The middle class, social security, and the economy in the region could be affected

Leer en Español: Consecuencias de la reforma tributaria de Trump

The United States Congress approved a tax reform endorsed by the Trump administration. The reduction of taxes, the largest the country has seen over the last 30 years, has been criticized by economists who argue that the measure is designed to favor the richest and would increase the budget deficit by more than a trillion and a half dollars over the next decade, thus affecting cuts in social security and health care services.  

Chuck Schumer, Democrat leader within the US Senate, stated that the reform only benefits large corporations and the richest strata of society; in fact, the central part of the law establishes that the corporate tax will have a permanent reduction from 35 to 20 percent, but also includes other controversial aspects such as eliminating taxes on inheritances of more than US$22 million and reducing fees on private plane owners, producers of alcoholic beverages, users of private schools, and proprietors of golf courses.

In addition, the tax reform simplifies the individual income tax brackets from the current seven to four; the reductions for middle class taxpayers would expire after eight years, which means that in 2027 people who earn between 40 and 50 thousand dollars a year would pay US$5.3 billion more in taxes, while those who earn more than one million dollars a year would enjoy a tax cut of US$5.8 billion.

On the other hand, the defenders of the measure, like the republican senator Mitch McConnell, affirm that the law would pay for itself since it would stimulate the economy and that, thanks to the diminution in their taxation, companies will be able to generate more jobs.

The Speaker of the House of Representatives, Paul Ryan, stated that the fiscal plan amounts to a savings of US$1,182 for the American families. Now, to become a law, the initiative will be signed by President Trump.

According to economic analysts, the US tax reform would negatively affect Latin America since its currencies would depreciate due to the fact that the United States would be more attractive for investment. Also, some Latin American governments, such as Mexico’s, could be driven to also cut their taxes, affecting their fiscal consolidation.

This could also happen in Colombia, according to Alejandro Torres, head of the department of Economics at Eafit University. Torres stated that new tax conditions in the United States would displace the interest of investors towards said market; by having a lower tax rate, production would be relatively cheaper giving the opportunity to international companies settled in Colombia to have more incentives to relocate to the North American country.

However, for Camilo Silva, partner of Valora Inversiones, there would also be positive consequences, such as greater exports of Colombian products to the US market; in addition, companies with large exposure in the United States, such as Cementos Argos and Tecnoglass, would benefit from the law.

Latin American Post | Javier Rodríguez Sotomayor 

Copy edited by Susana Cicchetto