase of 4.0% over the previous year. From 2016 to 2018, total personal disposable income in the United States has increased.

From 2017 to 2018, the value added of various industries in the US private industry, its proportion in real GDP, and real growth rate Notes: (1) The data is adjusted quarterly at the annual rate. (2) “Real growth rate” refers to the rate of change of the actual value added compared to the previous year. Data source: Bureau of Economic Analysis

Of the personal disposable income in 2018, the total personal expenditure was 14.5 trillion US dollars, an increase of 5.3% over the previous year; the total personal savings was 1.2 trillion US dollars, an increase of 17.4% over the previous year, exceeding the growth of personal expenditures, and personal savings in personal disposable income The proportion of China rose from 7.0% to 7.7% in the previous year, an increase of 0.7 percentage points; accordingly, the proportion of total personal expenditure decreased from 93.0% to 92.3%, a decrease of 0.7 percentage points.

However, in the first half of 2019, personal disposable income continued to grow year-on-year, with the year-on-year growth of 8.5% and 8.1% respectively in the first two quarters, and the proportion of personal savings fell to 4.4% and 2.5%, respectively. The decline in the proportion of personal savings indicates that the proportion of personal expenditure is increasing.

Increase in foreign direct investment in the manufacturing sector
From 2016 to 2017, the amount of foreign direct investment (FDI) in the United States has been declining for two consecutive years, decreasing by $ 59.8 billion and $ 107 billion, respectively. After the implementation of the tax reform law in 2018, US FDI increased. In 2018, FDI entered through acquisition ($ 287.3 billion), establishment ($ 5.3 billion), and expansion of business ($ 3.8 billion) reached $ 296.4 billion, an increase of $ 23.6 billion or 8.7% over the previous year.

Acquisitions have become the main form of foreign direct investment in the United States. The amount of new acquisitions in 2018 increased by 9.9% over the previous year, and the amount of new acquisitions accounted for 96.9% of all new FDI additions; both new investment in direct investment to establish enterprises and new direct investment expansion The annual decrease is -11.8% and -28.2%.

From the perspective of investment areas of FDI, the new investment in manufacturing FDI in 2018 accounted for 67.4% of the total new FDI, an increase of 28.4 percentage points from the previous year. Compared with 2017, except for the manufacturing industry, the proportion of FDI in the retail industry increased in 2018, and the real estate and leasing industries increased slightly, but the proportion of FDI in most service industries declined.

From the perspective of various manufacturing sectors, the sector with the largest FDI investment and the largest increase in proportion in 2018 is the chemical industry, whose FDI proportion jumped from 8.9% the previous year to 48.0%; followed by the plastics and rubber industries, the proportion From 1.0% to 10.6%; non-metallic mineral products increased from 0.02% to 1.2%. At the same time, the proportion of FDI in some sectors has declined, such as the transportation equipment sector, the computer and electronics sectors.

Reduced stock of foreign direct investment
In 2018, the stock of foreign direct investment in the United States was 5.95 trillion US dollars, a decrease of 62.3 billion US dollars over the previous year.

In 2015, the United States’ stock of direct investment from Canada in North America decreased for a time, but has continued to increase since then, increasing by USD 10.7 billion in 2018 compared with the previous year. The stock of direct investment in Europe has also increased since 2014, with an increase of $ 57 billion in 2018 over the previous year. The stock of direct investment in the Middle East continued to decrease from 2014 to 2016, and began to increase in 2017, increasing by 3.1 billion US dollars in 2018. The stock of direct investment in Latin America, other Western Hemisphere regions, and the Asia-Pacific region continued to grow from 2014 to 2016, and then declined after 2017. The stock of direct investment in these two regions decreased by USD 75.8 billion and USD 54.9 billion in 2018, respectively. The stock of direct investment in Africa continued to decline from 2014 to 2017, and further reduced by 2.5 billion US dollars in 2018.

In general, the stock of US foreign direct investment declined in 2018.

The value added of the manufacturing industry has expanded
In 2018, the U.S. manufacturing added value was 2.33 trillion U.S. dollars, and the actual added value increased by 4.5% over the previous year. This growth rate was only lower than the growth rate of the information industry, professional and business services, and higher than many other industries.

Among the various industries, the value added of the financial, insurance, real estate, and leasing industries accounted for the largest proportion of GDP, accounting for more than one fifth, and the proportion of value added in 2018 decreased by 0.1 percentage point from the previous year. Second, the proportion in 2018 increased by 0.1 percentage point. The manufacturing industry ranked third. In 2018, the value added accounted for 11.4% of GDP, an increase of 0.2 percentage points from the previous year.

After the tax reform, the added value of the manufacturing industry has been increasing since the second quarter of 2018. The increase in durable consumer goods has increased from high to low, while the non-durable consumer goods have increased from low to high.

Unemployment rate decreases and real GDP per capita rises
After the financial crisis in 2009, the average annual unemployment rate in the United States once reached the highest point of 9.6% in 2010, and then continued to decline with the implementation of various government measures. In 2015, it fell below the pre-crisis level of 5.3% in 2015. ; In 2017 it fell further to 4.4% and in 2018 it fell to 3.9%. The real GDP per capita was less than US $ 50,000 in 2009. After three years, it reached US $ 51,600 in 2012, surpassing before the crisis; it reached US $ 55,500 in 2017, and increased to US $ 56,700 in 2018.

In December 2018 and January 2019, the unemployment rate rose at one time, but the overall trend has since fallen. So far, the unemployment rate has fallen by 0.2 percentage points.

It can be seen that after the U.S. tax reform, domestic corporate income tax has generally declined; the changes in corporate profits have been calculated according to different methods, but no matter what method is adopted, corporate profits have continued to decline in the fourth quarter of 2018 and the first quarter of 2019. , But the profits of foreign companies have increased.

Personal disposable income increased, of which, the proportion of personal savings increased after the increase; personal direct investment in the domestic manufacturing sector increased, and the stock of foreign direct investment decreased; the value-added scale of the manufacturing industry has expanded, and the actual value added of all industries except agriculture, forestry, animal husbandry and fishery has increased There has been growth; real GDP per capita has further increased, and the unemployment rate has continued to decrease.

Although tax reform policies are inevitably affected by other policies, such as trade protection policies for the revitalization of manufacturing, trade frictions and trade wars between the United States and trading partners such as China, the new tax collection policy has reduced corporate income tax, Increased profits, increased value-added manufacturing, and increased foreign direct investment in the United States have played a certain stimulating role. However, as of now, the effect of tax reduction measures in promoting corporate investment, increasing exports, and attracting overseas companies to return has not been fully demonstrated.