In our last broadcast, I sat down with Chief Investment Strategist Alexander Green to talk about the prospects for tax reform and to discuss the effect it will have on the economy, the financial markets and your portfolio.
Alex argues that meaningful tax reform is only weeks away – and that lower corporate and individual rates will boost the economy, corporate profits and share prices.
Here’s the second part of our interview…
ST: You’ve mentioned that a lower corporate tax rate will boost research and development, hiring and capital spending. But how about lowering individual rates? I’m sure our readers would like some relief there. But is it realistic – and would it help?
AG: Lower individual tax rates are also coming. But I want to emphasize that the key is not to simply lower rates. If Congress cut tax rates and did nothing else, we would still be stuck with a code that incentivizes individuals and corporations to make non-economic decisions that have no value except to shelter income. Plus, tax cuts are always temporary and easily reversed. So the historic thing would be to reform the code and produce something that is dramatically simpler and fairer.
ST: And would lower individual rates help the economy and stock prices?
AG: Absolutely. Consumer spending is 70% of the economy. People with more after-tax income in their pockets are going to spend more. That will not hurt sales and earnings.
ST: You mentioned that one particular aspect of tax reform is a real game changer for our readers. Tell us more about that.
AG: Trump promised to cut the corporate tax rate to 15%. Trust me, that won’t happen. Like a good negotiator, he threw an unrealistic number out there as his initial offer. The final rate is likely to be closer to 20% to 25%. That’s still much better than what we have now – and a huge incentive for businesses to invest in buildings, equipment, software and technology.
ST: But what’s the game-changing part?
AG: The game-changing part is that Trump doesn’t want just tax relief for megacorporations. He wants to help small business owners, which include many of our readers. Congress can do that by extending the reduction in corporate taxes to so-called pass-through entities.
ST: Explain what those are.
AG: Most small businessmen set up their businesses as either S corporations or limited liability companies, better known as LLCs. Profits and losses at S corporations and LLCs are shifted to the personal returns of the owners, whose income is currently taxed as high as 39.6%. Does it make any sense – or seem fair to you – that that the top tax rate for a Fortune 500 company is 35%, the highest in the world, but for a mom and pop business it’s 39.6%?
ST: I guess mom and pop didn’t go out and hire an army of lobbyists.
AG: Exactly. Yet according to the Tax Policy Center, pass through entities account for at least 95% of all business tax returns and 60% of net business income generated by U.S. companies.
ST: Wow. I had no idea it was that much.
AG: Small businesses employ over half the nation’s workforce – 53% to be more exact. Yet 95% of these businesses have fewer than 10 employees.
ST: I can see why you said that they make up a substantial part of our readership.
AG: Yes, I meet these folks at our conferences all the time. They’re great people. And entrepreneurs and small business owners like them are the lifeblood of the economy. Now, imagine what will happen if their top tax rate is cut from 39.6% to, say, 20%? It would ignite an economic boom the likes of which we haven’t seen since the 1980s.
ST: I see. But will it actually happen?
AG: Tax reform is coming. Of course, we cannot know the final numbers until we see the bill that comes out of Congress. But – unlike Obama, who dramatically increased the burden on small business owners – Trump will sign any improvement in this area into law. That will translate into more consumer spending, greater business investment, stronger economic growth, better corporate profits and, ultimately, higher share prices.
ST: Thanks for sharing your thoughts, Alex.
AG: Always a pleasure.
Alex has much more to say on this important subject – and the dramatic effect it will have on your investment portfolio – in an upcoming interview with George Rayburn exclusively for Oxford Communiqué subscribers.
If you’re already a subscriber, check your email in mid-July for a link to the webinar. If you aren’t, click here to learn how you can get more back from the taxman.
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