IMF issues Donald Trump tax alert

The IMF has warned that President Donald Trump’s proposed tax cuts and rollback of financial regulations could spark a new round of financial risk-taking of the type that preceded the last crisis in 2008.

The IMF said in its semi-annual Global Financial Stability Report that risks to stability have generally diminished in the last six months amid stronger global economic growth and higher interest rates that have improved bank earnings.

But it said that already highly-leveraged US companies may not be in a position to translate a cash-flow boost from US Republican tax reform proposals into productive capital investments that can aid sustainable growth.

Instead, the IMF said the slug of cash, which is likely to include repatriation of profits held overseas by multinational corporations, could be channelled into risks such as purchases of financial assets, mergers and dividend payouts. Such temptations would be highest in the information technology and health care sectors, according to the report.

“Cash flow from tax reforms may accrue mainly to sectors that have engaged in substantial financial risk-taking,” the IMF said. “Such risk taking is associated with intermittent large destabilising swings in the financial system over the past few decades.”

The report noted that past major tax changes typically were followed by increases in financial risk-taking, including the tax reforms in 1986 and a corporate tax repatriation “holiday” in 2004. In both cases, these led to leverage buildups that were followed by recessions, in 1990 and 2008.

If the US labour market turns out to have little slack left to absorb the stimulus from President Trump’s proposed tax cuts and spending plans, inflation and interest rates could rise more sharply than expected.

This could increase market volatility and raise debt service costs for already-stretched corporate balance sheets, the IMF said. It added that a shift toward protectionism in the US and other advanced countries also could reduce trade and capital flows, reducing growth and dampening market sentiment.

“Tighter financial conditions could lead to distress” for weaker firms, the IMF said, noting that resulting losses would be borne by banks, life insurers, mutual funds, pension funds, and overseas institutions.

— Reuters

© Irish Examiner Ltd. All rights reserved

Email Updates

Receive our lunchtime briefing straight to your inbox

Related Articles

Solemn duty to remember Holocaust victims, says Donald Trump on memorial visit

Sinkhole opens up in road outside Donald Trump's Florida resort

Michael Flynn 'lied to security officials about payments from Russian TV'

Billy Bush breaks silence over infamous Donald Trump tape

More in this Section

Tourism and aviation must shout louder at Brexit table

Greencore shares rise on improved US outlook

Saoirse Ronan’s firm gets a star turn as profits on the rise

Hibernia Reit eyes offices growth


Breaking Stories

Daa chairman says cap on pay of CEOs at semi-state bodies 'way below market'

Report claims renewable energy will lead to lower hikes in electricity prices

Marks & Spencer profits tumble

Lifestyle

Lorraine Kelly never felt better as she heads for 60

LauraLynn provide numerous services to families and support that is 'absolutely fantastic'

Making Cents: Why we need to eliminate waste from food budgets

Exploring synaesthesia - see sounds, taste colours, smell words

More From The Irish Examiner