US Tax Reform Could Raise US GDP by 1.4%. But How Much Will It Lower Singapore’s GDP?
The Republican tax plan is now almost certain to become law by the end of this year. As I write it has been passed by the Senate and the House but still needs another House vote due to a technical issue. After that Trump will sign it into law and it will take effect in 2018.
The most important part of the package is the cut in the corporate tax rate from 35% to 21% which is aimed at stopping the erosion of the US tax base through US companies moving their domicile abroad to low tax havens, often through a US company taking over a foreign competitor, a process known as inversion. Current tax rates have also subsidised the takeover of US companies by their foreign competitors from countries with lower corporate tax rates like Germany or the UK. Once taken over their foreign acquirers use debt and transfer pricing to ensure that profits are minimised in the US and exported to a low tax jurisdiction.
US companies, especially tech ones, use the same tricks by moving their intellectual property to countries with low tax rates like Ireland (and Singapore) and then charging the US company royalties. The effect is the same: to reduce profits in the high tax jurisdiction and maximise them in the low tax haven.
I wrote about this in a recent article, “More On Singapore’s Fake GDP Growth“, where I estimated, using figures provided by Matthew Klein of the FT, that 12% of GDP, and possibly much more, could be derived from the tax avoidance strategies of US multinationals. Ireland plays a similar game and its GDP has grown even faster than Singapore’s since the financial crisis of 2008, with a 25% growth in 2015.
According to a WSJ article from two days ago, “This One Weird Tax Trick Could Raise GDP, Shrink the Trade Deficit” , this sort of transfer pricing understates US GDP by $280 billion a year, citing a study by Fatih Guvenen of the University of Minnesota and three co-authors. “This effect has grown; they estimate treating U.S. exports as foreign-based income depressed official estimates of annual productivity growth by 0.25 percentage point between 2004 and 2008.”
$280 billion is only 1.5% of US GDP in 2016. So while significant it is not huge. But even if only 10-15% of that was accounted for by the booking of income in Singapore for tax reasons then that would be a large percentage of Singapore’s GDP. $42 billion would be nearly 14% of Singapore’s GDP.
The new US tax bill also includes a minimum tax on intellectual property income earned in low tax countries and on foreign companies that artificially reduce their US tax. This means it will be harder for countries like Singapore and Ireland to try to maintain their tax haven advantage by slashing corporate tax rates close to zero. However expect our Finance Minister to try at the same time to increase taxes on middle and lower income Singaporeans to make up for lost revenue. Naturally there will be much talk about the need for low personal tax rates to continue to induce billionaires to relocate to Singapore but which wholly coincidentally also benefit our hardworking ministers and the Familee.
It is unlikely that we will see any significant reduction in Singapore’s published GDP since the Statistics Department is not independent (like everything else in Singapore) and just part of the Ministry of Trade and Industry. But expect to see much slower GDP growth over the next few years coupled with increases in GST and other regressive taxes.