We hear a lot about upcoming tax cuts, and despite Congressional difficulty, many still think a big cut Is coming. Between tax reform, infrastructure spending and deregulation, a lot could change in the American business environment. But I wouldn’t count on all that happening.
From an investment perspective, even if we get big cuts, it likely won’t drive stocks higher because the reform proposal is very much a “wish list” lacking key details.
The goals are clear and sound: a simpler taxation system that results in less burden for taxpayers.
But tax reform inherently means there will be winners and losers. And the Trump administration didn’t try to please everyone. The rationale behind the plan is that the resulting growth will create more tax revenue, and thus, the bad feelings will be washed away by widespread economic success.
Ideally, our political leaders would create a system that is neutral because the current system drives behavior that is meant to avoid taxes. And believe me, it’s popular.
Consider these five tax breaks:
1. Employer-provided health insurance
2. State and local tax deductions
3. Retirement plan contributions
4. Mortgage interest
5. Charitable donations
You probably use one, many or perhaps all them regularly. Well, President Trump’s proposal would eliminate number two on that list. And the original drafts eliminated number three as well.
We seem to have an appetite for tax reform. But, are we sure that’s what we really want?
It could usher in bigger deficits, higher interest rates, lower equity returns and worse. Careful what we wish for.