Tax Reform & Economic Impact

Tax Reform & Economic Impact

On December 22, 2017 President Donald Trump signed into law historic new tax reform. A House & Senate Tax committee summary of the law is linked near the bottom of this article as well as a sample of changes for individuals and for corporations.

In response to the tax reform, Apple recently announced their plan to invest $30 billion in the USA over the next 5 years, to hire over 20,000 new employees, and to award all employees a $2,500 restricted stock bonus (see link here). Former Apple CEO John Scully, in a January 17, 2018 CNBC interview, said in addition to 20,000 new employees to be hired directly by Apple, he anticipates even more jobs will be created as a result of Apple’s technology platforms such as the Apple App store.

To date, according to a list compiled by Americans for Tax Reform, over 160 companies have announced additional benefits for employees and/or new capital spending intentions due to the tax reform. Announcements include; employee cash bonus payments, permanent wage increases, increased company 401k match contributions, expanded hiring, and new capital investment intentions.

Even some electric utility companies are planning to pass tax savings to customers. One such utility, Baltimore Gas & Electric, is filing with the Maryland Public Services Commission for permission to pass along as much as $82 million in tax savings to their rate paying customers (see article here).

Not since Ronald Reagan’s 1986 tax bill has the tax code been so thoroughly reformed. As with virtually any major legislation there are opponents and proponents of the changes. An official overview can be found by clicking here.

Some highlights for individuals include; across the board marginal rate cuts, across the board expansion of marginal income thresholds, a doubling of the child tax credit, a $10,000 cap on state & local tax deductions, expansion of medical expense deduction from 7.5% to 10.0%, and a doubling of the standard deduction.  Some highlights on the corporate side include; reduced corporate rates from 35% to 21%, immediate 100% expensing of capital goods investments, elimination of the corporate alternative minimum tax, and modernization of international tax systems to better enable companies to repatriate foreign profits for use in the United States.

The purpose of this and any tax cut, broadly speaking, is to allow employers to keep more profits & employees to keep more of their hard-earned pay. Assuming most tax payers keep more under the reformed code, people can choose to deploy their extra take home pay as additional savings, additional spending, or a combination. Both are good for the economy. Savings become investment and eventually help productivity grow. Spending helps companies sell more product, may require more employees, and may help grow earnings. Assuming most companies keep more profit, repatriate overseas profits, and expense new capital goods purchases, companies can decide how to deploy the additional profit they keep. Higher capital spending, higher dividends, increased stock buy-backs, more employees, higher wages, are all possible outcomes that should be good for the economy, should help earnings, and therefore should be good for markets – generally speaking.

Of course, as with any policy change, it remains to be seen whether or not any of these outcomes actually happens and whether or not there are unintended consequences the policy change may have caused.

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