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What the U.S. Tax Reform Means for the Economy

5 MINS READApr 17, 2018 | 14:27 GMT
Enacted in December, the bill marks the first major overhaul of the U.S. tax system since the Reagan era. And it couldn’t come at a better time: The global economy is undergoing a monumental shift away from cheap labor and toward technologies like artificial intelligence.
Enacted in December, the bill marks the first major overhaul of the U.S. tax system since the Reagan era. And it couldn’t come at a better time: The global economy is undergoing a monumental shift away from cheap labor and toward technologies like artificial intelligence. Thanks in part to the new legislation, the country best positioned to pull ahead of the pack in the race to the cutting edge is the United States.

Sometimes the headlines can make it tough to feel optimistic about the direction the United States is headed. Congress is stuck in a partisan rut; the economy is rebounding more slowly than many would have hoped; and new threats to national security seem to crop up every day. But believe it or not, the future is bright for the United States — if you know where to look.

A good place to start is Washington's latest tax reform. Enacted in December, the bill marks the first major overhaul of the U.S. tax system since the Reagan era. And it couldn’t come at a better time: The global economy is undergoing a monumental shift away from cheap labor and toward technologies like artificial intelligence. Thanks in part to the new legislation, the country best positioned to pull ahead of the pack in the race to the cutting edge is the United States.

The Perks

Putting more money in Uncle Sam's pocket. Faced with high corporate tax rates at home, American companies historically have had an incentive to store their spare cash in offshore tax havens. But the December tax reform closed the loopholes that led to the formation of these colossal "cashbergs": Not only does it force U.S. companies to pay taxes on their foreign earnings, but it also contains provisions that are designed to guard against firms booking profits in jurisdictions with more favorable tax structures. To sweeten the deal even further, the bill slashed the tax rate that firms will have to pay to repatriate their money, making the exercise relatively painless for everyone involved — except, of course, the countries that have played host to such wealth until now. Under the new tax system, then, the profits of American companies will be better reflected in Uncle Sam's wallet than they have been in years.

Boosting the profits on businesses' books. Those profits, moreover, are about to go up. As the corporate tax rate drops from 35 to 21 percent, U.S. companies will owe less money to the government and have more to spend as they see fit. U.S. firms won't be the only ones to take notice of the new perks, either. As the American business environment becomes more competitive with the rest of the world's, foreign companies may increasingly choose the United States as a base of operations — a choice that would be made even easier by the massive consumer market the country has to offer.

Honing America's competitive edge in tech: A few decades ago, China's economic opening flooded the global labor market with a massive workforce, creating a glut of cheap labor that drove down wages in the West and reduced companies' need to invest in new technology to boost their productivity. But China's workforce is aging, mirroring the developed world's own, which will cause the world's labor pool to shrink over time. As wages rebound, Western corporations will turn back to technologies — chief among them, artificial intelligence — as a way to up their output. A clear leader in the industry, the United States already has a head start in the coming sprint toward artificial intelligence. But by getting rid of the incentives that have driven American tech giants like Apple, Amazon and Google to keep their cash offshore, Washington's recent tax reform will tie their fates more closely to that of the U.S. economy, better preparing the nation to take advantage of the global shift toward tech on the horizon.

The Price

Of course, every new policy comes with a price tag, and the tax reform has a hefty one. Like most tax cuts, the bill will cause a short-term dip in government revenue at a time when Washington plans to hike up spending on entitlements and defense — a combination that has blown targets for balancing the U.S. budget out of the water.

The danger of a ballooning debt is that it makes lenders nervous about the debt holder's ability to pay it back. As their faith dwindles, bonds become less attractive (pushing their price down) while investors demand higher interest rates (pushing their yield up) to account for the extra risk. This can lead to a vicious cycle: An indebted country’s debt repayments rise just when it can least afford to pay them. Sure enough, over the past few months the interest rate on U.S. bonds rose for the first time in a decade. In the past, many states caught in this downward spiral have had to seek a bailout from outside lenders like the IMF — an option that wouldn't be available to an economy the size of the United States.

Still, the world's largest economy has an ace up its sleeve: the dollar. The greenback is the currency of choice for central banks looking for a safe asset in which to keep their savings. Because the most common way to invest in the dollar is to buy up the U.S. government's debt, global demand for the American currency will keep underwriting the issuance of U.S. debt — at least, as long as that demand holds. And by all appearances, the dollar promises to remain the world's premier currency for a while longer.

Interested in learning more about the U.S. tax reform or the rise of artificial intelligence? Read the full version of this piece here.

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