With China and Europe panicking over President Donald Trump’s aggressive plan to slash corporate taxes – the real test is coming down to whether a deal can be made with Republicans on Capitol Hill.
Companies ready to move billions in cash and create thousands of American jobs are hoping they do just that, despite one prominent Republican negotiator mocking the Trump plan as a “magic unicorn.”
The White House recently unveiled broad parameters to cut corporate taxes from the current 35 percent rate to 15 percent.
“We’ll bring back trillions of dollars that are offshore to be invested in the U.S. to purchase capital and create jobs,” said Treasury Secretary Steven Mnuchin.
Despite the lack of details, foreign governments and non-governmental organizations reacted with fury. Europeans have said the Trump corporate tax cut would be disastrous for everybody and it would pressure the European socialist bureaucracy. Such corporate tax cuts would lead “to the deterioration of our public services,” said Claude Bartolone, President of the French National Assembly.
Oxfam warned it will make it harder for European governments to pay welfare and healthcare benefits. The Trump tax cuts “will only further increase global inequality which is undermining stability around the world,” Oxfam Senior Policy Advisor Didier Jacobs told Fox News.
It could do the same thing to the Chinese Communist Party. Last month, China’s official government mouthpiece “People’s Daily” bemoaned “the US tax cut will harm some export-oriented countries that are powerless to compete in tax reductions.”
“If Chinese companies are unwilling to stay at home, there will be Chinese job losses,” which threaten the Chinese Communist administrative state, said Professor Shen Dingli of Fudan University in Shanghai.
Such concerns may just be posturing, since Congress has had little time to focus on big-ticket items beyond the Obamacare replacement bill, and the Trump plan amounts to little more than a one-page blueprint.
“It’s just a piece of paper. There aren’t any details in it,” said former Congressional Budget Office Director Doug Holtz-Eakin.
House Speaker Paul Ryan’s top tax adviser, George Callas, sounded frustrated with the White House plan last month. “People can come up with whatever plans they want,” but if it’s not revenue neutral, meaning it won’t add to the soaring deficit passed on by former President Obama, “it’s not a real thing. Members won’t vote for it. I think one of the biggest threats to the timeline on tax reform is the continued survival of magic unicorns.”
Callas and others are worried about putting into place a corporate tax cut plan that has to expire, or sunset, after a few years because of rising government debt.
"A two-year corporate rate cut would have virtually no economic effect. It would not alter business decisions. It would not cause anyone to build a factory. It would just be dropping cash out of helicopters onto corporate headquarters,” said Callas.
“Don’t do what the White House is suggesting,” agreed Holtz-Eakin, “The corporate tax cut from the Trump Administration will hike the deficit.”
Rather than going from 35 to 15 percent, a plan floated by the House Republican leadership puts the target corporate tax rate in the mid-20 percent range, and that’s where Holtz-Eakin thinks it will end up after the negotiations with the White House.
“That should still be very attractive to companies planning to do business here,” he told Fox News.
But manufacturers won’t make big plans en masse until they are assured that whatever deal emerges from Congress contains reassurances it won’t suddenly come to an end after just a couple of years.
“What we need is permanency,” Scott Paul of the Alliance for American Manufacturing told Fox News. “If we have a better competitive market here we can capture global market share with the right policies.”
The pressure is on Congressional and White House negotiators in no small part because of the increasingly hostile business climate overseas. In a major reversal from just a couple of decades ago, companies both American and foreign are genuinely interested in bringing big manufacturing projects to American shores, provided the right mix of tax incentives.
One company betting it will happen is China-based Fuyao Glass led by billionaire Cao Dewang, the so-called glass king of China. In a shocking display of candor last fall, Cao declared the “U.S. is a cheaper and better place to make glass because taxes are much lower.” He said the Chinese government is hiking social welfare and environmental taxes, outweighing the benefits of cheaper Chinese labor.
Cao made the comments as he opened a new factory in Ohio, with more hiring to come in Michigan and Illinois. The Fuyao Glass webpage blares: “Manufacturing returns to the USA. We are looking to fill positions across the board.”
Professor Shen told Fox News that Fuyao is just the beginning. If Washington can come up with meaningful tax reform, “more Chinese companies would be enticed to leave China for America.”
As for American companies, they are growing tired of what one businessman told Fox News on condition of anonymity, is a Beijing that clearly “has animosity towards us.” In a survey taken just before Trump was elected, 80 percent of foreign companies said they felt less welcome than ever before in China and more than 60 percent have little or no confidence that the Communist government is committed to further opening China’s markets.
“Many Chinese mainlanders view doing business with the West as war, a view incompatible with the basic tenet of reasonably equal exchange in western trade,” said Robert Boxwell of Opera Advisors based in Kuala Lumpur, Malaysia.
“There’s already a competitive tax war going on. The United States is just way behind.” At least that’s the perspective of manufacturers, said Thomas Duesterberg, a senior fellow at the Hudson Institute. “If Trump and the Republican House, succeed we’re just catching up and moving one step ahead, hopefully.”
Duesterberg and others said an added effect of a permanently lower US corporate tax rate could be profound political change in Europe and China.
“This may force Europe to rethink the experiment they’ve been going through with a bigger and bigger welfare state. Over time it will force them to compete with the United States,” said Duesterberg.
The American businessman based in Asia told Fox News it could even help usher in sweeping changes to China, not unlike the way President Reagan’s policies helped bankrupt the Soviet Union, and ultimately led to the end of the Cold War.
“If a ‘tax war’ with the U.S. makes Trump this generation’s Reagan, i.e., helps bankrupt Beijing like Reagan did Moscow, then that’s a good thing,” he said.
But others worried there could be dangerous, unintended consequences, from a newly aggressive U.S. corporate tax code.
“The roots of World War I and World War II were based in trade policy,” said Professor Joseph Mason, an economist at Louisiana State University. “If Chinese and Europeans are unemployed for the benefit of U.S. employment that will lead to social unrest, and that same social unrest can lead to war.”
Professor Shen, however, is optimistic it won’t come to that.