Tax Reform to Ring in 2018
The 2017 Tax Cuts and Jobs Act is headed to the President’s desk for signature. This legislation has significant implications for businesses and individual taxpayers. PSG Advisor, Steve Stern, summarizes the changes in the new law on our website (http://psgplanning.com/2017-tax-cuts-jobs-act-might-impact/).
From an investment viewpoint, here are my initial thoughts:
- A holiday gift to US Corporations: The corporate tax rate will move from 35% to 21%. The US moves from the highest corporate income tax rate to middle of the pack out of the 36 countries in the OECD. The result: US corporations will receive an estimated benefit of $80 billion per year over the next several years (estimates from the Congressional Business Office and JP Morgan Asset Management).
- High tax industries are partying like its 1999: Banks will see an immediate boon to the bottom line. Tax reform was one of the reasons we increased exposure to financial services companies in portfolios this year. AT&T, a highly-taxed telecom company, announced that once the bill becomes law, each of its 200,000 workers will get a check for $1,000. In addition, AT&T will spend another $1 billion on business investment. Expect more announcements like this from other corporations.
- Bring the cash home: A 15.5% one-time repatriation tax holiday on cash held by US businesses overseas is in the final bill. Goldman Sachs estimates the S&P 500 companies will bring back $250 billion of the $920 billion of untaxed overseas cash.
- Supportive: What will companies do with all of this found money? Expect companies to increase &/or pay special dividends and buy back stock. In addition, look for mergers and acquisitions to pick-up. This will be welcome news to investors and should help support risky-asset prices.
- Odds of a US recession in 2018 are very low as individuals and corporations have more money in their pockets. We believe the end to the bull market in equities will occur with the next recession. This favors growth investments over income investments (of course, this depends on your risk tolerance and unique goals).
- Raining on the Parade: The glass half empty side of me worries about potential risks. Unemployment is already extremely low. Employers may have to pay-up for talent. An acceleration in wages would limit the benefit to corporate earnings from the tax cuts and likely encourage the Federal Reserve to raise rates faster than expected. This risk is not likely priced into markets and if it were to occur, volatility will increase.
From all of us at Planning Solutions Group, wishing you and your loved ones a Happy New Year.