Tax Reform Is Here, But Will Investors Cheer?

 

On Wednesday Republican congressional leaders unveiled the outlines of their much-anticipated tax reform plan, and President Trump touted its virtues.

While short on details, the plan’s key provisions are:

  • Reduce the statutory corporate tax rate to 20%, from 35%.
  • Cut the number of individual tax brackets from seven to three–12%, 25%, and 35%– and maybe include another one for higher-income taxpayers.
  • Eliminate the estate tax and alternative minimum tax, a potential windfall for big earners.
  • Double the standard deduction and eliminate certain deductions, especially deductions for state and local taxes.

Some Republicans were quick to say the tax cuts would “pay for themselves” through faster economic growth, but nobody except a few supply-side fanatics believes that anymore. The nonpartisan Tax Policy Center estimated the plan would cost the Treasury $2.4 trillion over the next decade. “All income groups would see their average taxes fall,” the group declared, “but…those with the highest incomes would receive the biggest tax cuts.”

Well, surprise, surprise. And  now that investors have a clearer idea of what they’ll be getting after waiting so long, what will they do?

So far, not much. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite index are at all-time highs, but gained around 1 percent in the three trading days since the plan was released.

Much of the coverage has focused on the fiscal impact of the package and the likely difficulty in getting it through Congress in light of what’s sure to be a concerted lobbying effort by every powerful special interest in Washington, D.C.

For example, the National Association of Realtors, not satisfied that its sacred mortgage interest deduction will be preserved, is whining that doubling the standard deduction will cause many taxpayers to take that rather than itemize, and that will lower the value of said mortgage interest deduction. I mean, really?

Also, Republican congressmen in heavily taxed blue states may vote against their own party to keep the deduction on state and local taxes, which will make it harder to offset the revenues lost by cutting taxes.

And this is before we even have a real bill. No wonder so many Americans are disgusted with Washington, D.C.!

The point is, especially after the fiasco over attempts to repeal and replace Obamacare, people are sharply lowering their expectations of what’s achievable. I’ve read quite a few commentaries about this, and nobody expects even tax cuts without reform to pass by the end of the year. And next year is no slam dunk, either, given the chaos in Congress.

Since the election, investors have driven stocks higher largely on hopes tax reform and deregulation will boost corporate earnings. Now, as they confront the hard realities, will they sell on the news?

 

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