Sep 16-30, 2017

USA

The highlight of the fortnight was the announcement in Indiana of a comprehensive tax reform plan for the United States by president Trump who announced a four-point plan that included a tax cut for all Working American Families. He said that people will pay a lot less money. Single individuals will not be taxed on the first $12,000 of income earned, and a married couple will pay zero taxes on their first $24,000 of income. After that, taxable income will be subject to just three tax rates—12%, 25% and 35%. He also plans to expand the child tax credit, eliminate the credit’s marriage penalty, and provide a new $500 tax credit for elder-care and other adult dependents. This the new administration claims is the “real and lasting tax relief that everyday Americans badly need and truly deserve. This is what working Americans have been after. “

Second, Trump seeks to make the tax code simple, fair, and easy to understand whereby the vast majority of families will be able to file their taxes on a single sheet of paper. Third, the tax reforms seek to restore America’s competitive edge so that American businesses and workers can win again. Trump announced, “We will cut the corporate rate below the average of our foreign competitors—and we will reduce the top marginal income tax rate on small and mid-sized businesses to the lowest in more than 80 years. It’s so important because our companies are leaving our shores and when they leave, they let go of the workers. And then they make their product and they send it back into our country. We don’t tax them, we don’t do anything. Those days are over. We now have a competitive tax where our companies won’t be leaving.”

Finally, the framework that has been announced would hopefully encourage corporations to bring back “trillions of dollars in wealth parked overseas, and stops punishing companies for keeping their headquarters in the US. That’s actually what’s happening. Companies that stay in our country are being punished by our tax code. This will switch our current offshoring model—a tax system that drives jobs to other countries—to a new American Model. Under this plan, we want our companies to hire and grow in America, to raise wages for American workers, and to help rebuild American cities and towns.”

It however remains to be seen if this would be implemented and yield desired results.

Europe

Angela Merkel won the September 24 elections in Germany and was returned to power, securing her fourth term as German Chancellor. Merkel’s centre-right Christian Democrat-led alliance secured 33% of the vote, 12 points ahead of her main rivals, Martin Schulz’s centre-left Social Democrats (SPD), which secured around 21% of the vote. The SPD result is the worst for the party since 1949, prompting Schulz to declare an end to the “grand coalition” with Merkel’s party, and a promise his party would now sit in opposition to the Chancellor.

The far-right Alternative fur Deutschland (AfD) secured 13% of the vote to become the third-biggest party in the country. It's the first time in more than 50 years that an openly nationalist party will be represented in the German parliament. According to a report in the Guardian, “AfD’s propulsion into parliament just four years into its existence gives the country its first far-right force on the national stage since 1961, and a faction with the most substantial presence of rightwing extremists since the Nazi era.”

While Merkel may have won, the result is “disastrous” for Merkel, says BBC’s Berlin correspondent Jenny Hill. “The chancellor is being punished … for opening Germany's door to almost 900,000 undocumented refugees and migrants,” Hill says. With the SPD’s withdrawal from the ruling coalition, Merkel is faced with the task of building new partnerships to form a government, a task that could take months of delicate negotiations. Merkel said: “Today we can say that we now have a mandate to assume responsibility and we're going to assume this responsibility calmly, talking with our partners, of course.”

Brexit

Theresa May’s hard approach to Brexit seems to be under considerable strain and is being questioned even by her supporters. According to analysts, her government’s position on the transition to the final relationship with the European Union (EU) has become more confused. Before the general election, May spoke of an “implementation period” after March 2019, in which Britain and the EU would progressively enact a long-term arrangement that had been agreed before Brexit day. Now, the government has shifted, with Chancellor Philip Hammond pressing for a transition that will largely replicate EU membership, because Britain does not have enough time to set up new customs and migration systems, or the regulations and institutions required to enforce them. Nor is there time to replicate the trade deals that the EU has with third countries or do many other things before March 2019. It is not clear whether May agrees with Hammond. For their part, the other 27 members say that only once “sufficient progress” has been made on the money, citizens’ rights and the Irish border, will they move on to negotiations about the transition and the final deal. Britain’s new negotiating position is to hold out the possibility of paying if the EU agrees to a transition period. The British are trying to convince the 27 to change their line that the divorce must come first. This is a reasonable strategy from Britain’s point of view, but the EU is unlikely to back down.

Britain’s strongest card in the negotiations has always been its sizeable contribution to the EU budget. Since 2011, its net contribution has averaged £9.6 billion (€10.6 billion) a year, the second largest of any member-state in absolute terms, and the sixth largest in per capita terms. The EU’s budget runs in seven-year cycles, with the current one running from 2014 to 2020. If the UK leaves the EU with no deal on the money in March 2019, the EU stands to lose two years of United Kingdom’s (UK) net contributions - 2019 and 2020. Some spending agreed in this budget round – largely on infrastructure and other funding for economic development – will not be disbursed until after 2020. Add-in EU officials’ pensions, contingent financial guarantees and loans, and farm payments in 2019 and 2020, and the upfront bill the UK is being asked to pay is somewhere between €82 and €113 billion, depending on the calculation made. (After a decade this would fall to between €42 and €75 billion, as the UK received its share of EU spending and was paid back for its share of loans.)

Obviously, these are very large sums of money. But it does not follow that no deal would lead to much fiscal pain for the 27. The hole in the budget would have to be met by member-states which are net payers and those that are net recipients paying more. The simplest way of filling the hole in the budget would be to divide the UK’s net contribution in proportion to the size of each remaining member-state’s economy. This would mean that each member-state would have to contribute 0.1 per cent of GDP more to the EU budget annually, until the UK’s share of the EU’s current liabilities were paid off. Officials in Brussels say that, in the event of no deal, they could spread any extra payments by member-states over time, and they might also choose to bear down on future expenditure.