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Trump’s Tax Revolution

Written by
1 December 2016

The meaning of this US presidential election will be picked over for decades. But time is a luxury in politics. Australia’s political class is right now trying to draw some lessons from Donald Trump’s unexpected victory.

Bill Shorten was first out of the blocks, targeting skilled migration and the 457 visa scheme with what he calls an ‘aggressive Australia First’ policy. For Labor, Trump’s win is a sign that the Democrats had forgotten their traditional blue collar workers, who feel threatened by foreign workers.

Prime Minister Malcolm Turnbull found a different lesson. Turnbull told the ABC’s 7.30 that the election vindicated his government’s focus on ‘jobs and growth’—‘One of his compelling arguments to many Americans was that he was going to make America great again, he was going to do that by driving economic growth’.

There’s enough in every election carnival for analysts to draw whatever lessons they like. And, while Trump was a strange and unconventional candidate, it’s always easy to overstate the possibilities of political and ideological realignment.

The fact is that the United States is now being led by a Republican president with a Republican majority in the House of Representatives and the Senate. Yes, the US President has a great deal of power—even more now thanks to Barack Obama’s steady accumulation of presidential discretionary power. But whatever Trump does will be restrained by a Republican legislature that won their seats in their own right, on traditionally Republican platforms.

As the IPA’s Scott Hargreaves and Daniel Wild write in the cover story of the IPA Review, that presents both challenges and opportunities for Australia. Trump’s highly publicised antipathy to free trade throws the Trans-Pacific Partnership back to the drawing board. If he follows through with tariffs on Chinese goods, a resulting protectionist surge would be very bad for the world economy. Australia benefits from the liberal world order as much as any country.

But the more classically free market Republican policies that Trump took to the election are where the opportunity of a Trump administration lies.

The election has already spiked any hope on the left that the United States will embrace the sort of harmful carbon tax that was introduced and repealed in Australia. Trump promises a substantial deregulatory agenda. The Washington-based Competitive Enterprise Institute has found that red tape costs the American economy $1.885 trillion a year. And Trump is offering tax cuts—both personal income tax cuts and a dramatic reduction in the federal corporate income tax rate, from 35 per cent, to 15 per cent.

A corporate tax reduction like that would be a geopolitical game-changer. The effect on the American business climate would be enormous. The effect on the global economy would be even more dramatic.

The United States is the largest economy in the world (depending on how much you trust Chinese economic statistics). Trump’s plan would put the United States in the same category as so-called ‘tax havens’ like Georgia (with a corporate tax rate of 15 per cent), Ireland (12.5 per cent) and Macao (12 per cent).

It is not hard to foresee any such change precipitating economic upheaval globally—pushing other countries to reduce their rates. Ireland, with its population of four and a half million, has an outsized global economic profile because of its low corporate tax rate and friendly business climate. As the Cato Institute’s Dan Mitchell points out, the corporate tax cut is the ‘crown jewel’ of Trump’s plan. It could be revolutionary.

Australian politics has been at a stalemate since the Coalition scraped narrowly into power in the 2016 federal election. The cause of economic reform has been at a stalement for much longer than that. A Trump administration could be the spark Australian efforts require.

It is not often understood that economic reform is a global program. Governments of left and right in the 1980s engaged in much the same programs of deregulation as they strove to attract capital from their reforming competitors.

Australians should hope this new Republican administration is up to the task.

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