What Trump’s tax plan could mean for the Australian economy and share market

President Donald Trump has finally reached the main game and his new tax plan is crucial in determining how the US and world economies will perform over the next few years.

The Trump tax plan is a radical simplification of the existing US tax system, reducing seven tax tiers to just three of 12, 25 and 35 per cent.

Corporate taxes would fall to 20 per cent from 35 per cent with a clear aim of slashing small business tax and also getting an estimated $3.2 trillion of cash US companies have stashed around the world back into the US tax system through a concessional repatriation.

It is a bold plan but also a real game changer for the US and world economies which are faced with the staged withdrawal of monetary stimulus as interest rates start to rise to more normal levels and massive central bank balance sheets are gradually wound back.

Markets searching for a reason to go higher

In simple terms, stock markets are now searching for a reason to go higher and this highly stimulatory tax plan could provide just that – with any failure providing a very good reason to head in the opposite direction.

Which of course leaves us wondering whether the Trump plan can triumph or whether it will be shot down in flames like so many of his other changes so far.

Can the plan get up?

On the positive side, the tax plan seems to have been assembled with some key points of flexibility which will be essential as it winds its way through the US political labyrinth.

Also helping the plan should be the fear of any politician wanting to be seen as getting in the way of a tax cut.

On the negative side of the ledger is President Trump’s poor record of successful legislative change, which can either be read as a useful learning experience or as a sign of being a big talker with poor follow through.

Australia behind the eight ball

Whatever you think of the chances of this tax reform becoming law, its progress or otherwise will have very important ramifications for Australia.

For a start there is our competitiveness on business tax which is already poor compared to the countries that surround us.

Australia’s much less courageous tax “reform” is to gradually cut the corporate tax rate from 30 per cent to 25 per cent by 2027 and even that process is stalled at the moment.

Why lower tax?

Having a competitive business tax rate is one of the keys to attracting and keeping business investment and providing employment so it is far from a moot point.

If we assume for a minute that the Trump plan gets through and has the effect of directly stimulating the US private sector then we would expect higher interest rates and a stronger currency in the US, which would be a marked contrast to our range-bound market which is still well below its pre-GFC high and our relatively sluggish economic growth performance compared to historical norms.

While the relationship between the real economy and the share market is best described as being highly elastic, over time you need growing companies and profits to drive markets higher and Australia with its high levels of household debt runs the risk of being left well behind if the global push for lower taxes gathers pace.

Ironically, lower tax rates need not necessarily slash government revenues, particularly when you consider the billions being spent by companies “avoiding’’ tax through complex structures and tax havens.

In the case of the US, the return of that $3.2 trillion stashed offshore into the US tax system would be a massive and lucrative long term triumph, even if it takes a concessional rate to get it “stateside”.

Market takes an each way bet

The market response to the US tax plan has been positive but muted, perhaps hinting at some of the scepticism that the plan will ever become anything more than that.

Here in Australia there has been plenty of action as usual at the small cap end of our market as company specific news drove prices.

Pilbara gold

Gold discoveries in the Pilbara sent several share prices rocketing even as WA producers continued to battle negative perceptions of the state following the imposition of a higher gold royalty.

Artemis Resources (ASX: ARV) was again in the news after the third gold discovery this month from its Silica Hills project while De Grey Mining (ASX: DEG) also kept the bourse hopping with its discovery of 91 small nuggets.

Medical marvels

Another one to keep a close eye on is medical device company Respiri (ASX: RSH) which has been around the block a few times with its asthma management system. While this has been far from a trouble free investment so far, experienced large shareholders including Bruce Mathieson remain behind it so it would not surprise to see some developments soon from experienced executive chair Leon L’Huillier.

Staying with medical technology, Neurotech International (ASX: NTI) reported some promising findings for its Mente autism device, marking this as another one to keep an eye on.

For those that can’t get enough of talent quests, Megastar Millionaire (ASX: MSM) are about to launch global auditions for their first Megastar competition via a new online app.

Coming up

Looking at the week ahead, it will be interesting to keep an eye on the RBA announcement on Tuesday, even though they are highly unlikely to change interest rates and there could be some reaction from the purchasing manager surveys for the manufacturing and services sectors out of China, which still exerts an outsized influence on Australia.