Current proposals between the House and the Senate to provide much-needed relief to middle-class Americans have gained traction in recent weeks after the Senate voted in favor of Tax Reform. It’s important appreciate the importance of tax reform in the US – the world #1 biggest economy. According to the Republicans, tax savings will amount to $1,200 per household of 4, with a median income of around $59,000. Based on proposals, the standard deduction will rise to $12,000, meaning that tax will not have to be paid on the first $12,000 if itemized deductions are not made. Additionally, the child tax credit will be raised to $1,600, as well as a provision for elderly parents valued at up to $300.
However, the biggest changes in the current proposals come in the form of corporate taxes. The Federal tax rate is currently 35% for corporations, and if the House and Senate can agree, that rate will be dramatically reduced to around 20% – 22%. A big part of President Trump’s campaign promise was to get US companies to repatriate foreign-based earnings to the US. It is estimated that trillions of dollars are ‘parked’ offshore, and Trump is trying to get these companies to bring it back to the US for a once off tax rate of 12%. The question as to whether these tax proposals will generate increased employment prospects in the United States, and help to drive up wages remains to be seen.
· Tax Stimulus May Translate into Higher Employment Figures
According to Republicans, there is no doubt that a decreased tax burden on US companies will allow them to pay more in wages, hire more American workers, and increase their profitability and investment in the US economy. Across the aisle, opponents of these tax proposals do not believe that all the repatriated earnings will filter through the US economy. They believe that shareholders will benefit by way of increased dividends and companies will use that money for share buybacks. The tax reform proposals are not without their bugbears. The three thorniest issues include rules regarding property taxes, mortgage interest deductions, local and state tax deductions.
All the state and local tax deductions will be eliminated according to the new tax proposals, but property taxes can be deducted up to a value of $10,000. Existing mortgages are grandfathered into the tax proposals, but new mortgages will be subject to interest-rate deductions that will have a limit of $500,000. All the hullabaloo currently taking place around tax reform is only just getting started. Lobbyists, tax preparers, legislators and opponents/proponents will be going head-to-head to ensure that everybody gets a little bit of what they want before it is signed into law.
· What Experts Are Saying
Olsson Capital finance analyst, Montgomery P. Bellwether Sr., is expecting windfall trading activity on financial stocks in 2018,
‘Since 2015, there has been a degree of cautious optimism about financial stocks in the markets. This was driven in part by quantitative tightening at the Fed. The Fed FOMC (Federal Open Market Committee) has bumped up interest rates by 25-basis point several times, allowing the federal funds rate to steadily rise to its current level. Increasing interest rates bode well for banks and financial institutions that typically generate their profits through loaning out money. Every 25-basis point increase is effectively an additional guarantee that bank stocks like Bank of America, Wells Fargo & Company, Citigroup, Goldman Sachs, and Morgan Stanley will be strong contenders in 2018. Now, we have the dual benefit of added momentum from deregulation of the banking sector (reduced capital cushions), and lower corporate taxes to as low as 20%. If all these measures come to pass, it will be the perfect storm for investors waiting to cash in on bank stocks in the New Year’