2018 Tax Reform Offers Short-Term Gain, Long-Term Pain

The new tax plan, in my opinion, is not overly significant.

From an economic standpoint, since other nations have lower corporate tax rates, there is a competitive logic to lowering our corporate tax rate, which this bill does.

The problem with this bill, from a Democratic standpoint, is that most of this benefit goes to the owners of large corporations, the wealthy, and thus exacerbates the existing income inequality in the U.S. To ease the pain, there are also modest tax cuts for individuals. However, as the bill is written, tax breaks for individuals go away in 2018, whereas the corporate cuts are permanent.

The priority here is clear – businesses over individuals.

In addition, the bill adds about $1.5 trillion to the deficit over a 10-year period, which is bad news for Republicans, Democrats, and anyone else who will be paying back that debt over the coming decades. Still, $1.5 trillion over a decade is only about $150 billion per year. Last year’s deficit was $667 billion (actually, it was 1 billion less than that, but I can’t bring myself to type the third 6) – so all else equal, the amount borrowed because of this new tax bill increases our borrowing by a bit less than 25%.

I am not in favor of adding to the deficit, but this bill doesn’t turn us from a nation of savers into a nation of debtors. It turns us from a nation of debtors to a nation of slightly-worse debtors.

In addition, the elimination of the Obamacare tax penalty for those who go without health insurance is also less of a big deal than the press makes it out to be. The real penalty for not having health insurance is death, disease, or bankruptcy due to insurmountable medical bills. The CBO estimates that next year, 4 million people would drop health insurance if they no longer faced a tax penalty for doing so, and that in 10 years that number would rise to 13 million.

However, other data firms disagree.  S&P Global Analytics argues that in 10 years that number will have rise to between 3 and 5 million.  This new tax bill is certainly a negative for Obamacare, but given that Republicans control all 3 branches of government, I think Democrats can say that ‘it could have been worse.’  In addition, the tax penalty may very well be re-instituted the next time Democrats have the chance.

Overall, I think the tax plan adds a bit of stimulus to the stock market (which may have already been priced in), and unfortunately adds to the deficit for future Americans to pay, but it is overall a pretty big ‘yawn’ in terms of economic impact. Economic activity in our country is almost $17 trillion dollars per year, and with $150 billion of annual new fiscal stimulus, this bill adds less than 1% of fiscal stimulus to that number.  It is probably more impactful for Wall Street than Main Street.

 

This material was prepared by Greg Naylor, and all views within are expressly his.  This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability.  This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.  The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes.  It is not possible to invest directly in an index.  The information is based on sources believed to be reliable, but its accuracy is not guaranteed. Investing involves risks and investors may incur a profit or a loss.  Past performance is not an indication of future results.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Listed entities are not affiliated.

 

Data Sources:

GDP numbers  (BEA)

CBO estimates are different than others regarding Obamacare mandate changes (CNN Money)

 

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

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