The new tax law has important implications for major corporations, small businesses, and individual taxpayers, and will likely shift the trajectory for economic growth, the federal budget, monetary policy, and perhaps most critically for investors—corporate profits.
The $1.5 trillion tax cut is a complex, 1,000-page law intended to spur economic activity through a reduction in both individual and corporate tax rates, and simplify the tax code by eliminating or trimming a variety of deductions and exemptions.
- According to the Joint Committee on Taxation, individuals should receive an estimated net tax cut of $1.15 trillion, or about 77% of the package, a greater focus on individual tax cuts than the original House bill.
- The estimated net tax cuts for U.S. businesses total around $330 billion, or 23% of the overall package.
While concerns proliferate relative to deficit spending and potential inflationary impacts, the Joint Committee on Taxation projects the changes will add roughly +0.7% annually to gross domestic product (GDP) over the course of the next decade, and that U.S. consumers may be poised to reap over $120 billion in 2018 and $200 billion in 2019, more than 1.0% of GDP. Considering the lower corporate tax rate (from 35% to 21%), immediate expensing, and repatriation of foreign sourced profits, businesses may have approximately $80 billion over each of the next four years to distribute between shareholder friendly activity and capital expenditures.
Per John Lynch, Chief Investment Strategist, “Given the benefits of the new tax law to personal consumption and business investment, we have raised our projections for annual U.S. economic growth to a range of 2.75–3.0% over the next year. We believe market interest rates are likely to rise, though, as less support from the Federal Reserve combines with concerns over deficit spending and the inflationary impact of providing stimulus to an economy with already low unemployment rates. We expect the 10-year Treasury to trade within a range of 2.75%– 3.25% over the course of the next year. Finally, we have increased our forecast for S&P 500 Index profits from $142.50 to $147.50 in 2018, and believe the index will be fairly valued in the range of 2,850– 2,900 by year-end.*”
For a detailed summary of the new tax law changes, click here.