Taxing the Economy: Achieving a Delicate Balance
The study of macroeconomics is an interesting one, as it explores the behaviour of the aggregate economy and the complex relationships that exist between factors such as inflation, interest rates and the underlying value of currency.
The impact of taxation within the economy makes for an equally interesting study particularly over the course of modern history. This seems even more relevant in the modern age, with Donald Trump's proposed tax plans expected to slash corporate taxes and trigger a boom in the business world.
More specifically, Trump's proposed corporate tax reforms would lower the maximum rate for small and medium-sized businesses from 38% to 15%. The new President has also proposed a one-time repatriation on any income that corporations earn overseas, with a potential rate of 10% enabling U.S.-based businesses to reinvest money back into the American economy.
Zak Goldberg is a Law & Business Graduate from the University of Leeds who has chosen to follow his aspirations of becoming a full-time published writer, offering his expertise on all areas of law and finance.
You can follow Zak on Twitter here.
This is a guest blog post*
Tax and the Economy: A Brief History and Explanation
In this respect, Trump is following in the footsteps of his Republican predecessor Ronald Reagan, whose ambitious plan to reduce taxes by an estimated 30% in three years was seen as ground-breaking at the time. Regan was of the opinion that a punitive and oppressive tax regime had restricted economic growth in the States, and his decision to slash corporation levies was designed to empower business spending and trigger the reinvestment of funds into the national economy. This would also have the benefits of reigniting the stock markets, increasing sentiment and making practices such as CFD trading increasingly popular.
It is worth remembering that Reagan's tenure as President began after a turbulent decade for the U.S., as rising unemployment levels and inflation had forced the government to extend the money supply in a bid to stimulate the economy. Reagan saw this as unsustainable, particularly from the perspective of government spending and the stringent tax regulations facing small, medium and large businesses. So, he sought to create a taxation model that would reduce the reliance on the public sector, slash taxes for corporations and establish a competitive economy that was driven by successful corporations.
Of course, Regan's plan and the challenges that they were designed to meet hint at the obvious balance that economists and world leaders must face when establishing tax levies. After all, taxation creates income that the government can leverage to invest in public services, while targeting high earners and corporations creates a socialist infrastructure that successfully (and hopefully fairly) distributes wealth. Conversely, excessive taxation can restrict business growth and limit job creation over time, potentially creating a scenario where there are less tax payers and more citizens dependent on state welfare.
Boom and Bust, Ireland and the EU
The difficulty in achieving this balance is reflected by the economic cycles that we have witnessed over time, which often bridge the gap between jobless economies and those in which large corporations are able to negotiate extremely low tax deals with national governments. Whether the income saved through these deals is subsequently used to create jobs or increase wages is a major bone of contention, but there is no doubt that low corporate tax rates help to drive competition and increase private sector spending.
For an example of the latter, we need look no further than the arrangement that Apple were able to secure in Ireland. Following the passing of a relatively obscure revenue law passed in 1991, Apple was able to base itself in Ireland and subsequently avoid paying almost any tax on its profits in Europe (and other global markets). This became the subject of a U.S. Congress enquiry in 2013, before the EU and Brussels officials launched their own investigation while souring relations between the union and American authorities.
The UK: Why Taxing the Economy is a Controversial Talking Point at Present
This type of agreement has become prevalent in England, Europe and across the globe, with giants such as Uber paying barely any tax through their UK arm of the business. It is also indicative of the perceived imbalance that exists within the region and Britain in particular, as while citizens have experienced years of austerity, large corporations are deemed to be getting richer. These extreme conditions were tackled in Labour's recent election manifesto, and they highlight the way in which an unfair taxation policy can ultimately harm people at both ends of the economic spectrum.
This became a major focal point for the recent election, with the Tories having presided over seven years of austerity through a sustained spell of reduced public spending. This policy was initially implemented to counter the excessive spending of the previous Labour government, but it has also allowed large corporations such as Uber to reduce their tax burden, thrive and contribute towards higher levels of job creation in the UK.
So while this economic and taxation policy has seen the unemployment rate in the UK recently fall to a 43-year low of 4.5%, reduced government spending and the implementation of stringent pay caps in the public sector have created a huge wealth divide in Britain.
