20171121-NATIXIS-Is_a_supply-side_policy_needed_in_the_United_States__6页_690kb

Flash Economics: Is a Supply-Side Policy Needed in the United States?

Core Content

The document discusses the potential impact of supply-side policies in the United States, particularly focusing on the proposed reduction in corporate tax rates under the Trump administration. It analyzes whether such a policy is necessary by examining key economic indicators like income distribution, corporate profitability, investment levels, and external trade deficits.

Main Points

• Corporate Tax Reduction as a Supply-Side Policy:
  The Trump administration is expected to implement a significant tax cut on corporate earnings, potentially reducing the tax rate from 35% to 20%. This is considered a supply-side policy as it aims to increase corporate profitability and return on equity.

• Potential Impact on Equity Markets:
  The document suggests that the main expected outcome of this policy is a boost to equity markets, rather than a substantial increase in economic activity or investment. It implies that the policy may serve to validate the high valuations of US equities and prevent a market correction.

Key Arguments Against the Need for a Supply-Side Policy

• Income Distribution Distortion:
  Income distribution in the United States is significantly skewed in favor of higher-income households, which has already contributed to increased corporate profitability. This suggests that the current structure of income distribution is not a constraint on economic performance.

• High Corporate Self-Financing Rate:
  The US corporate self-financing rate is close to 100%, indicating that companies are not constrained by profitability in their investment decisions. This suggests that additional profitability from tax cuts may not translate into increased investment.

• Labour Costs and Employment:
  Labour costs, especially for low wages, have increased slightly, yet employment has risen sharply. This indicates that labour costs are not a limiting factor for employment or economic growth.

• Corporate Investment Levels:
  Corporate investment in the US is already high and seems excessive relative to the growth rate. Investment in new technologies is also robust, suggesting no investment shortfall that would require correction through tax cuts.

• External Deficit and Competitiveness:
  The US external deficit is attributed to a low level of savings, not to a lack of cost competitiveness. The export market share of the US has remained stable since 2003, further supporting the idea that the deficit is not due to competitiveness issues.

Conclusion

The document concludes that the current economic conditions in the United States do not justify the implementation of a supply-side policy, such as a corporate tax cut. Instead, the policy is likely to have a limited effect on the equity market, serving more as a validation of current valuations than as a driver of economic growth.

Disclaimer

• The document is intended for professional and qualified investors only.
• It is confidential and cannot be disclosed to third parties without prior written consent.
• It does not constitute a financial analysis or personalized investment recommendation.
• It is based on public information and does not account for specific tax or accounting rules.
• No liability is accepted for any use of the information contained in the document.
• The views expressed are those of the authors and do not necessarily reflect those of Natixis or its affiliates.

Regulatory Information

• Supervision and Authorization:
  Natixis is supervised by the European Central Bank (ECB), authorized and regulated in various countries including France, the UK, Germany, Spain, Italy, and the UAE.
• Regulatory Jurisdictions:
  The document is subject to different regulatory frameworks depending on the jurisdiction of the recipient.
• Legal Disclaimer:
  The information is not intended to be used as a financial analysis or investment recommendation and is provided for general informational purposes only.

Summary

The analysis concludes that while the Trump administration is likely to implement a significant corporate tax cut, this policy does not address underlying economic issues such as income distribution, investment levels, or external deficits. Instead, it may primarily benefit equity markets by reinforcing current valuations. The document serves as a general economic insight and does not constitute a financial recommendation, with clear disclaimers and regulatory information provided for the intended professional audience.