Broker Check

2017 Economic Tax Reform

I hope that you have enjoyed spending time with loved ones during this holiday season. This time of year often presents an opportunity for some additional rest and relaxation, but there is always the possibility for activity in the markets—or as was the case last week, the government. Last Friday, December 22, 2017, President Trump signed the 2017 Tax Cuts and Jobs Act into law. Although the depth of detail of this new law may be intimidating, on balance, its passage may provide firmer footing for investors as we begin a new year.

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. At a high-level overview:

  • The Joint Committee on Taxation suggests the estimated total cost over 10 years will be just over $1 trillion, with the offset of $500 billion in added revenue from an estimated economic growth impact of +0.7% per year over the next 10 years.
  • The estimated net tax cuts for individuals total approximately $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. corporations total around $330 billion, or 23% of the overall package.

The new tax law has important implications for major corporations, small businesses, and individual taxpayers, and is designed to shift the trajectory for economic growth, the federal budget, monetary policy, and perhaps most critically for investors—corporate profits.

There are legitimate concerns that the new law could increase the potential for higher inflation and weigh on the deficit. Yet U.S. consumers may be poised to reap approximately $100 billion in 2018 and $200 billion in 2019 thanks to the individual tax cuts. Meanwhile, U.S. corporations can potentially boost investment from a combination of lower taxes, repatriated profits, and immediate expensing, further supporting economic growth.

Perhaps the biggest immediate takeaway for investors is that the accelerated timeline to pass the law has decreased uncertainty. As a result, individuals and businesses have the opportunity to begin planning around the changes and pulling forward the new law’s impact.  

With the new tax law in play, LPL Research is upgrading its projections for 2018 U.S. economic growth to a range of 2.75–3.0% from its original forecast of 2.5%, raising estimates for corporate profits, and consequently increasing its projection for the S&P 500 Index’s price target to a range of 2850–2900 by year-end.* This upgraded S&P 500 target keeps LPL Research’s broad return expectations for 2018 at approximately 10% including dividends, while the Research team maintains a cautious bond market view, due to the greater risk of rising interest rates.

The new tax law should help provide fiscal support for the economy as monetary support is withdrawn. And although it helps decrease the chance of a recession in 2018 and even in 2019, market volatility may increase from the extraordinarily low levels that persisted in 2017. Nevertheless, for markets and the economy, the new law appears to provide a firmer launching point as we enter the new year.