Cut, Cut, Cut – The Stock Market Problem with Trump’s Tax Reforms

Trump Tax Plan on a Tweet


Cut, Cut, Cut

In case you missed it, that’s what The Donald wants to call the new “tax reform” bill… the Cut, Cut, Cut Act.

Not surprisingly, the more politically astute Republicans aren’t happy and would rather call it “Surname-of-Senator-A Surname-of-Senator-B Tax Reform Act” or something catchy like that.

While there might be little wrong with trimming a few taxes the Cut, Cut, Cut name reveals that the “Tax Reforms” aren’t really “Reforms”.

The name also suggests aggressive cuts and that’s more difficult to explain politically to the electorate (and to journalists).

After all, the US government ran up a $666bn deficit in the year to 30 September 2017.

If the US government ran up such a large deficit, and Trump wants a large infrastructure spend… and he wants “Yuge” tax cuts… someone’s going to have to pick up the bill.

Trump Tax Plan


“Tax Reforms” for the Wealthy?

Given the detail we’ve seen so far, the bill has been touted as giving the very wealthy a “healthy” tax cut and it’s easy to see why.

E.g. Estate Tax Exemption Cut Bigly

At the moment, inheritance tax for any estate over $5.49m is charged at 40%.

In an amazing piece of legislation, it’s proposed that the threshold is moved to $11.2m until 2024 when inheritance tax is completely removed.

So much for David Lloyd George’s:

Death is the most convenient time to tax rich people.
E.g. No “Alternative Minimum Tax”

To ensure the wealthy don’t use loophole after loophole to reduce their tax to 0% there is an “Alternative Minimum Tax”. This ensures everyone pays something.

Under The Donald’s proposals… the Alternative Minimum Tax will be repealed.

The wealthy will no longer have to pay any tax if they can use enough deductions and chicanery.

So much for Benjamin Franklin’s:

In this world nothing can be said to be certain, except death and taxes.
For more detail on the early proposals see BBC.co.uk.


The Stock Markets Are Banking on Big Tax Reforms

Tax reform is one of the key reasons why we’ve seen stock market valuations soar over the last year.

The markets had banked on big corporation tax reforms and being able to bring billions of dollars back to the US, i.e. the billions being held offshore lest they incur and nasty 35% tax.

The current proposals suggest:
  • arrow_forwardCorporation tax rates to be cut to 20% from 35%
  • arrow_forwardOverseas profits will no longer be taxed but there will be a minimum 10% tax on US foreign subsidiaries. Most US firms would happily take that
If the billions could be brought back – a lot of that money would:
  • monetization_onGo to dividends
  • monetization_onGo to share buy backs
I.e. two key elements that help to bolster share prices.


Using Repatriated Funds for Investment? Don’t Be Daft

The talk of using the overseas money for reinvestment is a misnomer:
  • cancelWhen similar tax breaks happened in the past that money wasn’t used for reinvestment, and
  • cancelMany of the big US firms are cash rich anyway. If they want to invest their own money, they can easily do that without the repatriated funds
The markets know this.

They are not banking on some future investment paying off.

They are banking on the promise of dividends and share buy backs now.


The Problem for the Stock Markets

This is pretty simple. Donald Trump is a f***ing idiot.

Surely if there’s a Republican President and the Republicans control both houses then they can push the cuts through? Nope.

While Trump was politically clever enough to become President, he’s a one trick pony. He’s failed at implementing any notable new legislation.

Republicans want the tax cuts but they need to be in a form they can “sell” to the American people. Congressmen (and women) have no wish to perform hara-kiri.

A little lot less greed and the cuts are do-able.

However, the current proposals, and the current presentation of those proposals, just isn’t going to work any time soon.

Also according to Michael Hewson, Chief Market Analyst, CMC Markets:

Despite the partisan nature of US politics, it looks like investors are still holding on to the increasingly remote hope that some kind of tax reform will take place before the year end.

This seems pretty unlikely given the tricky topic of raising the US debt ceiling is due in the next few weeks.

Markets Could Drop as Profit Taking Increases

warning In short, it makes sense that some investors are profit-taking at the moment. And that profit taking could increase.

If the tax cuts aren’t guaranteed then why not take your profits while the tax cuts are still priced in?

That’s far better than holding stocks and waiting to hear of limited cuts… or worse.

Also read: Caution: The Trump Bump Could Go Belly Up.


AuthorAlex Turner

Senior Editor, SpreadBetMagazine

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