Unlike much of the news flow that emanates from the White House, we at Macrovue believe that the reform of the U.S. tax code for companies and individuals, as proposed by Donald Trump’s Republican party, will be a key driver for global markets going forward.
President Trump’s economic adviser, Gary Cohn, said that starting this week the administration expects to launch a tax campaign that will lead to major legislation by the end of 2017. Markets have rallied on the news.
The key points of the plan
(as it was released earlier this year are)
- Corporate tax rate of 15%: The current federal statutory rate is 35%, one of the highest in the world.
- Allows a pass-through rate for business owners: self-owned businesses are taxed at the personal income rate; business owners would have incomes from operations taxed at the 15% rate.
- An adjustment to individual tax rates. There would be three tax brackets with rates of 35%, 25%, and 10%, down from the current seven brackets. Exact incomes associated with the brackets are yet to be released.
- Doubling of the standard individual tax deduction: This would allow individual filers to deduct their first $12,700 in income from their taxes and $25,400 for joint filers, as opposed to the current $6,350 for individuals and $12,700 for joint filers.
- A one-time repatriation tax: This would allow companies to bring back money from overseas to the US with a lower, one-time tax. The White House did not clarify the rate at which this money would be taxed. U.S. companies are estimated to hold over 2.7 trillion USD overseas.
- Elimination of the estate tax: This would negate tax on assets being transferred through a will.
- Elimination of itemised tax deductions other than charitable donations and mortgage payments: The White House said this provision would close "loopholes" and offset the decrease in base tax rate for high income Americans.
Treasury Secretary Mnuchin has said the bill would be paid for through ongoing economic growth of 3% plus.
Many economists agree that although the tax changes may widen the budget deficit in the short term, lower tax rates and the higher accumulation of capital will mean faster economic growth and higher real incomes, which will result in lower long-term deficits over the medium term.
Implications for Investors
Now, while many of the details are yet to be clarified, you don’t have to be an economist to see just how positive this would be for companies and individuals, as well as the U.S. (and global) economy. It is the most “pro-growth” plan I have ever seen in my career.
Tax reform remains the last best hope for the White House and the Republican Party to put aside their differences and rally around a common ideological cause as the 2018 elections loom large. Let’s face it, the Trump administration has been severely lacking on legislative successes in its crucial first year so far. They need a “win.”
In fact of all the election promises made by President Trump, we believe that tax reform has the best chance of passage (in spite of perceived Republican party dysfunction) and holds the greatest promise for investors. As it is early days and many more specific details will be released, Macrovue will be keeping subscribers up to date on this important topic and how it affects companies and markets.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual and does not constitute financial advice. Consider the appropriateness of the information in regards to your circumstances.
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