Trump lowers taxes; will other countries follow?

Donald Trump has just lowered corporate taxes to 15 per cent from 35 per cent, in an effort to seduce American companies, which have stashed $2.5 trillion of surplus funds abroad, to bring them back to America at an attractive rate. If a large part of this is brought back to the US, as this columnist expects, it would help revive investments, and jobs, and also help fund a government which is about to hit a Congress-authorised debt ceiling.

Individual tax slabs have been cut to three from seven and rates lowered. Estate duties have been abolished.

Given that the US has a cheap source of energy in shale oil/gas, the 15 per cent tax on corporate profits should be attractive enough to revive its investment cycle.

The tax cut would also put severe competitive pressure on other countries, including India, to follow suit. The Modi government has been attempting to sell a ‘Make in India’ programme, aimed largely with the objective of job creation.

Its efforts have not borne much success, for many reasons, mainly the snail-like pace of our judicial system. International companies prefer the alternate route of settling disputes through international arbitration. India’s track record in arbitration is poor, and it has lost in cases such as DoCoMo and Dai-ichi.

Last week, India was at the receiving end of adverse decisions in international arbitration in the Cairn Energy case. Our States are also, often, badly governed. What else explains the slowness of the Maharashtra government to curb illegal sand mining, as wonderfully brought out by RN Bhaskar in FPJ. The Maharashtra government has not filed a single case of illegal sand mining in court!

The Centre is, however, taking some sensible steps. In a bid to jumpstart the sale of electric vehicles, it is contemplating giving tax breaks to electric vehicles sold without a battery.

The bane of electric vehicles is the long time (hours) it takes to recharge a battery compared to the short time (minutes) for a petrol tank to be filled. To avert this, an idea mooted by Israeli company Better Place, is being adopted. Batteries are to be rented (not owned) just like mobile phone plans. So, when an electric vehicle owner drives into a pump to recharge a battery, it is simply removed, and replaced, within minutes, by a fully charged one.

A flight of funds to the US thanks to the tax-break can threaten the ongoing market rally. Besides, there are other threats. An escalation of the North Korean situation once the US aircraft carrier reaches the region (next week) is one of them. Another is the withdrawal of funds given by Chinese banks to ‘entrusted’ asset managers to manage. The total is a whopping $1.7 trillion. The asset managers, in turn, had lent the money to construction and other firms, which will face a severe funds crunch.

Another risk factor is if the US Fed drops the MOAB and raises interest rates more sharply than expected.

(The writer is India Head, Euromoney Conferences. The views are personal.)

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