The US Congress has all but approved a comprehensive reform of the tax code that will see corporate tax cut from 35 per cent to 21 per cent along with more modest cuts for individuals.
But according to AMP Capital chief economist Shane Oliver, both individuals and market participants in general are underestimating the positive impact of the reforms.
While 40 per cent of Americans believe they will see a tax hike because of the reforms, Mr Oliver said, less than 5 per cent of taxpayers will actually see an increase.
“The tax reform package is likely to provide a solid boost to US GDP growth next year, whereas markets and individuals still appear to be underestimating the size of the boost,” he said.
He said most taxpayers are set to see a cut, with the bulk of the tax cuts going to households.
“A typical family at the median income are estimated to receive a US$2,059 tax cut,” Mr Oliver said.
“So many households will get a positive surprise and this will likely further boost already strong consumer spending next year.
“The instant write-off of new business investment will likely also provide a boost to business investment along with the lower headline corporate tax rate.”
The stimulus would come to around 1 per cent of US GDP in 2018, but Mr Oliver indicated the actual boost to growth would “likely be a bit less than this (as tax cuts are always partly saved) at maybe around 0.4 per cent of GDP”.
“At a time when the US economy is already very strong this will likely add to a pick-up in US inflation in the year ahead,” he said.
On a more domestic front, Mr Oliver forecasted stronger growth in the US would be positive for export demand and commodity prices, and have flow-on effects for Australia.
However, he also pointed to the fact that “the Australian economy is lagging the US – as evident in labour market underutilisation near 14 per cent compared to 8 per cent in the US – and so the RBA will continue to lag the Fed in raising rates (hiking rates at most just once late next year compared to four hikes from the Fed)”.
“So while Australian bond yields will likely rise with US bond yields (albeit more slowly) the declining interest rate differential versus the US will likely depress the Australian dollar over time (or at least keep a lid on it in the face of solid commodity prices),” Mr Oliver said.
In terms of policy, Australia could be compelled to lower corporate tax as well, “lest Australian companies decide to relocate to the US”, he warned.
“However, domestic politics seem to be such that personal tax cuts are more likely to be announced ahead of the next election than seeing the large corporate tax rate start to be reduced,” Mr Oliver said.
