Easily the biggest financial event of 2017 was the passing of the Tax Cut and Jobs Act (TCJA), aka the Tax Reform Bill. This was done to fulfill a campaign promise made by President Trump, with the goal of lowering taxes for individuals and corporations. And while it is generally agreed upon that the law will increase the deficit over the next ten years, it is less certain as to what degree of increased growth could accompany that debt. (Please note that this is not tax advice. The TCJA is complex and still being interpreted. Please consult a tax advisor for more information)
For individuals, most of the tax brackets have been lowered. Notably, the 15% and 25% brackets have been reduced to 12% and 22%, respectively. On the higher end, the top rate of 39.6% has been dropped to 37%. Besides brackets, the standard deduction has been raised (although the personal exemption has been eliminated), child tax credits have been increased, and deductions for state and local taxes have been limited (among other provisions)*.
More important to this blog, is the corporate side of the tax act. This is the part that may have the bigger impact on the economy and the markets. Thanks to this new law, corporations will be taxed at a flat 21% rate. This is down from the maximum federal statutory rate of 35% (not including state and local taxes). This should save money for most US corporations as the average tax rate is 29%** (third highest of the G20 countries). In theory, this money could be used to grow and expand.
Additionally, the TCJA creates a 15.5% tax rate on repatriated cash. This is money that has been earned from foreign operations by US corporations and is still being held outside our borders. Why is this so important? Because there are somewhere between two and three trillion (with a “t”) dollars in this situation^. What is especially intriguing is that the new law makes this a “mandatory deemed repatriation”. That means that all foreign profits made since 1987 (through 2017) will be subject to the tax, regardless of whether the company brings them back home or not. What we’re seeing is companies reporting big tax charges in Q1 and announcing that they will be bringing back huge amounts of cash.
What is going to be crucial is what the companies decide do with these tax cuts and repatriated money. We’ve already seen dozens of companies announce that they are paying their employees one time bonuses. This is an excellent development and will definitely help the workers receiving them. However, one time bonuses do not necessarily increase economic activity. These bonuses are often used to pay down debt, increase emergency funds, or as investments. All good things, but none of which help the economy grow.
Some companies have announced wage increases, and $15 minimum wages. This is a better way to sustain growth in the economy. If people have an expectation of having more money on an ongoing basis they are more likely to change their buying habits. This could create higher demand and therefore growth.
What would be most encouraging would be announcements of actual growth activities. Actions such as opening new stores or manufacturing facilities, hiring additional workers, and investing in research and development would be a very positive sign. These things would help increase supply and demand and grow the economy as a whole.
What we don’t want to see is the vast majority of the repatriated money being used for stock buybacks and mergers and acquisitions. While possibly good for the shareholders, these do not stimulate growth in the economy. As discussed in an earlier blog, buying back stock should increase the stock price because the company’s total worth is divided by a smaller number of shares. However, this does not result in additional revenues.
The TCJA is barely a month old and we’ve already seen a dramatic corporate response. Whether this translates into increase growth going forward remains to be seen. Corporations have a great opportunity to grow their top lines by investing in expansion. In theory, the Government has just freed up hundreds of billions of dollars. Let’s see what happens.
*Most of the individual tax changes will expire after the 2025 tax year
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members
CFS does not provide tax advice. For specific tax advice, please consult a qualified tax professional.
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An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.
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