This a major source of angst, and something that Labour leader Jeremy Corbin successfully leveraged to drive his popularity in the recent election. His own tax proposals would see firms such as Uber and Apple pay a fixed rate of corporate tax, while CEOs and high earners would also see their own personal tax bands increase to 50%. This would instantly create a huge source of revenue that could be reinvested into the economy and public sector, theoretically establishing a more balanced financial climate that can be sustained over time.
In reality, however, Corbin's ethos is potentially flawed and capable of increasing the national debt exponentially. It also has the potential to drive big businesses out of the UK, reducing job creation and placing a greater strain on the welfare system in the process. This policy also highlights the difference between the right and the left on the UK's political spectrum, while it showcases the damage that shifting between two economic extremes can do citizens, businesses and public sector authorities.
The Last Word
As we can see, taxing the economy is a challenging exercise for government, and one that plays a pivotal role in empowering all sections of society. The examples we have discussed also highlight the perils of extreme and unbalanced taxation policies, whether they are borne out of political bias or as a direct response to an existing economic climate. Either way, taxation policies that favour one demographic or market over another are unsustainable, as they create seismic economic shifts and place too great a strain on either businesses, the public sector or individual households.
Ultimately, the need for balance is paramount, as otherwise we see economic growth stagnate or public service spending dwindle. It is inequality in the tax system that also creates volatility, and variable cycles of boom and bust across the globe. We have already seen such inequality blight the U.S. and Britain throughout the 1970s and 1980s, for example, while a return to traditional right and left political divides in the UK also means that the British economy is being placed under an incredible strain at present.
This is without considering the impact of Brexit, which is likely to see inflation rise further in the UK as real wages stall and big corporations thrive. This is perhaps one of the reasons behind Prime Minister Theresa May's recent call for collaboration between the Conservatives and Labour, and while this has been derided by some it arguably creates a unique opportunity for the government to create a balanced taxation policy that offers incentive to everyone. This would also help Britain to cope with the challenges ahead, by equipping every single business, household and government agency to operate to their full potential.
This may be an impossible dream, of course, but regardless of what the future holds there is one thing that we can be sure of. This is that extreme conditions trigger even more extreme reactions, so a balanced and fair-minded taxation policy is needed if countries are to thrive over a sustained period of time.
*Guest blog posts do not necessarily reflect the views of FocusEconomics.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Date: July 18, 2017
Tagsprecious metals United Kingdom Euro Area Latin America Japan Exchange Rate European Union Infographic Turkey UK Panelists Commodities Forex Fed G7 China Germany oil prices Sub-Saharan Africa Australia Ukraine Mexico Canada United States Oil Spain Portugal Inflation Energy Commodities Africa Italy Consensus Forecast World Bank Brexit Brazil Economic Growth (GDP) Vietnam Trade Nordic Economies Asia Unemployment rate OPEC Tunisia Base Metals Commodities Russia Agricultural Commodities Eastern Europe Major Economies Banking Sector Housing Market Industrial Metals Commodities South Africa India NAFTA Financial Sector Emerging Markets USA Argentina MENA Gold Colombia Precious Metals Commodities IMF Greece Venezuela Investment Company News France Iran
ASEAN economy to see best result in years https://t.co/dtUEc8O6XM
3 hours ago
Find out what the key risk are to the Sub-Saharan Africa economy this year: https://t.co/3FJNSXuquV
7 hours ago
Korea’s housing reforms will impact the economy next year. Find out how https://t.co/WGy4yEEmva
19 hours ago
Sub-Saharan Africa GDP 2018 Forecast: analysts slash forecasts on political risks https://t.co/myw4vXbCDM
1 day ago
How will China’s upcoming National Congress of the Communist Party shape the economic and political future? https://t.co/0wYwPd07q7
1 day ago
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- Is the UK really "shackled to a corpse"?
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- Gold: The Most Precious of Metals (Part 3)
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- 2017 & 2018 Economic Outlook for the Top Oil Producing Countries
- Which countries will have the highest and lowest inflation in 2017?
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- There's no end in sight to the Venezuela crisis
- Can the peso predict the U.S. election results?
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit