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The Trump Effect on Businesses – What You Need to Know

The Trump Effect on Businesses – What You Need to Know

By: Yian Pan

 

The Trump Effect on Businesses – What You Need to Know

Donald John Trump was sworn in on January 20, 2017 as the 45th President of the United States and the only president who has neither had any political experience nor any military experience. [1] Regardless of political views, this administration will undoubtedly bring about drastic changes in this country. This post will focus on some of the potential changes and the effects the new administration will have on corporations and businesses, including Trump’s proposed corporate tax plan, his trade war, Dodd-Frank reforms and future prosecutions of corporate crime.

 

Corporate Tax Plan

Many would agree that the current corporate tax structure in this country “is a mess”.[2] Not only does the United States tax corporate profits at a rate of 35%—one of the highest worldwide—the U.S. actually collects less money compared to other advanced countries.[3] As a result of the high corporate tax rate, many U.S. corporations choose to operate in countries with less tax and cheaper labour, such as China or Mexico.[4] Trump’s proposed tax plan would reduce corporate tax rates from 35% to 15%,[5] which would immediately provide a huge incentive for corporations to move their operations back to the U.S. There is also an estimated $2.5 trillion in profits currently held overseas as a result of the high U.S. corporate income tax rate.[6] Trump also proposes a 10% “special tax repatriation rate” for U.S. multinationals to incentivize them to repatriate accumulated overseas profits. Further, high corporate taxes can also drive away foreign investors and discourage reinvestment.[7] Some have referred to Trump’s proposal to lower corporate tax rates as the “carrot”, with the “stick” being his threat to impose tariffs on imports by U.S. corporations from overseas.[8]

While Trump’s 20% corporate tax cut would hypothetically encourage hiring and investment, shareholders are more likely to benefit from the tax cut than the economy as a whole.[9] In addition, lowering the corporate tax rate will also increase the government’s budget deficit and could potentially be “an expensive revenue loser.”[10] Analysts also state that, due to its complex nature, Trump’s corporate tax reform is unlikely to be implemented in 2017.[11] Some have gone so far as to question whether the corporate tax reform will even be implemented at all – even Republicans in the White House are sharply divided over the proposal.[12]

 

America First – Trump’s Trade War

While Trump believes that his proposed plan will encourage domestic manufacturing, many economists disagree and argue that “it will spur nothing more than a needless trade war.”[13] According to James J. Angel, an associate professor at Georgetown University’s McDonough School of Business, Trump’s plan cannot be accomplished simply by “drying up international trade.”[14] Trump’s anti-international trade plan could lead to severe consequences for the country and permanently damage the global economy, including harmful effects on global supply chains and export markets.[15] Currently, 7% of American jobs and 14% of the gross domestic product in the U.S. rely on exports.[16] Mexico is also the U.S.; second-largest export market and its third-largest trade partner.[17] A Morgan Stanley analyst reported in a note to its investors that Trump’s restrictions on imports and international trade would put millions of jobs in danger, contrary to his claim to “bring jobs back to America”.[18] The Peterson Institute for International Economics (“PIIE”) conducted a study of Trump’s trade policies prior to his election last year and concluded that Trump’s plans would cost over 4 million private-sector American jobs if instituted.[19] The executive vice president and director of studies at PIIE also warned that “[t]ariffs would immediately disrupt the supply chain of basically all American multinationals working in electronics and motor vehicles as well as many others”.[20]

 

In addition, economists have also warned that import duties will increase prices of products in the country.[21] While domestic manufacturing has the potential to increase the number of jobs, labour costs in the U.S. are considerably higher than that of countries, like China and Mexico, which in turn will be reflected in product prices. The increase in production costs could also lead to higher inflation and higher interest rates, potentially leading to a recession.[22]For instance, an import product that original cost $100 pre-tariff would increase to $120 post-tariff if the company chose to continue the import despite Trump’s 20% tariff, an increase ultimately felt by the American consumer.[23] In addition, states like Texas had over $84 billion worth of imports from Mexico in 2015 alone, more than twice the import value from Texas’ second-largest source—China.[24] If the Trump administration ultimately implements the 20% import duty, based on numbers from 2015, Texas would have to pay $16.8 billion more for the exact same goods and services.[25]

 

Dodd-Frank Reforms

On January 30, 2017, Trump signed an executive order to reduce federal regulations and promised to “do a big number on Obama-era Wall Street restrictions.”[26] Though neither Trump nor the Republicans will be able to immediately repeal the Dodd-Frank Act, they will be able to slowly chip away at it.[27] While this executive order has received less media attention than the executive order on immigration, any financial reforms would impact millions more Americans, and would affect everything from amounts owed in credit card fees to the likelihood of obtaining a mortgage.[28]

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in response to the 2008 financial crisis to make it less likely that such an event will recur, and doing away with the Act will put the country back in the same position it was in back then.[29] Dodd-Frank is essentially comprised of two components.[30] First, its primary legislation placed restrictions on financial activities of banks and also created the Consumer Financial Protection Bureau,[31] which protects consumers from “unfair, deceptive, or abusive practices and take[s] action against companies that break the law.”[32] Second, the Dodd-Frank law includes provisions that mandate corporations to disclose their use of conflict materials, as well as a provision that governs the cost of swiping a credit card.[33] While many people agree that various provisions of the Dodd-Frank Act need revising, leaving its core intact is crucial since its purpose is to stabilize the economic system and not to make it more virtuous.[34] However, the acting chairman of the Securities and Exchange Commission, Michael Piwowar, indicated his plan to erode the rule that forces companies to publicly compare chief executive and employee salaries,[35] a move that will likely undermine the transparency sought in corporate governance. In a leaked memo from Representative Jeb Hensarling, the Texas Republican stated that he “will not rest until Dodd-Frank is ripped out by its roots and tossed on the trash bin of history.”[36]

 

Jeff Sessions on Corporate Crime

On February 8, 2017 after a bitter bipartisan debate, Senator Jeff Sessions was confirmed as the next U.S. Attorney General.[37] Since Sessions was announced as Trump’s nominee for the position, Sessions’ history with racial issues have been central to the discussions prior to and surrounding his confirmation.[38] While criticisms against Sessions’ confirmation have focused on concerns that he will limit civil rights and is racially insensitive, Sessions’ “hard line on corporate wrongdoers” has generally been overlooked.[39] A brief review of his history reveals that he has taken a harsh stance against corporate malfeasance: he argued in 2002 that “[h]arsh sentencing does deter”,[40] and that having worked as a United States Attorney during the Savings and Loan fraud cases,[41] he believed that prison time was successful in changing people’s behaviours.[42] For instance, during that same hearing in 2002, Sessions stated, “I have always felt that the true measure of criminality and the punishment is the degree of criminality, the degree of malicious intent, the degree of conscious fraud that has occurred.”[43] In 2007, Sessions was also one of 25 senators who refused to vote for the bailout of Treasury Secretary Hank Paulson, asserting that corporations had to be held responsible for their acts.[44] Further, in 2010, Sessions argued at James Cole’s Deputy Attorney General’ hearing that “no company should be considered ‘too big to fail’”.[45] Sessions’ track record indicates that he may potentially continue the successful prosecution streak the Department of Justice has had, especially at the start of 2017.

[1]              David A. Fahrenthold, Robert Costa & John Wagner, Donald Trump is sworn in as president, vows to end “American Carnage”, Wash. Post (Jan. 20, 2017), https://www.washingtonpost.com/politics/trump-to-be-sworn-in-marking-a-transformative-shift-in-the-countrys-leadership/2017/01/20/954b9cac-de7d-11e6-ad42-f3375f271c9c_story.html?utm_term=.b3e1b0cf00ee; Zachary Crockett, Donald Trump is the only US president ever with no political or military experience, Vox (Jan. 23, 2017, 10:07 AM), http://www.vox.com/policy-and-politics/2016/11/11/13587532/donald-trump-no-experience.

