Flat White

What we can learn from tax cuts and Trump

13 August 2018

8:35 AM

13 August 2018

8:35 AM

The Trump administration’s liberalisation of the United States economy has seen growth accelerate to four per cent for the second quarter of 2018, in annualised terms. This is the fastest rate of growth in four years.

Yes, this is just for one quarter and there are a range of factors at play. But massive tax cuts, deregulation, and liberalisation of America’s energy sector have had a big impact.

In December 2017, President Trump signed into law a substantial drop in the US corporate tax rate, from 35 per cent to 21 per cent.

Workers yielded benefits immediately, with companies from Boeing to Walmart offering employee bonuses and pay rises. To date, more than 90 per cent of American wage-earners have higher take-home pay as a result of the tax cuts, according to Americans for Tax Reform, a not-for-profit which advocates for lower taxes.

Alongside the corporate tax cuts has been a deep and sustained red tape reduction agenda. One of Mr Trump’s first actions as President was to issue an Executive Order which announced a “one-in-two-out” approach to regulation, where “for every one new regulation issued, at least two prior regulations be identified for elimination.”

The operative word being “at least.” At last count, the Trump Administration was running at one-in-five-out, meaning five regulations were being removed for every new one introduced.

It’s been environmental regulation – or “green tape” – that has been squarely in the crosshairs.

The Environmental Protection Agency is enemy number one when it comes to economic development. That’s why President Trump appointed Scott Pruitt – a no-nonsense conservative who hasn’t bought the global warming hysteria – to lead the EPA.

Under Pruitt’s (who has since departed the EPA) leadership, the 2018 Budget outlined a reduction in funding of 31 per cent and a reduction in full-time staff numbers of 25 per cent.

On top of this came has come a series of reforms. The Obama-era Clean Power Plan, which placed a limit on greenhouse gas emissions for each state, has been rescinded. Restrictions on the development of oil and gas on federal land have been removed. And formal notice was given that the US would be withdrawing from the Paris Climate Accord.

These reforms help explain why, for example, the cost of electricity for residential purposes in Texas is just 14 cents per kilowatt-hour. In Australia, it is close to three times that, at around 40 cents.

These reforms also explain why consumer spending increased by four per cent, and business investment increased seven per cent, in annualised terms for the June quarter.

Trump’s success offers lessons for the Turnbull government.

Following a poor showing the recent by-elections, some in the government want to drop the policy to cut the business tax rate to 25 per cent for all businesses and put broader economic reform on ice. This would be the wrong lesson.

Rather, the government should be running harder and faster on economic reform.

This should include a more ambitious company tax cut agenda, by lowering the business tax rate to 10 or 15 per cent immediately; cutting red tape by implementing a one-in-two-out rule where two regulations are repealed for every new one introduced; and exiting the Paris Climate Agreement so that the affordability and reliability of electricity supply are put ahead of reducing emissions.

Indeed, the Paris Climate Agreement is moribund. The US has withdrawn. China can increase its emissions unconstrained until 2030. And none of the EU nations are on track to meet their targets. Better that Australia gets out now before it gets worse.

Collectively, these policies would increase business investment, which is currently just 11.7 per cent of GDP. This is lower than the average rate that prevailed during the Whitlam years. Higher business investment would boost the nation’s capital stock, resulting in more demand for workers and higher wages.

Such reform would also be popular. Forty-nine per cent of voters support reducing the company tax rate to 25 per cent, a plurality of voters believe Australia has “too much regulation”, and 63 per cent want to see the government prioritise lower power prices over reducing emissions, according to polls by Sky News/Reachtel, Essential Research, and Newspoll, respectively.

One doesn’t need to be a fan of Trump personally to see that his administration’s economic policies are doing a lot of good. President Trump matched vision with action to implement bold reform many said was impossible. But now the US has hit four per cent growth, and that is just the beginning.

Daniel Wild is a Research Fellow at the Institute of Public Affairs.

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