Why US Tax Reforms May Fail To Address The Big Challenges

Business, Company Strategy, Economics, US

By John Richardson

CORPORATE America is of course delighted with the biggest US tax reforms in a generation that seem very likely to pass unheeded through Congress this week and reach the president’s desk for final sign-off before Christmas.

What isn’t there is to be pleased about, given that the main Federal corporate tax rate is set to be lowered all the way from 21% to 35%?

But as fellow blogger Paul Hodges wrote in early November, the tax cuts will add to US debt at a time when it is facing a demand deficit from an ageing population.

Yes, stock markets could well rally even further once the tax bill becomes law. Short term economic growth might also improve.

But without a major uptick in immigration, the US working age population will fall by 18m by 2035. This could eventually force the US to raise taxes, reversing some of the reductions contained in the new bill, as the drop in tax revenues resulting from the decline in the workforce might otherwise leave big holes in public pension funds and in Social Security and Medicare provision.

And crucially, of course, the risk is that a smaller workforce means less demand over the long term, no matter how much you cut taxes.

People spend less when they are retired as a.) They have already bought most of the things they need, and b.) They are living on reduced means, especially if they are dependent on the US public pensions system.

There will also obviously be less young people around to buy all the finished products made from chemicals and polymers than during the Economic Supercycle.

This is not insoluble. But the tax bill doesn’t appear to be the long term answer as it doesn’t include provisions to encourage people to work longer.

If older people are given the training to stay in the workforce, and if the retirement age is raised, then the demand deficit I described above can be cancelled out. The big improvement in human health, and so life expectancy, over the last 50 years makes this a viable solution.

Something also needs to be done to deal with looming deficits in Social Security, Medicare and pension funds. Otherwise, as I said, the long term risk is that taxes might eventually have to be raised.

Dealing with labour market challenges

But perhaps I am wrong to assume that the tax bill won’t compensate for today’s demographic demand deficit. I hope so. I equally hope that the bill is able to address some of the big challenges confronting the US workforce:

  • Wages don’t seem to be rising quickly enough. Over the past year, wages have risen just by an average of  just 64¢, or 2.5%, which continues a pattern of slow growth that dates back to the 1970s.
  • Whilst white unemployment has fallen to just 3.6%, the rate for African Americans is at 7.3%. The teenage unemployment rate is at 15.9%, according to the US Bureau of Labor Statistics (BLS)
  • And most importantly of all, perhaps, is the fall in the US jobs participation rate as the chart at the beginning of this blog post indicates. BLS research largely attributes this decline to the shrinking of the working-age population because of the retirement of the Bayboomers. This underlines my point about today’s demographics-driven demand deficit. The lower participation rate also helps to explain the fall in in the overall percentage of people who are unemployed, as of course the base from which this is assessed is smaller.

There is a scenario where the tax bill works by boosting economic growth to the 4% annual target set by President Trump. This would mean that the tax cuts would easily pay for themselves – and some more – through higher tax revenues.

Equally, though, there is a risk – however small you think the risk might be – that the tax reforms fail because US economic growth disappoints.

Chemicals and other companies should plan for both scenarios and should make clear to their investors, and their other stakeholders, that this planning has taken place.

PREVIOUS POST

The Blog Is On Holiday Until December 18

10/12/2017

 

Learn more
NEXT POST

China Pollution Campaign: 2018 Chemicals Market Opportunities, Challenges

20/12/2017

By John Richardson XI JINPING mentioned the environment no less than 89 times du...

Learn more
More posts
BASF’s shocking Q2 results should have been no shock at all
09/07/2019

y John Richardson NOBODY should be surprised by the BASF results for Q1 2019 where, on a year-on-yea...

Read
Multiple trade disputes and the risks for the US PE industry
03/07/2019

By John Richardson FALLING out with a trading partner as big as China is problematic enough. But the...

Read
China PE overstocking at nearly a million tonnes as demand weakens, competition intensifies
02/07/2019

By John Richardson MEASURING petrochemicals and polymer inventory levels in China with any reasonabl...

Read
China petrochemicals recovery on G20 trade war progress will be shortlived
30/06/2019

By John Richardson China petrochemical and polymer price spreads over naphtha feedstock costs will r...

Read
President Trump’s Vietnam warning threatens more polyethylene disruptions
27/06/2019

Just to stress  that, as always, what follows are my own personal views and not those of ICIS By Jo...

Read
US LLDPE imports and the impact on European petrochemicals
26/06/2019

  By John Richardson EUROPEAN linear-low density polyethylene (LLDPE) markets have yet to feel ...

Read
Southeast Asia PE spreads further underline weak demand, but trade talks promise rebound
25/06/2019

By John Richardson THE GOOD news today is that the US and China have agreed to resume trade talks. P...

Read
Global polyethylene: Supply is not the problem, it is demand
24/06/2019

By John Richardson WHEN people talk about supply it is very often because it is much easier to quant...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more