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 study by the Centre for European Economic Research (ZEW), Mannheim. 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 EU would have to expect fatal consequences from the enforcement of the US tax plans.
The EU would have to expect fatal consequences from the enforcement of the US tax plans.

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 Professor 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 Professor 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.

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


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