Dramatic moves are afoot to try and revise the US tax code by offering a big break to businesses and individuals. President Donald J. Trump has argued that corporate taxes should be reduced from their current rate of 35% to 20% before the end of the year.
He recently pitched his tax plan to the country’s most prominent conservative think tank: The Heritage Foundation. There are diametrically opposed views on this topic, with Democrats urging higher taxation on businesses and high net worth individuals to maintain the social safety net that the country relies upon, and Republicans seeking to reduce taxes to allow businesses to prosper.
Trump’s sweeping tax plan would see a sharp reduction in the number of income tax brackets that are currently in play. Whether the math is accurate or flawed remains to be seen. The president claims that these new tax plans would put $4,000 more per year into the pockets of average American families, but skeptics remain unconvinced. There is some concerning news for the US economy however, and it comes from existing home sales figures for September 2017. Analysts anticipated a decline in this metric, and the actual figures came in as expected.
The GBPUSD Pair
One of the unlikely outcomes of the current plans for tax reform is a weakening of the GBP/USD pair. Any time there is talk of tax reform in the US, this strengthens the greenback and weakens other currencies trading against it. For example, the GBP/USD pair dropped to 1.3177 by Friday, 20 October 2017 as talk of Trump’s tax plan permeated markets. If there is progress on implementing a new tax code in the US, this will invariably boost prospects for the US economy.
Businesses will be subject to lower corporate taxation, allowing them to invest more money into the US economy, and make the US an attractive destination for foreign corporations. The GBP dropped as low as 1.312 against the greenback on Thursday, 19 October 2017, before recovering slightly. Petty political squabbling aside, a US tax cut would be hugely beneficial to the US economy by reducing the burden that is currently being placed on businesses. The US has one of the highest tax rates in the world, and this does not provide for an environment conducive to buying and investing in America.
The sterling was not to be undercut for too long. News started circulating about the UK public deficit in September 2017. Wilkins Finance expert, Pete Montgomery remains cautiously optimistic about the GBP. ‘According to stats released by the ONS (Office for National Statistics), government borrowing amounted to £5.33 billion in the month of September, when analysts were expecting borrowings of £5.7 billion in September. The deficit in August was revised to £4.14 billion from £5.09 billion. This is the type of news that really puts the brakes on the bears. There is plenty of juice left in GBP, and we should not write off our currency in a hurry.’
Chancellor of the Exchequer, Philip Hammond will now have more maneuverability when it comes to the budget speech in November 2017. Meanwhile, the situation remains balanced on a knife edge with Brexit talks. The current state of negotiations is less than optimistic. Prime Minister Theresa May has been hard at work trying to come to consensus with her European counterparts regarding the pathway to Brexit. As it stands, progress has been difficult to come by. Trade talks are expected by the end of 2017, but the UK only has until the early 2019 to create a blueprint for Brexit.
By Taylor Wilman