The ECB is out with a paper analysing the new US tax changes

A research paper from the ECB discusses the new US tax reforms and their effects on both the US and EU economies.

  • The tax burden on US corporate income will fall significantly to a level close to that in a number of euro area economies
  • The reform will provide a significant fiscal stimulus to the US economy over the next decade
  • The reform is expected to boost US domestic demand and raise US real GDP in the near term
  • Some positive impact on the economy’s production capacity can be expected
  • However, in a mature stage of the business cycle, fiscal multipliers tend to be smaller than when there is a large output gap
  • Available estimates suggest that the impact of the tax reform on US GDP will be positive in the short term, while the long-term effects are much more uncertain
  • From a euro area perspective, the reform could have implications in terms of macroeconomic spillovers
  • The euro area will also be affected by the changes in the international tax landscape, the consequences of which are highly uncertain and complex

They also cite analysis from ZEW that the new tax changes will lead to flows out of Europe and into the US but they also highlight that some of the new tax rules might fall foul of WTO rules. That’s something that could rear its head down the line;

Centre for European Economic Research (Zentrum für Europäische Wirtschaftsforschung– ZEW) finds that the tax reform will lead to a rise in inbound foreign direct investment (FDI) into the United States originating from the European Union which outweighs an increase in US outbound FDI into the EU. Second, the reform will affect tax planning strategies of multinational enterprises. In particular, through the US move to a territorial system and through the differences in tax rates between the United States and some high-tax EU countries after the reform, the incentives for profit shifting are changed. Some aspects of the reform also provide incentives to relocate intellectual property to the United States. More generally, the reform risks intensifying tax competition worldwide, entailing a possible erosion of tax bases in EU countries. Third, it has been pointed out that some of the international provisions of the US tax reform may not be in accordance with World Trade Organization rules and double taxation treaties.

Overall, they don’t seem overly bothered about the tax changes and in most circles, it’s seen as a big unknown. Still, it’s an excuse Draghi can keep in his back pocket for use later.

Full paper here; The macroeconomic impact of the US tax reform

Ryan Littlestone

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