What is going on here? Maybe President Donald Trump is doing a big “tax switch”. This could see him reducing income and company tax domestically, and increasing tariffs externally, while reducing the government expenditure, deficit and interest rates at the same time. Maybe it will work for the US?
While the US is the planet’s largest economy, the new US Administration has inherited significant challenges. With a GDP of US$29 trillion ($50.7t) it has growing and expensive debt of US$37t.
Annual government revenue is US$4.5t, but spending is US$6.5t, thus delivering an annual deficit of about US$2t.
With interest rates rising off historical lows, the cost of paying for that increasing debt is also increasing for every dollar. And in the next year, the US needs to refinance about US$10t of its debt. At what interest rate?
These metrics are all heading in the wrong direction. Choices for the US will become more limited over time, unless they take some action. So they are.
Trump has assembled a Cabinet of outside-the-box thinkers. It is therefore logical that we will get some outside-of-the box actions.
Elon Musk has been appointed as the tsar of government cost-cutting.
His Department of Government Efficiency (Doge) is targeting “waste, fraud and abuse” with some vigour. His target is at least $1t of the $6.5t annual expenditure. That’s about a 17% reduction.
Howard Lutnick has been appointed the new Secretary of Commerce. He is setting up the External Revenue Service to complement the current Internal Revenue Service, which is equivalent to our IRD.
It is tasked with getting a trillion dollars of external revenue from two key sources – tariffs and selling US immigration visas.
It is suggested that the visas – or Gold Cards as they are known - will be offered for sale at US$5 million each.
This may give the purchasers citizenship while only requiring tax to be paid on US-earned income. Estimates of how much demand there will be for such a visa vary significantly. If one million were sold, that would earn US$5t in revenue.
So government expenses down a trillion, government revenue up a trillion. This would reduce the deficit to zero. Sale of visas would reduce the expensive US$37t debt mountain.
And the uncertainty created by doing all this may see the economy stall in the short term, this seeing interest rates fall. And therefore, the cost of refinancing all that debt fall.
Trump has noted that Ireland has benefitted considerably from lowering company taxes. He may now do similar to give the US a competitive advantage and get companies to “onshore” into the US.
The impact for New Zealand could be significant if we can’t get an exemption for the new tariffs.
We have around $25 billion in two-way trade in goods and services between New Zealand and the US. A 25% tariff on exported goods to America of over $8b could see a $2b bill.
We could also be affected both positively or negatively through changed trade flows, commodity prices, interest, exchange rates and the value of our KiwiSaver accounts.
Tariffs were first introduced into the US in 1789 and in New Zealand in 1840. Income taxes were not introduced into the US until 1861 and New Zealand in 1891.
So having high tariffs and low income and company tax is not new. Are we heading back to the future? It’s a big risk, but perhaps it will make America great again.
