How „phenomenal“ will Trump’s tax reform be?

President Trump has signalled that he will be making a „phenomenal announcement“ in coming weeks on matters of tax policy.

Since his election but at the very latest since Donald Trump’s inauguration as President of the United States of America, the imminent introduction of a major tax reform in conjunction with the prospect of higher public expenditure and deregulation is serving as a new stimulus for corporate profits in the USA.

The present tax system in the USA is inefficient by international standards and discriminates against US companies to some degree in international competition, particularly if profits generated abroad are to be transferred to the USA.

The intention of the Republicans to focus on a number of weaknesses in the tax system must be viewed in a positive light. A lower tax rate applied to a broader tax base would lead to efficiency gains. The additional tax revenues from a repatriation of foreign assets could be used to stimulate the economy. If, by introducing a border-adjustment tax, incentives were to be created to relocate a higher share of net output to the USA, GDP growth could indeed turn out higher than if no such policy were introduced.

However, the positive repercussions of a new type of corporation taxation (equal treatment of debt capital/equity capital, higher investments in durable assets, higher domestic production, downscaling of the current account deficit) are counterbalanced by key arguments which, as things stand today, seriously question whether a „phenomenal tax reform“ will actually be implemented in the USA. Worth mentioning in this context are the risks of a marked rise in consumer prices, a strengthening US dollar and objections raised by the WTO.

According to our estimate, the equity market trend and valuation is pricing in higher corporate profits accompanied and driven by a tax reform. If the reform were to be addressed either in part (e.g. the repatriation of foreign assets) or in full, this would have a positive impact on the valuation and attractiveness of the US equity market.

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