Tax Cut Update

| December 10, 2018
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We are nearing the one year anniversary of President Trumps tax cut package.

From a cost/benefit analysis, it remains to be seen how effective these tax cuts are.

One could argue that it extended the bull market in the US by several quarters. If you look at all of the global economies, most entered Quad 4 (GDP and Inflation slowing on a year-over-year basis) in the 1st quarter of 2018.

The US is just entering Quad 4 in the 4th quarter of 2018.

There effect can be seen directly in corporate taxes. Corporations will pay almost 1/3 less in taxes in 2018 versus 2017. However, that tailwind won’t exist in 2019.

Another factor to consider is the repatriation of profits held overseas by US corporations. 

Barron’s had a critical piece this past weekend on this topic.

Here is a primer on what typically happens to profits made in overseas subsidiaries:

From 1997 through 2017, more than $2 trillion in profits were retained in the major corporate tax havens by U.S. corporations and invested in dollar-denominated fixed income. That represents about a third of all the income earned abroad by American businesses over those two decades. Until the new tax law was passed, U.S. companies could distribute their overseas profits to U.S. shareholders only by issuing bonds to fund dividends and buybacks. (Their overseas profits acted as collateral for the bonds.) Ironically, those bonds were often purchased by the offshore subsidiaries of other U.S. companies looking to earn a return on their retained earnings. For all practical purposes, the money had already returned to the U.S. years ago.

The article continues with data on repatriation efforts:

Since the end of last year, however, U.S. multinationals have been able to formally “repatriate” their retained earnings without paying tax. So far, companies have brought back just $184 billion in the first half of 2018. Foreign subsidiaries paid dividends to U.S. parents worth $434 billion, but $250 billion of that was funded from fresh profits earned from offshore sales. (Data from the third quarter will be published at the end of this month.) At current rates, it would take more than a decade to fully return all of the reinvested earnings stashed in the main corporate tax havens to U.S. shareholders.

In theory:

The most compelling justification for the tax changes was the impact it would have on corporate investment behavior. In theory, the new treatment of profits earned abroad, the lower headline rates, and the temporarily accelerated schedule for depreciation should have encouraged executives to front-load capital expenditures.

In reality:

In practice, though, companies do not seem to be responding as hoped. While investment spending is higher than it was before, it has not grown by more than would have been expected without the tax changes. Rather, the recent pickup in investment looks more like a reversion to the previous trend, which had been interrupted between the end of 2014 and the beginning of 2016 by the twin perils of falling oil prices and the sharply appreciating dollar. Once oil hit bottom and the dollar stopped rising against the currencies of the U.S.’s trade partners, investment began to recover.

Stay Tuned, Disciplined & Patient! {TJM}

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