Tax reforms in the United States and Macedonia

Nikola Popovski

What seemed to be impossible these days, has happened – the authorities in the United States made a huge reduction in the corporate profit tax rate (known to us as a tax on profits) and they reduced it from 35 percent to “only” 20 percent. We say “only” because in our country and in our surroundings, where the tax rates of profits are in the borders of about 10 percent, it can be interpreted that 20 percent is a high rate. At the same time, the new legislation has allowed corporations to increase the rates that calculate the depreciation of their fixed assets and hence make it much faster, allowing them to significantly reduce the tax base. In other words, they will be able to write off their fixed assets immediately, which is 100 percent in the first 5 years (so far it was 50 percent). Based on this, the profits will be reduced and they will pay even smaller amounts of corporate tax. A number of other changes have been made in the field of corporate taxation and personal incomes downwards.

The effects of these tax reforms in the United States will be essential. First, the fiscal impact of the reform is estimated at about $ 1,500 billion lower budget revenues. Given that the fiscal expenditures are not essentially reduced, it should be expected that the general government deficit will increase significantly in the future, and therefore the public debt that exceeds the 100% threshold in the United States by the level of GDP in the future 2012 and today it is about 104 percent of GDP. The assumption is that in the future, the exit will be demanded in a serious reduction of the additional costs of public health care for the poor and the elderly that have been introduced in the past by the previous government, and the measure was popularly called Obamacare.

From this comes the second effect, which is that the tax reform will be on the back of the poorer part of the population, which means that social differences should increase. Considerations that the situation of the poor will improve through the effect of the larger taxable profits that remain for companies, and which through major investments can turn into new jobs is excluded, for the simple reason that unemployment in the United States is at the lowest level in for the past 10 years and only 4.1% in November this year. Accordingly, new incomes for the poor and the unemployed from creating new jobs are excluded because there are enough jobs as it is. The tax reform is likely end up as a new redistribution of income for the benefit of the owners and deepening of social differences in favor of the wealthier, especially the high middle class and the high class.

The third effect is considered to be the raising the growth of the economy by additional 0,1 to 0,3 percent annually on that account only. It is difficult to assume whether the calculations are exact and if it really that important to the economy. However, we should not forget that it is about a relatively big long-term effects, and the possible additional growth of the GDP would be about additional $16 billion to $50 billion annually. Let’s not forget that this is equal to 1,5 to 4,5 annual GDP in Macedonia.

The fourth effect is that much encouragement should be expected for the domestic and foreign investors, as well as the faster growth of the shares of corporations in the stock exchanges and, consequently, the stock indices themselves that have grown steadily in the last 12 months.

Finally, President Trump’s government relied on the most obstinate neo-liberal beliefs and corresponding economic policies and thus marked its presidency in the first year.

Our power changed 4.5 months after the change in the United States. And our government announced some significant tax reforms, but it started with a more modest realization. Towards the end of the year, it can be concluded that the announced major tax reforms have been postponed for the beginning of 2019, although they are not of the utmost importance because the profit tax will not change at all, and another one will be introduced in the taxation tax, an additional and higher tax rate of probably 15 or 18 percent of the income over 60,000 denars per month or the income of over 1 million denars per year. The public still does not know how the final change will look. However, it will not apply to more than 2-3% of the persons with personal income in Macedonia. There will also be changes in the level of paid health and pension insurance contributions for those bonds that have a monthly salary of over 12 average monthly salaries in Macedonia. Their margin is increased by paying the contribution at the prescribed rate to the level of 16 average monthly salaries paid in Macedonia. On the other hand, an unannounced tax, and this is the excise tax on diesel fuels, has increased. Such a change will largely affect only some citizens, and to a lesser extent at all. The effects of this shift on the budget will be limited, though not unimportant (around 35m euros), but it may also result in some other longer-term effects such as, for instance, the reorientation to higher gasoline consumption instead of the current diesel consumption.

Additionally, another election-announced and already submitted to the Parliament is the appropriate tax change in the taxation of individual farmers with the personal income tax from the agricultural activity. This reform is different from the rest because it is not general, but sectoral. It is aimed only at agriculture and farmers. It belongs to the order of the so-called selective tax measures that are highly unpopular with market-oriented economists. In other words, through it, and with the amendments to the Law on Personal Income, all those farmers whose agricultural activity is the main activity and who have an annual income of up to 1 million denars, the personal tax that is retained during the year will be fully refunded.  The border has so far been at the level of annual revenues of 300,000 denars. The new measure will cover as much as 65,000 agricultural households, which at the beginning of each subsequent year will be paid the amount equal to the retained tax in the previous year on their account. The fiscal impact of this is estimated at around 7 million euros in favor of individual farmers with an appropriate income.

If we compare the two partial tax reforms in the US and Macedonia this year, it can be easily noted that both have a considerable effect of a certain redistribution of income to certain parts of the population but in the opposite direction. Reforms in the United States are predominantly aimed at redistributing income among the layers of the population according to the level of income they make, and in Macedonia they have a strong sectoral component through the pronounced selective tax policy. We will never know which reform will be better and more successful because both reforms have different goals.

The author is a professor and former minister