On Thursday the House of Representatives passed the Tax Cuts and Jobs Bill by a surprisingly decent margin of 227-205, and for a day at least investors cheered.
The Dow Jones Industrial Average gained 187 points Thursday while the S&P 500 tacked on 21 points as investors celebrated the long-awaited milestone. Senate Majority Leader Mitch McConnell promised to put that body’s version of the legislation up for a vote after Thanksgiving.
The plan would permanently slash corporate tax rates to 20% from the current 35%; reduce the number of tax brackets; eliminate personal exemptions while doubling the standard deduction and child tax credit; cut rates for some “pass-through” businesses, and end the alternative minimum tax and phase out the estate tax.
To recoup enough projected revenue losses to get the bill through the Senate, the House plan ends deductibility of state and local income taxes and caps the amount taxpayers can deduct for medical expenses, mortgage interest, and property taxes.
But the big deal here for investors (and big political donors, who pushed Republican congressmen hard on this bill) is the corporate tax cut, which was on a percentage basis the largest we’ve ever seen.
Here’s why so much is riding on it.
A big cut in the statutory rate (which few companies actually pay), as well as an even lower tax rate on earnings multinationals repatriate (or bring back) to the U.S., would be a huge boost for corporate profits.
You might think companies don’t need the help—corporate profits already are near their all-time highs above $1.8 trillion in the first quarter, according to the Commerce Department. But markets look to the future, and so do CEOs, more than half of whose compensation is tied to their company’s stock performance.
The rationale for this, of course, is that if companies make more profits and bring all that money back from overseas, they’ll add more jobs and pay higher wages in the good old USA.
That may be lawmakers’ incentive, but it’s not corporate CEOs’. The shareholder value movement has made sure—through proxy fights and the aforementioned compensation schemes—that executives are solely devoted to increasing shareholders’ wealth, and everything else is incidental.
That’s why the last time Congress passed a bill that allowed companies to repatriate earnings at lower tax rates, those same companies gave 92 cents of every dollar they brought home to shareholders through dividend hikes and share buybacks.
As the economy gains steam, both here and overseas, consumer demand should pick up, too. The big, fat tax cuts should cause billions of dollars to flow to companies’ bottom line and reward investors for some time.
That’s why stocks are up more than 30% since the election. We don’t know if that will continue or if at some point investors will sell on the news.
GoldenEgg Investing will not publish an update next Friday because of the holiday weekend. We wish you all a happy Thanksgiving!