[2]              Neil Irwin, The Major Potential Impact of a Corporate Tax Overhaul, N.Y. Times (Jan. 7, 2017), https://www.nytimes.com/2017/01/07/upshot/the-major-potential-impact-of-a-corporate-tax-overhaul.html?rref=collection%2Fcolumn%2FEconomic%20View (“The United States system for taxing businesses is a mess. If there’s one thing nearly everyone can agree upon, it is that.”). See U.S. corporate tax code is a mess, Dispatch (Apr. 7, 2016, 12:01 AM), http://www.dispatch.com/content/stories/editorials/2016/04/08/1-u-s-corporate-tax-code-is-a-mess.html (last visited Feb. 10, 2017)  (“It’s hard to overstate just how bad the U.S. corporate tax code is.”); The corporate tax mess: Our View, USA Today (May 24, 2016, 5:50 PM), http://www.usatoday.com/story/opinion/2016/05/24/tax-inversions-corporations-ireland-jack-lew-barack-obama-editorials-debates/82992264/ (“The U.S. corporate tax system is an unholy mess”).

[3][3]             Irwin, supra note __; Kyle Pomerleau & Emily Potosky, Corporate Income Tax Rates around the World, 2016, Tax Foundation (Aug. 18, 2016), https://taxfoundation.org/corporate-income-tax-rates-around-world-2016/ (“The United States, with a combined top marginal tax rate of 38.9 percent (consisting of the federal tax rate of 35 percent plus the average tax rate among the states), has the third highest corporate income tax rate in the world, slightly behind Puerto Rico.”).

[4]              Tony Nitti, Battle Lines Being Drawn Between Trump, Rest Of GOP, On Tax Reform: Where Do They Stand?, Forbes (Jan. 19, 2017, 11:52 AM), http://www.forbes.com/sites/anthonynitti/2017/01/19/battle-lines-being-drawn-between-trump-rest-of-gop-on-tax-reform-where-do-they-stand/#eaea41b4ee71.

[5]              Mousa Ackall, 5 Ways a Trump Administration Could Impact Your Business, Workmarket (Nov. 21, 2016), https://blog.workmarket.com/workforce-managers/5-ways-trump-administration-impact-business.html.

[6]              Sean Williams, The Most Disappointing Aspect of Trump’s Tax Plan Is What It’s Lacking, Motley Fool (Jan. 23, 2017, 7:03 AM), https://www.fool.com/retirement/2017/01/23/the-most-disappointing-aspect-of-trumps-tax-plan-i.aspx.

[7]              Sean Williams, The Most Disappointing Aspect of Trump’s Tax Plan Is What It’s Lacking, Motley Fool (Jan. 23, 2017, 7:03 AM), https://www.fool.com/retirement/2017/01/23/the-most-disappointing-aspect-of-trumps-tax-plan-i.aspx.

[8]              Nicholas Sargen, Opinion: Trump’s ‘phenomenal’ tax plan raises stakes for Corporate America, MarketWatch (Feb. 13, 2017, 8:52 AM), http://www.marketwatch.com/story/trumps-phenomenal-tax-plan-raises-stakes-for-corporate-america-2017-02-13.

[9]              Akin Oyedele, One of Trump’s biggest plans to stimulate the economy won’t be great for most Americans, Bus. Insider (Dec. 21, 2016, 1:48 PM), http://www.businessinsider.com/trump-corporate-tax-cut-impact-2016-12.

[10] Michael Schuyler, Growth Dividend from a Lower Corporate Tax Rate, Tax Foundation (Mar. 12, 2013), https://taxfoundation.org/growth-dividend-lower-corporate-tax-rate/.

[11]             Id.

[12]          Rachel Bade, Burgess Everett & Eliana Johnson, Ryan struggles to sell tax reform plan to fellow Republicans, Politico (Feb. 16, 2017, 7:38 PM), http://www.politico.com/story/2017/02/paul-ryan-tax-reform-republicans-235117.

[13]             Nitti, supra note __.

[14]             Martha C. White, Trump Trade Policy Ideas Could Trigger Recession, Stagflation, Economists Say, NBC News (Nov. 10, 2016, 4:18 PM), http://www.nbcnews.com/business/economy/trump-trade-policy-ideas-could-trigger-recession-stagflation-economists-say-n682221.

[15]             Id.

[16]             Id.

