Trump is not bad for the USA

For US President Donald Trump, things are not developing all that badly at the moment. Growth in the USA is very robust and unemployment has fallen to nearly 4 percent. The development of wages and salaries and of inflation remains very moderate. The US Federal Reserve is therefore under no pressure to tighten monetary policy and dampen growth. These are all solid conditions for a good longer-term economic development.

But Trump is not only doing well economically but also politically. The federal debt ceiling was temporarily raised, preventing authorities from coming to a standstill. However, the most important development is the Senate’s adoption of the tax reform. The law has yet to receive the green light from the House of Representatives, but the tax reform will most likely be adopted in the end.

The expected tax reform in the United States could turn out to be an enormous Christmas present for the US corporate sector. The planned relief of some 1.4 trillion US dollars would represent the greatest revision of the tax code since President Reagan. Were the tax rate for profits of US companies to be actually lowered from a nominal 35 to 20 percent, companies can expect a significant leap in profits. While the majority of US companies already pay far less than 35 percent tax (25 to 27 percent is likely to be more realistic) thanks to the many possibilities of tax evasion, most of these tax loopholes have not been closed in the tax law amendment. The effective tax rate of companies is therefore likely to fall more or less as strongly as the nominal tax rates.

Furthermore – as was the case in 2004 – assets from abroad are to be repatriated to the USA at favourable tax conditions. A permanent repatriation tax of 14.5 percent is being discussed here. In particular technology giants such as Cisco, Qualcomm, Apple and Oracle currently hold huge amounts of cash outside the USA. In terms of all US companies, the total of foreign assets adds up to more than 1.2 trillion US dollars. A part of the tax relief will certainly flow into higher wages and salaries and into more investments, but the bulk is likely to end up with the investors in the form of share buybacks and dividends.

The finance sector is also likely to experience a relative improvement in its competitive situation. Consent has been reached in the Basel Committee on a whole series of further regulatory measures aimed at making the banking systems safer (Basel IIII). Due, however, to the different structures of the banking systems in the USA and Europe, the additional capital requirements are far lower in the USA than in Europe. Aligning the business models is no easy task and will probably only be achieved in the long term.

The key difference lies in the way in which companies are financed. In Europe, companies primarily finance their activities through loans, and the loans are carried in the balance sheets of the banks. The competitive situation of US banks in relation to European banks can therefore be expected to further improve with Basel IIII. In line with this, the market shares and profitability of US banks will further increase, in absolute and relative terms.

The advantages of the USA as an investment location will therefore be particularly enhanced as a result of the tax reform but also because of Basel IIII. An economic policy displaying distinctly protectionist features will add to this. The decision to invest in the USA rather than in other countries will therefore be made far easier for many companies in the years ahead. Economic considerations and tax reasons argue for the USA as an investment location. Such decisions are therefore likely to boost the growth potential of the USA in the medium term, at Europe’s expense.

It is difficult to ascertain whether all this has been planned, and many developments would probably have come about even without Trump. But despite all the mockery over US President Trump, much is currently heading in the right direction for the USA.

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