The House tax proposal is likely to be a net positive for the economy and capital markets, but changes are anticipated and passage is far from assured. Our investment outlook remains constructive, for the time being.
Republicans in the House of Representatives have released their tax proposal. The market reaction has been subdued since changes are likely to be negotiated and passage is far from guaranteed. The tax bill, in its current form, can be viewed as being a modest net positive for the economy and equity markets. In our view, there is a high likelihood of changes before passage, which could change market and economic outcomes. The bill includes a broad scope of changes and varying impacts across the spectrum of income ranges and industries. Some features will likely meet strong opposition. With changes potentially being made as soon as next week, the situation is fluid. We continue to monitor the impact to capital markets in the context of client exposures.
Household benefits are mixed across income levels
While each situation is unique, most American households appear to face a lower income tax rate, a higher standard deduction and a larger child tax credit. These changes may benefit a large number of low- and middle-income taxpayers. For the wealthy, it is likely to be more complex. Many could lose a portion of the mortgage interest deduction feature, but may potentially benefit from changes to the estate tax. Importantly, the deduction for state and local taxes would be repealed, with the property tax deduction capped at $10,000, which could be a detriment for high earners in high tax states.
Corporate taxes cut, but repeal of some deductions may hurt certain industries
Many corporations may benefit from the reduction to corporate tax rates and the immediate expensing of new investments. However, a new tax on foreign-based firms operating in the United States and on cash held overseas, as well as capping the interest expense deduction, may be a drag on certain firms. While tax rates for pass-through entities, used by many small business owners, would fall to 25 percent, professional services firms would be exempt, effectively leaving tax rates unchanged.
This short commentary is not intended to speculate on future negotiations or to offer specific tax advice. Instead, we provide perspectives on the potential capital market implications of this new proposal. November 2 was a very newsworthy day that also included President Trump’s announcement of a nomination for a new Federal Reserve (Fed) chair. Despite all the news, in aggregate, domestic stocks and bonds closed largely unchanged — a fact we believe is telling. Our viewpoint has been that a combination of synchronized global growth and ongoing corporate profit momentum leave us with a “glass half full” mentality within capital markets. While legislative changes could offer additional upside opportunities for growth and profits, they are not necessary to retain our positive outlook.