IEEJ：December 2017○ｃIEEJ 2017
Special Bulletin
A Japanese Perspective on the International Energy Landscape (355)

December 21, 2017

Massive Tax Cuts Cleared U.S. Congress for Signing by President Trump
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn December 20, the U.S. House of Representatives voted 224 to 201 to pass massive tax
cuts bill, a presidential campaign promise to which President Donald Trump has given priority. Earlier,the Senate passed the tax bill with a vote of 51 to 48. Following the passage through the two chambers,
the bill was to be sent to President Trump for his signing to enact the largest tax reduction in threedecades.
The tax bill will lower the corporate tax rate from 35% to 21% permanently from 2018. It
also includes temporary measures to cut the maximum personal income tax rate from 39.6% to 37%
and the inheritance tax and expand tax credits for children. Tax cuts are estimated to total $1.5 trillion(about 17 trillion yen) in 10 years, representing the largest tax reduction since the tax overhaul under
the Reagan administration in the 1980s.
In response to the congressional passage of the bill, President Trump in his address at theWhite House emphasized that the tax reform would greatly contribute to boosting the economy,businesses and employment. The tax cut initiative has been positioned as one of the most importantcampaign promises since the presidential campaigns. Since its inauguration, however, the Trumpadministration has had difficulties dealing with Congress, failing to win the enactment of any bill torealize key campaign promises or policies. Therefore, the incoming enactment of the tax reform bill
will be the Trump administration’s first major domestic policy achievement.
President Trump may be willing to take advantage of the achievement for halting a fall andwinning a rebound in his approval ratings to shore up his administration in consideration of themidterm congressional elections in 2018. However, there are uncertainties about whether he can doso. The tax bill is criticized for favoring large companies and wealthy people too much and is estimatedto expand federal budget deficits by more than $1 trillion in 10 years, even with the tax cuts’ economyboosting effects taken into account. The tax reform’s macro and micro effects are attracting attention.
At least, however, the Trump administration won points by leading its domestic economic
policy as a key presidential campaign promise to clear Congress for enactment. The tax reform is
expected by a majority to have positive effects on economic growth. Hopes on the massive tax cuts,
as well as the robust U.S. economy, have contributed to leading the Dow Jones industrial average on
the New York Stock Exchange to rewrite a record high close to 25,000. In a sense, the tax cuts have
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been discounted into the stock market. Nevertheless, I would like to pay attention to the tax cuts’effects on future stock prices and GDP growth.
Given that U.S. economic growth sustained or accelerated through the tax cuts is expected
to have positive effects on the global economy, such effects in 2018 will attract attention. Global
economic trends are the most important factor for energy demand and a key point for analyzing thesupply-demand environment for the international energy market.
However, tax cuts’ effects are not simple. They influence the economy through various
complicated paths. If the massive tax cuts accelerate economic growth and push up stock prices, forexample, it may have some impact on future interest rate hikes. The Federal Open Market Committeeannounced 2017’s third policy interest rate hike of 0.25 percentage points on December 13 andmaintained a plan to raise interest rates three times in 2018. However, the FOMC noted that it would
closely watch future U.S. economic growth and inflation. It may pay attention to the impact of themassive tax cuts.
If the tax cuts exert any impact on the timings and degrees of interest rate hikes, it may cause
various effects not only on the United States but also on the global economy and the energy market.
This is because U.S. interest rates greatly influence global fund flows. Under generallyaccommodative monetary policy, abundant money is available in the international financial market.
U.S. interest hikes may prompt money to go back to the United States and fly away from emerging
economies.
Emerging economies, though continuing to grow, have some destabilizing factors including
financial risks to which attention must be paid. As the global economic growth center shifts toemerging countries and Asian developing nations, how U.S. interest rate hikes would impact thegrowth center and how such impact would affect global energy demand growth are key points.
Interest rate changes’ impact on fund flows could influence not only economic growth but
also flows into risk assets. In this sense, changes in fund flows into crude oil and other commodity
futures markets would influence commodity prices. While fundamental supply and demand factors arebasically important for commodity prices, financial effects on these prices cannot be ignored. In thissense, we may have to pay attention to U.S. interest rate changes’ effects on the dollar’s exchange
rates. As the dollar’s depreciation structurally causes crude oil price hikes or its appreciation triggers
oil price drops, I would like to watch future U.S. interest rate hikes’ contribution to the dollar’sappreciation.
How the key domestic policy achievement the Trump administration made at last one year
since its inauguration would influence the U.S. economy, the global economy and the internationalenergy market is a great matter of interest for me.

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