Tax cuts in the US will benefit small companies and wealthy individuals but will not slow rising un...
Tax cuts in the US will benefit small companies and wealthy individuals but will not slow rising unemployment or significantly impact on large corporations.
As part of the US government's long-term fiscal programme, income tax rates and dividend taxes were cut on 1 July, adding up to a $350bn reduction in government revenue.
Alison Wright, US investment manager at Britannic Asset Management, says the tax cuts mostly affect high net worth individuals.
She adds: 'High income individuals tend to spend more. However, spending depends on the confidence of the market. The more confident the market, the more the tendency to spend. So far, we have seen positive figures coming through from the US.'
Wright believes the fiscal changes can only have the desired effect if used simultaneously with looser monetary policy; hence the need for low interest rates remains a vital element for growth in the US.
However, the marginal impact of interest rate cuts is decreasing as rates are already at historically low levels of 1%. Still, Wright believes US consumers remain sensitive to rate cuts, making them an effective tool.
Improving confidence could still be dented by rising unemployment. The June US economic figures show unemployment has grown to from 6.1% in May.
This raises some concerns, says John Hatherly, head of global analysis at M&G, because it could negatively impact consumer confidence. He notes: 'Some 70% of the US economy relates to spending and this has been supported by a buoyant housing market so far. But if confidence falls, consumers will be less inclined to spend and this will affect the economy negatively.'
Companies are still cutting back on capacity and unemployment is bound to rise further before it falls, Hatherly believes. 'If demand for goods continues, the excess capacity will be used up and companies will look to take on more staff,' he says.
Hatherly also feels the cut in dividend tax from 38% to 15% will give an added boost to the US stock market, improving the outlook for companies. This is because capital gains tax, at 20%, has been lower than dividend tax, at 38%, causing companies to opt for capital growth rather than pay dividends.
Hatherly says: 'The government is tackling one of the problems of the US stock market. The market has been criticised for having low yields and being too expensive. The dividend tax cut to 15% will encourage firms to pay dividends and the stock market yield will rise and make the market more bullish.'
Small businesses will benefit from the tax cuts because they are subject to personal rather than corporate taxes, says Wright. She believes small companies will add to labour first because of their flexibility. Unemployment will not start to fall unless larger firms start recruiting as well, she notes.
However, smaller firms do not have the extent of excess capacity the larger firms have and it will take longer for large corporations to utilise their excess capacity before starting to recruit.
Fiscal policy supports spending for wealthy.
Monetary policy still effective.
Dividend tax cuts will increase market yield.
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