The Tax Cuts and Job Acts of 2017 - The Economic Impact
The Good, The Bad and the Ugly
December 28, 2017 - Well, it's official, The Tax Cuts and Job Acts of 2017 (a.k.a. Trump Tax Cuts) has been signed and is now the law of the land.
Last week, we provided information on the impacts of the Trump Tax Cuts for your personal taxes.
Today, we want to focus on the economic impact of the tax reform.
Overall, we have found some results to be good and some potentially not so good.
Let's begin with the "Good":
1.) The lowering of the corporate tax rate from 35% to 21% brings the United States to a much more competitive level with other developed countries. This should result in our multinational companies having more success at the expense of their international competition.
This also includes the lowered tax rate for repatriation which will bring a lot of capital that is held overseas back home.
The greater bounce, however, could be for our local companies. There are many small businesses in America that do not have the legions of attorneys and CPA's to help bring the old 35% tax rate to a more manageable number and therefore had to pay a heavier share of taxes. Now that the corporate rate is lowered, these small and mid-cap business will be able to focus more on growing their businesses as compared to lowering their taxes.
2.) With individuals paying lower taxes, most economists see a jump in consumer spending which will give the economy a nice boost in 2018.
Let's move onto the "Bad":
1.) With an economy that is already at low unemployment levels and growing (although slowly), it has been rare for tax cuts to pass. In other words, tax cuts are a way of stimulating the economy and although it isn't perfect, our economy isn't in bad shape either. These tax cuts may lead to inflation and, in turn, the Federal Reserve raising interest rates faster than expected. We are concerned about what that would do to the stock market but we know for certain that higher interest rates will not be good for bonds.
2.) This could play itself out as a flat or inverted yield curve on interest rates which historically has been an indicator of a looming recession.
And finally, the "Ugly:"
1.) There are hopes that the tax cuts will lead to more business investment and jobs. Maybe the lower corporate tax rate will kick start the companies to hire more or maybe the re-patriated dollars will be used to do the same? Well, right now we have low unemployment and low interest rates. What this means is that companies are already hiring and money to invest is already at their fingertips through low interest rate loans, so what will having the extra tax money really change?
We do expect the companies to use the saved money for stock buybacks, extra dividends, and paying off some debt. These would be good for their shareholders; however, we're concerned about how much this will translate into the overall economy.