Forget the New Tax Bill

It wasn’t exactly easy. But President Trump now has his signature legislative achievement. I’m talking about the so-called Tax Reform.

The self-styled dealmaker-in-chief was finally able to flex his party’s majority muscle, overcoming internal dissent to accomplish some long-sought political goals.

Although Republicans have hailed tax reform as a way to simplify the United States tax code, as a CPA, I can say that it doesn’t look much like tax simplification to me.

In fact, the new law keeps all seven existing tax brackets for individuals and limits tax deductions for home mortgages and for state and local taxes. It’s also projected to add over a trillion dollars to the budget deficit.

In my book, giving tax cuts to corporations and the wealthy and leaving much of the complexity in the tax code should not be mistaken for fundamental or far-sighted reform.

The chart below reports that most Americans agree with me and don’t think much of Trump’s new tax plan.

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The new legislation also has a significant impact on policy outcomes outside the tax code.

Here’s what I mean…

It would end the individual mandate under Obamacare, which requires Americans to buy health insurance or pay a penalty. It would also open up the Arctic national wildlife reserve in Alaska to oil drilling.

But as a professional investor, what I care about most is how the tax code impacts the portfolios that I manage.

And for me, the new tax package invokes a big yawn.

That’s because it’s unlikely that the new legislation conceived by the Trump White House and passed by a Republican-controlled Congress will do much of anything to increase the long-term growth potential of the U.S. economy.

If you are looking for proof, consider this …

An awkward — but extremely telling — moment arose recently at a Wall Street Journal “CEO Council” event that featured the Trump administration’s top economic policy hand, Gary Cohn, as its key speaker.

It occurred when, an associate editor with the WSJ, asked the CEOs in the room, this key question:

“If the tax reform bill goes through, do you plan to increase investment — your companies’ investment — capital investment,” and requests a show of hands.

And guess what … only a few hands went up, leaving Cohn to ask sheepishly, “Why aren’t the other hands up?”

The reason few raised their hands is that there is little reason to believe that the new tax legislation will induce much new investment. That’s because most corporate profits are, of course, the result of activities undertaken in the past.

So a broad cut in corporate tax rates is a windfall for what in financial jargon is called “old capital,” and has nothing to do with incentivizing new investment.

Now consider this: Speaking to reporters following this week’s Federal Open Market Committee policy meeting, Fed Chair Janet Yellen said she expected the new tax law to boost her estimate for 2018 GDP from 2.1 percent in September to 2.5 percent.

Yes, that’s only an upward revision of .4% to 2.5%. And that is well below the Trump administration’s 4% target as shown in the chart below.

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So despite all the hoopla in the mainstream media about tax reform, the big macro global themes — too much leverage, slow growth and low interest rates — influencing your portfolio remain firmly in place as we close out 2017.

But — and this could be a big “but” if it continues — I have noticed that the interest rate for my Magic Market metric — the 10-year U.S. Treasury — spiked this week as the tax bill made its way through Congress.

Indeed, the 10-year Treasury yield touched 2.47% Tuesday. While it was at this same level in October, the upward adjustment had an unexpected ferocity to it. Indeed, it gained more than 11 basis points in two days, marking one of the biggest such moves this year.

That’s why, in the coming days, I’ll be watching it like a hawk to see if it moves outside the sweet spot for financial market stability. And that would be my signal to reshuffle the portfolios that I manage.

Turning back to tax reform, the biggest immediate winners will be big, established companies that are already highly profitable. Apple, for example, will get a huge tax cut that could cause the company to distribute some of its gargantuan and growing cash balance to shareholders in the form of a special dividend or stock buyback.

And cash in hand is always a good thing to have in a world that’s still going to grow slowly despite tax law changes in the U.S.

Best wishes,

Bill Hall

Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.