Trump praised the new tax law at Davos, but will it prove to be positive for the global economy?

President Donald Trump delivers a speech to the World Economic Forum, Friday, Jan. 26, 2018, in Davos.

At this year’s World Economic Forum in Davos, American President Donald Trump was one of the most anticipated leader’s. As we all know President Trump is a fan of big crowds, about 3000 business leaders, government officials and NGOs flocked the main hall to see what the American President has to say. Trump was provided a very warm welcome by German economist and event organizer Klaus Schwab. Mr. Schwab also unexpectedly praised the President’s efforts toward the new tax reform.

Trump’s agenda at the forum was simply “America First”, the theme that Trump set out was, that United States was open for business to investors. Trump began his address to the global elites at Davos by praising the United State’s strong economic growth and emphasized the healthy stock market, tax reforms and regulations and modification of the trade policy.

Trump stated “The American economy is by far the largest in the world and we’ve just enacted the most significant tax cuts and reform in American history.” He briefly spoke about reducing America’s corporate tax rate from 35 percent to 21 percent and attracting investors with Apple’s lucrative profits that will be coming to America in the next five years.

It is precise that new tax reforms and deregulation can provide a fiscal stimulus to the economy and if done the right way, it can increase growth by encouraging investment. IMF chief, Christine Lagarde has called out Trump’s tax cuts, that it may destabilize the global economy. The US tax reforms are likely to have a positive impact for the United States and other countries investing but only on the short run – but also may lead to serious risks in the future. IMF chief Lagarde said “That has an impact on financial vulnerability, particularly given the high asset prices that we see around the world, and the easy financing that it still available.”

While many business leaders applauded Trump’s address at Davos on the tax reforms, but economists claim the US tax reform will likely raise the budget deficit. The extra borrowing by the US treasury will result in long-term American interest rates.

The full effects of the tax reform will take several months to become evident. As many companies are excited to invest in the United States, Frank Appel, the Chief executive of Deutsche Post AG says the tax cut would be great for a limited short term impact, however would increase the budget deficit and will definitely not do anything to provide a boost in productivity.

It will be rather interesting to see how other countries respond to President Trump’s moves on the new tax cuts. The American Tax reform is merely the start of a new tax race. This has the European Union searching for economic answers, they need to figure out whether they can afford to lower their taxes or keep them where they are. According to Sandhurst Consultancy in Singapore, there have been many examples of Americans who took strong measures to become tax residents in other parts of the world, including Singapore: “Eduardo Saverin, the co-founder of Facebook went as far as renouncing his US citizenship before relocating to Asia. Whilst the new tax code in the US will bring some relief, many Americans still take issue with the fact that they are liable for taxes on their worldwide earnings after relocating. It remains to be seen whether President Trump can stem the outflow of wealthy entrepreneurs.”

We have learned from Davos is that the tax reform could turn out to attract major investors from around the globe and make United States the go to place for businesses. American companies will now focus on investing more at home base and bring back the money into the American economy that has been invested in overseas.

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