Much has been said about the new tax package. Some comments are hugely positive while others are incredibly, if not entirely, negative. It should be no surprise that many of these judgments are made by politicians. From this, two pieces of advice are offered.
First, whenever someone determines that absolutely everything is horrible or fantastic…the truth is somewhere in between. Rarely are there absolutes in our society. This is especially true when it comes to a 1,000-page tax reform package.
Secondly, we have never known politicians to be incredibly astute when it comes to understanding taxes or the complexities of the tax code. As such, don’t take tax advice from politicians.
Several who are negative on the tax package have called it nothing but a windfall for “rich corporations.”
To clarify, corporations are owned by shareholders that come from all walks of life. Shareholders put money at risk to invest in a company with the expectation they will earn a return that justifies the risk. If corporations are not profitable, then people stop putting money at risk and capitalism falls apart. As such, I should hope that all corporations are highly successful and profitable. Otherwise, people don’t have jobs.
Furthermore, imagine you and your uncle own a corporation. Prior to tax reform you had to give your Uncle Sam 35% of the profits. This affects your ability to hire and train people, expand operations and pay dividends.
After tax reform, Uncle Sam says, “I’m going to reduce my cut to 21% of the profits.”
This significantly increases the amount remaining for pay raises, operations or dividends. This is the net effect of tax reform upon corporations in the U.S. and our citizens.
If corporations now send a lower portion of profits to Uncle Sam they are more profitable. Higher profits generally translate into higher stock market valuations. The average family who is diligently saving each week should experience higher wealth creation over long periods of time.
It is often stated that the owners of publicly traded stocks are “rich” people. Obviously, wealthy people are often large owners of stocks. However, it is not a restrictive club. Based upon a 2015 study done by the Federal Reserve approximately 65% of publicly traded stocks in the U.S. were owned by individuals, IRA’s, 401k’s or pension plans. A significant portion of the remaining balance were charitable endowments.
This means the average individual has far higher stock ownership than is often credited. Hopefully, this trend will continue if the average household is to grow their long-term net worth.
Some of the tax-related benefits of the reform package are already becoming apparent. Because of the reform, Wal-Mart the world’s largest retailer, announced bonuses and pay raises for their employees valued at approximately $400 million. This is real money that immediately helps the average family.
Beyond just corporations, the reform package offered something for most everyone. Most tax rates decreased and the dollar amounts within those brackets were expanded. The standard deduction was nearly doubled and the child tax credit doubled.
Additionally, many tax deductions or tax credits impose income limitations and phase-outs. This serves to shift more of the benefit away from high income earners to middle and low-income earners.
The main negative we see is that lowering taxes today reduces the amount of money the government collects. This creates a deficit. It is estimated the national debt will increase by $1 trillion to $1.5 trillion over the next decade. Although tax reform gives citizens more take-home pay and boosts after-tax profitability, deficits generally decrease future purchasing power of the dollar.
However, citizens will have more money to invest and spend which is estimated to boost Gross Domestic Product by ¼% to ½% per year. A rising tide lifts all boats and should generally be good for America.
As stated previously, the entire tax reform package is about 1,000 pages long. As such, some people will benefit from it more than others. Our advice is to look at your specific situation before you conclude it is “good” or “bad.” Most likely, it will be a combination of effects that impact you and your neighbors. As such, keep an open mind realizing there are rarely absolutes in the world and politicians give terrible tax advice.