The economies of Indonesia and other countries in Southeast Asia may feel the impact of US President Donald Trump's impending tax reforms. Currently markets are focused on these reforms. On Wednesday (26/04) Trump is set to propose steep cuts in US corporate taxes (from 35 percent to 15 percent) and the tax rate on offshore earnings that are repatriated (from 35 percent to 10 percent), while individual taxes will be simplified. These proposals will require US Congress approval before implementation.
Although Trump's tax reform proposal will surely curtail US government revenue (as tax revenue collection should decline) and thus cause a ballooning US deficit, Trump has his hopes set on unlocking accelerated US economic growth (perhaps up to 3 percent for the long-term). As the country's business environment becomes more attractive it should lead to rising investment and employment opportunities. This should then cause rising household consumption. This scenario will also lead to a strengthening US dollar.
Considering there exists resistance to Trump's tax reform proposal within US Congress (some find the tax rate cut excessive and see a risk for the country's fiscal stability), it may be another example of an "ambitious" Trump plan that is undermined by US courts or Congress. Moreover, with Trump eager to boost government spending (up to USD $1 trillion) on infrastructure development, it is not the right timing to allow falling tax revenue. As such, the actual tax rate cut that is accepted by Congress may not be as big as proposed by Trump.
Impact of Trump's Tax Reform on Indonesia
Trump's proposal to cut US corporate taxes from 35 percent to 15 percent may trigger a tax rate war across the globe. With US corporate tax at 15 percent, it would be more attractive for businessmen to invest in the USA than to invest in Indonesia where the corporate tax is set at 25 percent. But it can also encourage Indonesia's neighboring countries, like Singapore and Thailand, to slash their corporate taxes (that are already below Indonesian rates) in an attempt to maintain their attractiveness as a destination for foreign direct investment. For Indonesia it is not possible to slash corporate taxes significantly because corporate tax revenues contribute hugely to Indonesia's total tax income (a country where relatively few people pay individual income tax). Hence, Indonesia could become a less attractive country for foreign direct investment.
It would also be dangerous for Indonesia to join a corporate tax rate war because this race would limit Indonesia's focus on the improvement of the nation's fundamental economic bottlenecks, such as infrastructure development and the skills gap. Both issues need to be overcome by government programs. However, these programs need to be funded (largely) by tax income, not by rising direct investment.
Meanwhile, Trump wants to cut the tax rate on offshore earnings that are repatriated from 35 percent to 10 percent, a move that would benefit those US multinational companies that have billions of US dollars stashed overseas (for example Apple and Pfizer) and basically means Trump is encouraging US firms to reduce their investments abroad. This could mean Indonesia sees US companies reducing their direct investment in the world's largest archipelago.
Top Ten US Companies with Largest Funds Abroad:
(in billion USD)
|Johnson & Johnson||58.0|
Source: Oxfam America