The Tax Competition: Trump’s Sweet Poison for German Top Managers

The German CEO of Siemens praising the tax giveaway granted by a historically dangerous U.S. president gives us a peek at how harmful it can be when managers involve themselves in politics in such delicate times.

Some animals get excited reflexively, if, for example, you hold a stick in front of them. Without thinking twice about it. This is not how it works with managers and business representatives. They do not react to sticks, but rather to someone talking about tax cuts. That is when they start wagging their tails. Without thinking twice about it.

This is probably the only explanation for why some look so delighted when they listen to (or even meet) Donald Trump – like the head of Siemens, Joe Kaeser, who greatly praised the U.S. president at the World Economic Forum in Davos for his wonderful tax reductions. Some even believe that our own economic collapse is in sight unless we quickly undertake similar measures. Even our chancellor is already promising to think about this possibility.

Such happiness may even be understandable when one thinks about Kaeser and his colleagues making more money soon thanks to Trump’s tax reform because taxes on their earnings are being reduced without them having to do anything in exchange.

The situation seems less rosy when one reflects on the fact that Trump’s tax reform could eventually also lead to a financial and social disaster, and that the praise from the German executives may have validated the zeal of a man who presumably leans easily toward narcissism. This zeal can result in heavy costs in terms of peace and wealth. Of course, you have to be able to think outside Siemens’ box in order to notice that.

However, this is not to say that the tax reform that was just approved in America will have no positive effect. Those who invest will be able to obtain deductions faster, which may create the odd job here and there. The fact that it will make it harder for corporate groups to evade local taxes through virtual constructs is essentially helpful as well. The economists from the International Monetary Fund also mentioned the tax reform explicitly when they improved their short-term forecast for the U.S. economy during recent weeks.

Nevertheless, there are many reasons to believe that the effect will remain negligible and not pave the way for a boom. Moreover, this measure may even (careful!) boomerang. The wealthiest 6 percent in America will receive almost half of the whole tax relief by 2019. Therefore – we do already have everything, darling – they do not contribute much more money, meaning that they do not push the economy forward either. Nor are people with such a large income made any happier by receiving more money, as modern research on happiness demonstrates.

Windfall Profits for Shareholders

The reduction of American corporate tax rates from 35 percent to 21 percent – which seems so impressive at first glance – could have a similarly sobering effect on the economy. It will indeed allow successful corporate groups to make more money (filling Kaeser’s coffers), but there is no guarantee that it will lead enterprises to invest more. In Germany, the reduction of corporate tax rates in the 2000s fizzled out without any detectable effect on the country’s investment dynamic. According to David Milleker, chief economist at Union Investment, investment rates have even declined. Additionally, U.S. businesses have already been making historically huge earnings for years, without even coming close to investing this much money.

Businesses care more about having wealthy clients and markets to match. However, this has very little to do with how high taxes on earnings are. Essentially, according to the gloomy prediction by Martin Wolf of the Financial Times, such tax cuts constitute a sort of windfall profit for shareholders.

Should that be true, the lofty promise according to which Trump’s reform will create so much wealth that it will more or less finance itself through growth-related additional tax revenue is in danger of crumbling soon. Much like in the case of Ronald Reagan, who (after having wasted even more money) was soon forced to raise taxes again. Trump, therefore, risks throwing away an inconceivable amount of money for a meager result. It is a dangerous game.

As per official calculations, the reform will cost the country almost $1.5 trillion over the span of 10 years. The current national deficit could therefore soon increase by 1.5 percentage points, something that can be economically helpful in critical times, but would now occur in a moment when it would be best to make provisions for the next recession.

According to estimates by the Organization for Economic Cooperation and Development, the tax reform could cause the U.S. to enter the next downturn with a huge structural deficit amounting to nearly 5 percent of its economic output. Subsequently, the debt will skyrocket anyway, because there are suddenly fewer sources of tax revenue, and more money will have to go into supporting the unemployed. This is a disaster waiting to happen.

Who Will Pay When It Goes Wrong?

What will happen then? Thus far, it does not seem likely that Trump will demand the money from his rich friends. Would he then turn to those with lower income, i.e., the people who already risk getting the short end of the stick with this reform? In a country where the discontent from which Trump has been profiting thus far is mainly driven by dramatic income inequality? Hardly a reassuring scenario.

There are estimates that about a third of Americans – specifically those with a lower income – will lose money because of the tax reform. Or will Trump punish the bad Germans – the ones who have just smiled so nicely at him – because they export so much? Who knows whether the next U.S. president will still invite German managers to dinner.

This outcome is not set in stone, but the risk of it occurring is relatively high. High enough anyway to make German top managers look breathtakingly naive as they let the joy over short-term higher earnings induce them to chuckle over a U.S. president from whom we (and our chief executives) can only hope for one thing: that we may survive his threats of trade war, as well as war of other kinds, somewhat intact.

In order to ensure the future of whole societies, we have to do more than just give a treat to the ultrarich. We also need managers who are deeply focused on building the world’s most beautiful gas turbines instead of giving statements about foreign tax reforms and equally difficult political matters about which they do not seem to be wholly educated.