Table of Contents Table of Contents
Previous Page  22 / 106 Next Page
Information
Show Menu
Previous Page 22 / 106 Next Page
Page Background

World Economy

14

OPEC Monthly Oil Market Report – October 2017

US administration’s tax reform proposal

The US administration’s proposal,

“Unified Framework for Fixing Our Broken Tax Code”,

highlights the

main principles of a tax reform proposal presented recently. This “framework” focuses on proposed

changes to both corporate and individual taxes. Given the release of this proposal, the previously

advocated

Border Adjustment Tax (BAT)

now seems to have been superseded.

With regard to corporate taxes, the main changes involve a rate reduction from the current

35%

to

20%

, a

one-time repatriation tax to encourage companies to bring home a majority of the

$2.6 trillion

cash that

are held by US corporations outside the US, and a provision allowing businesses to immediately write off

all new depreciable investments.

Pertaining to individual taxes, the current seven tax brackets will be reduced to three (though to what

incomes the three brackets would apply has not been specified), with a top tax rate reduction from

39.6%

to

35.0%

and allowing additional room for tax deductions.

The impact on the

US economy

remains

somewhat unquantifiable pending further

information. Based on a first estimate of the

Tax

Policy Center

, this reform would amount to a

tax cut of

$2.4 trillion

over the next

ten years

.

As this would exceed budget deficit

requirements, the final amount of savings will

likely be lower. The latest 2018 Budget

Resolution from the Senate considers tax cuts of

up to

$1.5 trillion

in ten years. Considering this

most

recent

debate

and

budgetary

requirements, a tax cut of between

$500 billion

and

$1.5 trillion

over the next ten years seems

reasonable, which could be implemented by the

second half of 2018. Based on half-a-year effect

of a

$500 billion

tax reform (i.e. of

$50 billion

per annum)

,

2018 US GDP

growth may be

positively impacted by a magnitude of

0.1 pp to

0.3 pp

. This also should have a consequent

positive effect on oil demand.

Graph 3 - 1: US real GDP growth

The

global economy

would likely be

positively impacted

by a potential rise in US GDP, and trade

counterparts should benefit from an increase in US consumption. Negatively, the likelihood of rising

US interest rates – as an outcome of better economic performance – may lower capital flows to

Emerging Economies

(EMs), pressuring their economic activity and oil demand growth. The

medium-term effect of the proposal, also depending largely on the counter-financing measures, remains to

be seen.

The

US energy industry

, which currently pays an effective tax rate of up to

35%

, is set to potentially gain

significantly from the corporate tax reform plan, also with new deductibility measures and a lower tax rate

immediately having a positive effect on profits. Depending on oil price levels, this could also lead to rising

investments

, which may also be encouraged by rising

oil demand

, assuming that individual tax cuts

would lead to rising oil consumption. Another important aspect in the tax framework is the capping of

corporate deductions for interest payments, which could negatively impact the highly leveraged shale

companies currently benefitting from this deductibility. However, the net effect due to the reforms may be

positive for these producers.

Before this proposal is dealt with in greater detail in the coming months, looming budget issues will need to

be finalised first. While this framework assumes so-called “dynamic scoring” – that a tax cut will be

self-financed by rising economic growth, i.e. by an increase in tax revenues – it may be more realistic to

assume that the budget deficit would grow with potential effects on the US public finances.

0.3

0.0

0.1

0.2

0.3

0.4

1.1

1.4

1.7

2.0

2.3

2.6

2.9

3.2

2010

2011

2012

2013

2014

2015

2016

2017*

2018*

%

%

Changes (RHS)

US GDP US GDP

(tax cut)

Note: * 2017 - 2018 = Forecast.

Source: Haver Analytics, Oxford Economic Models and

OPEC Secretariat.