US Tax Plans Could Spark Global Trade and Taxation Wars

Over the course of the next few weeks, US President Donald Trumps will
finally have to take a stand regarding his tax policy plans. He had
announced a "historic tax reform", the details of which he now plans to
specify. Against this backdrop, Christoph Spengel and Friedrich Heinemann
examined the US tax plans of the Republican Party in a ZEW study. Their
message: If Trump translates these plans into actions, this could lead to
an international fiscal chaos with unforeseeable consequences for trade,
investment, and exchange rates.

The Republican's tax plan constitutes an entirely new approach to corporate
taxation: According to this new concept of cross-border taxation,
companies will only be taxed on sales generated within the United States.
Exports from the United States will be completely exempt from taxes,
whereas imports will be subject to a border tax adjustment. "Although the
tax plan appears to be a good solution in theory, in practice, it would
entail disastrous consequences and could potentially spark trade wars,"
concludes ZEW Research Associate Christoph Stengel.

The problem is that border taxation would have the same effect as import
tariffs. This could, for example, seriously damage exporting European
companies who want to sell their goods in the United States. Exporting
companies in the United States could, however, realise profits without
having to pay taxes, since US exports would neither be liable to taxation
in Europe nor in the United States. It is true that this form of taxation
would have an impact on the US dollar/euro exchange rate and is likely to
result in a further appreciation of the US dollar. However, the assumption
that the dollar will appreciate enough to offset the damaging effect on
European companies is very questionable.

Investment flows would be particularly hard hit by this policy: "Companies
from all across the globe would have a strong incentive to shift their
profits as well as their production to the United States," warns Friedrich
Heinemann, head of ZEW’s Research Department "Corporate Taxation and Public
Finance". The EU Member States would have to react to these reforms by
adapting their tax and trade policies. This may lead to trade wars across
the globe and initiate a new round of aggressive tax competition.
On the whole, the ZEW researchers conclude that the enforcement of the new
tax plan proposed by the Trump administration would constitute a tax
revolution. It would lead international taxation into chaos and ultimately
endanger open markets for goods, services, and capital worldwide.

Download the study in German at:
http://ftp.zew.de/pub/zew-docs/policybrief/pb02-17.pdf

The study will soon be made available in English on the ZEW homepage.

For more information please contact:
Prof. Dr. Friedrich Heinemann, Phone +49(0)621/1235-149,
E-mail heinemann@zew.de

Prof. Dr. Christoph Spengel, Phone +49(0)621/181-1704,
E-mail spengel@uni-mannheim.de