[17]             Carin Zissis, Inforgraphic: U.S.-Mexico Ties by the Numbers, Americas Soc’y / Council of Americas (Feb. 23, 2016), http://www.as-coa.org/articles/infographic-us-mexico-ties-numbers.

[18]             Id.

[19] Id.; Trump Trade Proposals Could Sink Economy, Peterson Inst. for Int’l Econs. (Sept. 19, 2016), https://piie.com/experts/peterson-perspectives/trump-trade-proposals-could-sink-economy.

[20]             White, supra note __.

[21]             Id.

[22]             Id.

[23]             Tim Worstall, Memo To Trump – 20% Mexican Import Tariff Means Americans Pay For The Wall, Forbes (Jan. 27, 2017, 7:39 AM), http://www.forbes.com/sites/timworstall/2017/01/27/memo-to-trump-20-mexican-import-tariff-means-americans-pay-for-the-wall/#39a565f9557a; Sargen, supra note ___ (“Businesses, after all, [will] merely pass along the cost increase to the final purchaser.”).

[24]             Christopher Woody, Business on the US-Mexico border is already feeling the fallout from Trump’s squabble with Mexico, Bus. Insider (Jan. 28, 2017, 10:54 AM), http://www.businessinsider.com/donald-trump-mexico-border-economic-policy-effect-on-texas-border-area-2017-1.

[25]             Id.

[26]             Ben Protess, Republicans’ Paths to Unraveling the Dodd-Frank Act, N.Y. Times (Jan. 30, 2017), https://www.nytimes.com/2017/01/30/business/dealbook/republicans-unravel-dodd-frank-act.html?_r=0.

[27]             Id.

[28]             Id.

[29]          Kimberly Amadeo, What Is the Dodd-Frank Wall Street Reform Act?, The Balance (Feb. 7, 2017), https://www.thebalance.com/dodd-frank-wall-street-reform-act-3305688.

[30]             Id.

[31]             Id.

[32]             The Bureau, CFPB, https://www.consumerfinance.gov/about-us/the-bureau/ (last visited Feb. 12, 2017).

[33]             Id.

[34]             Id,

[35]             Benjamin Bain, Pay Ratio Rule That CEOs Hate Is Getting a Fresh Look at the SEC, Bloomberg (Feb. 6, 2017, 3:07 PM), https://www.bloomberg.com/news/articles/2017-02-06/pay-ratio-rule-that-ceos-hate-is-getting-a-fresh-look-at-the-sec.

[36]             Id.

[37]             Ellen Nakashima, Senate confirms Jeff Sessions as attorney general, The Washington Post (Feb. 8, 2017), https://www.washingtonpost.com/world/national-security/senate-confirms-jeff-sessions-as-attorney-general/2017/02/08/051d58f6-ed72-11e6-9973-c5efb7ccfb0d_story.html?tid=a_inl&utm_term=.740e36accc04.

[38]             Eric Lichtblau & Matt Flegenheimer, Jeff Sessions Confirmed as Attorney General, Capping Bitter Battle, N.Y. Times (Feb. 8, 2017), https://www.nytimes.com/2017/02/08/us/politics/jeff-sessions-attorney-general-confirmation.html.

[39]             Julie Ragatz, What Jeff Sessions as U.S. Attorney General Would Mean for Corporate Crime, Fortune (Jan. 23, 2017), http://fortune.com/2017/01/23/jeff-sessions-u-s-attorney-general-corporate-crime/.

[40]             Penalties for White Collar Crime: Hearing on S. 107 – S. 923 Before the S. Comm. on Crime and Drugs, 107th Cong. 2 (2002) (statement of Sen. Jeff. Sessions. on White Collar Crime, U.S. Sen. of Ala.).

[41]             Id.

[42]             Ragatz, supra note ___.

[43]             Penalties for White Collar Crime: Hearing on S. 107 – S. 923 Before the S. Comm. on Crime and Drugs, 107th Cong. 2 (2002) (statement of Sen. Jeff. Sessions. on White Collar Crime, U.S. Sen. of Ala.).

[44]             Ragatz, supra note ___.

[45]             Id.