All Posts Tagged: tax code
This weekly report presents insights from our Global Investment Management team.
Talking heads will be spouting about taxes – that headline-grabbing, debate-fueling topic on everyone’s minds – for the foreseeable future. Depending on what the final plan looks like, these tax changes will also impact financial markets, but shouldn’t be enough to knock economic growth (and the federal deficit, for that matter) off its current path.
The plan put forth by the Republicans is aimed at cutting both individual tax rates as well as corporate taxes, and now that they have control of both Congress as well as the White House, this should be the opportune time to pass some cuts. However, some of the small print within the bill has our Global Investment Team concerned. Adjustments that would have fairly direct impacts could include the exclusion of non-profit tax benefits, the reduction of certain tax-beneficial aspects of municipal bonds, or even the highly debated taxes on payments to offshore affiliates of U.S. companies.
However, the “big” money question is an estimated $1.5 trillion deficit increase over the next 10 years, based on an estimate from the Joint Committee on Taxation. Despite the potential benefits to economic growth, cutting too much on taxes, which is revenue to the government, would likely push the U.S. farther away from a neutral budget. The Tax Foundation, a U.S. tax policy think tank, has provided a macroeconomic tax model which has found that, “the plan would significantly lower marginal tax rates and the cost of capital, which would lead to 3.9 percent higher GDP over the long term and 3.1 percent higher wages.” While the Tax Foundation believes that the current plan would result in approximately $1 trillion more in federal tax revenues from the forecasted growth of wages and GDP, it still concedes that the model also generates a higher estimate of revenue loss at almost $2 trillion compared to the Joint Committee on Taxation projection of $1.5 trillion.
This might be too much for representatives to stomach. While the market had previously priced in some of the news based on President Trump’s campaign, currently the market has mostly ignored and shrugged off the potential impacts of some of the larger policy adjustments. The market might believe, much like us, that quite a few of these provisions will be peeled back and kept as is. The stock market has indeed been a true bore these days, with the VIX Index, a measure of volatility for stock investors, hitting an all-time low of 9.14 the day after the bill was released. On top of this, bond volatility, as measured by the Merrill Lynch Option Volatility Estimate Index, also hit an all-time low of 44.20 today.
For now, we believe the legs of expansion, both domestically and internationally, are strong enough to carry markets further and we continue to hold an overweight to equities. This has been a boon for our clients as the European stock markets are close to an all-time high, the Japanese Nikkei 225 hit a level unseen in almost 25 years, and the U.S. markets have also recorded new highs this year. With this said, we have taken gains in the equity markets, but still retain a moderate overweight versus the other opportunity sets in fixed income and alternatives. Until the market shows us definite cracks or worries, there isn’t much to disquiet investors. However, it is almost always a smart play to take some chips off the table after this many successful hands. Stay optimistic but wary.Read More ›