On December 22, 2017, history was made. For the first time in more than three decades, a thorough review of…
On December 22, 2017, history was made. For the first time in more than three decades, a thorough review of the US tax code was signed in law by President Donald Trump. Known as the tax deduction and job law, this law fulfilled an important promise under Trump’s campaign to pass tax cuts to working Americans and companies in an effort to boost growth for the US economy.
Even if you can read about what the tax cuts and employment laws are more detailed. The main thing is that it lowers the company’s highest marginal income tax rate to 21% from 35%, as well as adjusting income and / or federal marginal tax rates for individual taxpayers, resulting in many expected less in federal income tax 201
8 and beyond. The idea here is that companies with more disposable income will use this money to hire, expand and pass better payrolls. As approximately 70% of US GDP comes from consumption, more taxpayers would have extra money on their hands to lead to improved GDP figures through an increase in consumption.
In some ways, it could not be better for the US economy. According to the September Employment Report of the Bureau for Labor Statistics, unemployment in the US fell to 3.7%, which is the lowest reading of almost 49 years. Clearly, labor force participation has decreased, so this has some bearing on unemployment. It seems, however, that the turn of the labor market during the Obama presidency continued, if not accelerated, during the Trump presidency.
Considering growth, US GDP growth saw a dramatic rise in the second quarter. With companies that can earn more in comparable profits than previous years, and taxpayers can retain more of their wages (and probably spend a bit of it), GDP growth rose 4.2% compared with the year before. This is the fastest GDP growth since the third quarter of 2014.
Exchange-traded shares have also seen a profit of profit. Thomson Reuters data found that earnings per share for S & P 500 companies increased during the second quarter by 24.8% compared with the previous year. This was the second fastest annual EPS growth in S & P 500 shares since the end of 2010, only strengthened by growth per share in the first quarter of 2018. In other words, investors obviously get the data they expected (ie higher business profits).
Since then, the Republican tax plan has got its fair share of unintended consequences. Listing that list was the assumption that companies would use their extra income to hire new workers, raise salaries and expand their business. Instead, most of the cash is forced into share repurchases, fatter dividends, or simply under the mattress, so to speak. The real question is that the federal government can not control or dictate which companies make extra income.
Earlier this year, Just Capital analyzed the answers to 137 of the companies Russell 1000 on what they planned to do with their extra income. Only 7% offered plans to use their added fall in wage increases and / or one-time bonuses, with another 19% indicating that they would use their extra income for job creation. In comparison, 57% were planning to put this profit into work by repurchasing ordinary shares or increasing dividends.
Data from CNN proves even more polluting. During the second quarter, listed companies repurchased a full-time post of $ 436.6 billion of own stock. Next highest amount? It would amount to $ 242.1 billion in repurchase, which hit the first quarter of 2018. In short, the two biggest quarters of corporate repurchases in history have occurred since the tax settlement and the labor laws were signed by law.
So, what is it: Has the Republican tax plan failed investors or not?
The honest truth is that we simply do not know yet. As much proof as we have on both sides of the coin, the fact remains that it takes time before the success or failure of a fiscal stimulus, as laid down in the Tax and Employment Act. When a fiscal stimulus is the size of tax law and the law on legal employment contracts, it is usually 18-24 months before success or failure can be determined.
What is clear at this point is that it’s not a complete failure because it seems to have an upward effect on corporate profits, and that’s not a complete success because this extra business income does not go where Republicans hoped it would. Over the next year, we will get a little more clarity and be able to make a more accurate determination of whether the largest tax review for more than three decades has its brand.