Monday, February 5, 2018

The tax burden on US corporate income will fall significantly to a level close to that in a number of euro area economies.. - Report ECB

Publication -  05- Feb. -2018 -  The macroeconomic impact of the US tax reform By Ursel Baumann and Allan Gloe Dizioli 

Following the passing of legislation on the US tax reform towards the end of last year, this box summarises its main features and assesses the channels via which the reform may affect the US macroeconomy. It also discusses possible spillovers and implications from a European perspective.

 In a major legislative achievement, US President Donald Trump signed into law the Tax Cuts and Jobs Act on 22 December 2017. This tax reform, which took effect on 1 January 2018, entails a major overhaul of the US tax system. The reform involves a large number of changes, with some of its main provisions being:

1 (i) a permanent reduction in the corporate tax rate from 35% to 21%, while allowing the full deduction of investment from the corporate tax base for five years, after which this will be phased out; (ii) a temporary simplification of and reduction in individual income taxes, as well as an increase in the child tax credit; (iii) lower income taxation for small business owners; and (iv) elimination of the taxation of most foreign corporate income of US corporate shareholders, implying a move to a “hybrid” territorial system with a one-time transition tax on untaxed profits of 15.5% on liquid and 8% on non-liquid assets. The territorial system is complemented by base erosion measures and a minimum tax on some of the foreign operations of US companies. 

The tax burden on US corporate income will fall significantly to a level close to that in a number of euro area economies. Chart A shows the corporate tax rate (combined for central and sub-central governments) of the United States before and after the reform as compared to the large euro area economies. Prior to the reform, the US corporate tax rate stood above the rates of all large euro area countries, while, after the reform, it is closer to the lower end of rates in those countries. 

Overall, the reform will provide a significant fiscal stimulus to the US economy over the next decade. The Joint Committee on Taxation estimates the static net fiscal stimulus for individuals and corporations at around USD 1.46 trillion over ten years, or 0.7% of GDP per year on average (see Chart B). The largest revenue effects occur in the period up to 2025, largely because most of the provisions affecting individuals expire after 2025. The revenue effects from the provisions affecting domestic corporations also diminish over time, partly owing to the gradual phasing out of bonus depreciation for investment. The main direct revenue generator of the reform stems from the one-off tax on foreign income of US multinationals on which tax payments had been deferred until repatriation to the United States.

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