Changes are blowing in the wind...
Written by: Megan K. Barnes, CPA, CA, LPA, Manager at Sone Rovet Chasson LLP
January 16, 2017
I drove into the office, exhausted from staying up the night before watching the results of the US election. Whether I was disappointed or not, my accountant hat was already on and I was preparing to be bombarded with what I had assumed would be phone calls from US tax clients wanting to renounce their citizenship. It was a reasonable expectation, given there had been so many reports of people claiming that this would be their reaction if Trump won.
However, when I arrived at the office, all of the calls were about the impact these results will have on our clients’ business operations in the U.S. At this point it is still hard to tell what will happen given that Donald Trump continues to change his mind via twitter. Here are a few things to keep in mind for the time being:
Trump vs. NAFTA
During the election, Trump made promises to renegotiate NAFTA. If the renegotiated terms are not satisfactory to Trump, the threat to withdraw completely could provide Trump with more leverage in the negotiations. As a result, tariffs could be levied on some or all imports from Canada and Mexico in an attempt to protect American jobs.
According to NAFTA, a party may withdraw from the agreement six months after providing written notice. Given that Trump plans to attempt renegotiating the terms first, the U.S. withdrawal from NAFTA is neither imminent nor guaranteed. In addition, it took approximately four years for NAFTA be negotiated, signed and ratified by each country’s parliament or legislature back in the early 1990s. Thus, it could be years before a new agreement is in place.
Trump’s Proposed Tax Plan
During the election Trump made it clear that he intends to reduce the Federal corporate tax rate from 35% to 15% and the top individual tax rate from 39.6% to 33%. He has proposed to increase spending in defence and infrastructure and is not planning to touch Social Security or Medicare, which are a rising cost for the U.S. government with an aging population. With a decrease in tax revenues, it is not clear how these programs are going to be fully funded going forward under Trump’s proposed plan.
Trump’s Promise of New Jobs
One of the most significant points in Trump’s election platform was his promise to bring American manufacturing jobs back to America. However, according to study done by the Center for Business and Economic Research at Ball State University in Indiana, approximately 85% of the jobs in the last 10 years were actually lost to changes in technology (i.e. automation), not trade agreements. Given the dramatic advances being made in technology, the likelihood of this changing is low. How Trump plans to counter the impending automation of the manufacturing industry is unknown.
Currently, Federal minimum wage in the U.S. is $7.25 an hour. Some States have passed laws to increase the rate from between $8.00 - $11.00 an hour. During the election, Trump changed his mind on minimum wage a number of times. However, it appears his most recent declaration was to increase the Federal rate to $10.00 per hour. Will Trump’s decrease in the Federal corporate tax rates be enough to counter the increase in labour costs, or will it result in more job losses?
As you can see, there are a number of changes on the horizon after the upcoming inauguration of the President-elect. However, there is also a great deal of uncertainty as to exactly what these changes might be. The world is definitely changing and we will all have to hold our breath and wait to see what happens after January 20th. Sone Rovet Chasson LLP will keep you posted.