Tax cut has even Beijing on edge

Editorial | Mary Ma 21 Dec 2017

It was embarrassing that US President Donald Trump's tax bill had to be tossed back to the House of Representatives for a re-vote due to some technical oversight, that should never have happened in very first place.

The mistake was minor, but evident enough to show just how hasty the legislative process had been. The bill was prepared by Republican leaders and lobbyists, with everybody else - not only Democrats and the American public, but also the Republican rank and file - being kept in dark until the bill was unveiled in late September.

Nonetheless, the last-minute hiccup isn't expected to prevent the House's passage of the tax cuts, to deliver the controversial president his first legislative victory so far, along with an early Christmas present for his ultra-rich peers - all this despite the fear that the tax package will create a gaping hole in public finances.

It's definitely a Yuletide gift for the really large corporations, whose tax ladder from 15 to 35 percent will be standardized to 21 percent. The change means smaller firms not earning enough to trigger the higher thresholds will pay more, while the behemoths will see a huge chunk of their taxes slashed.

On the individual level, the top 1 percent earning US$500,000 (HK$3.9 million) or more a year would have their personal taxes cut by US$51,000, while the average taxpayer will pay US$900 less per year from 2018.

Worst hit are people living in states like New York, where state taxes and living costs are high as the new law caps the state-related deduction they can claim while completing federal tax returns. A number of them may end up paying more instead.

Those hard-hit states all support the Democratic Party. Is that coincidental or by design?

Just as the bill was being passed, Beijing wrapped up its Central Economic Work Conference behind closed doors. It's a significant event because it would set the tone for economic policies in the next year.

The conference result may also be viewed in relation to the Trump tax reforms. Xinhua News Agency said Beijing will stick to a "proactive fiscal policy and prudent monetary policy" in 2018, while taking concrete measures to strengthen regulation of local government debt.

The tune is being viewed as a subtle shift from Beijing's hardline stance on deleveraging, which has been the policy priority for the past two years.

The shift is being made in response to the US development that's intended to cause American companies to repatriate trillions of US dollars from overseas. If successful, the repatriation will spark off fresh capital flight from markets including China.

If Beijing doesn't adjust its clearance of debt amid the threat of a fresh round of capital exodus, it would be like a suicide act. The softening is a preemptive move.

Investors normally buy on expectation and sell on good news. Wall Street has been on a rising streak since Trump's election, rallying on the prospect of tax cuts. So, will there be a sell-off on the good news of passage?

Even if there's a 50-50 chance, that's a probability one would be wise to heed.

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