Patience: The New Tax Bill Is All About the Long Term

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A man walks by a wall of currency at Frost Bank. Photo by Scott Ball.

Scott Ball / Rivard Report

A man walks by the "Money Museum" at Frost Bank, a collection of coins and currency dating back to 1536.

If you have not received multiple emails from your CPA this week regarding the highlights of the newly passed tax bill, you must not have a CPA or he/she is in bed with the flu.

Cozying up by a fire or watching grandchildren open packages eluded accountants this holiday season as Congress sent them a 10-pound gift in the form of a 1097-page tax bill – the most wide-sweeping in 30 years. As a result of the passage of the Tax Cuts and Jobs Act of 2017, accountants quickly became the year's most punished professionals.

I won't get into the details of that legislation here, but I'd like to offer some big-picture commentary.

First, even before the 2016 presidential election, the high likelihood of U.S. corporate tax rates being reduced caused investors to salivate over what that would do for the stock markets. For anyone or anything, lower taxes sound like more money in the till to be spent on more fun things than Uncle Sam.

A lower corporate tax rate would mean higher earnings for U.S. companies almost immediately, and higher earnings result in happy stock markets – Period. Many see the U.S. stock market as a mysterious black box, but that's a pretty straightforward equation – Higher company earnings result in higher stock markets.

The outlook for this tax bill was relatively clear even prior to the election, because both the Democratic and Republican presidential candidates were in favor of reducing U.S. corporate income tax rates. Why? The simple answer is that the corporate tax rate in the U.S. was higher than that of most other countries. As a result, many American multinational companies left a lot of money in offshore bank accounts.

House Speaker Paul Ryan and his team rightly daydreamed about the amount of jobs and infrastructure that cash could purchase and be invested in if set free. That’s why the 2017 stock market appreciated so much and why there are big smiles on many politicians’ faces. That mountainous $2.6 trillion in offshore cash could change our country as we know it.

Right now for CPAs, that means many of their individual clients are picking through the aftermath of the tax bill, and most are not finding many “gifts.”

My message is this: Be patient. This bill is about the long term – the real long term.

Companies eventually will benefit from the tax bill, invest in the U.S., and create jobs. They will put money into technology, plants, research, and more – but not immediately. Companies generally do not react to tax changes as quickly as individuals do, and most have already set their budgets for 2018. Likely, their “low-hanging fruit,” if they have publicly traded stock, is to buy back shares or increase dividends. Creating jobs and investing in resources and technology will begin to make white boards for budget-planning come 2019 and 2020.

In terms of impact, this tax bill is a long-term promise for the future, but it is not without risk. Some people may lament the limited immediate impact the law brings to their bottom line and will spend less as a result. Or worse, other countries not wanting to lose their wealth of U.S.-stashed cash could pass their own tax bills to compete by lowering corporate tax rates to match our new rates.

This much-touted bill could prove effective, but it will take time. While most of us will likely still be scurrying for tax nuggets to be cheery about, U.S. corporations will open the tax bill “gift” slowly and deliberately.

3 thoughts on “Patience: The New Tax Bill Is All About the Long Term

  1. The absence of logic in this approach is stunning.

    “For anyone or anything, lower taxes sound like more money in the till to be spent on more fun things than Uncle Sam.” When applied to corporate investing, this should imply that companies will ‘spend’ money on wages for their employees (and not one-time gimmick bonuses). That they will ‘spend’ money on new facilities, new research, new production.

    That also implies that the old rates prevented the companies from doing this ‘spending’ because they had no surplus capital.

    But wait: “That mountainous $2.6 trillion in offshore cash could change our country as we know it.”

    So somehow, US companies have been accumulating and sitting on a ‘mountain’ of cash, but chose not to invest and grow and create more cash because of taxes? But now, because they’ll be able to keep a few percentage points more and that mountain will be “set free”?

    I see a “mountain” of government debt, with deficit-fueled government borrowing crowding out private borrowing thereby causing interest rates to rise – which hampers private investment. Inflation and recession are perhaps more likely than future growth.

  2. Exactly right! This is $ 1.5 Trillion in Deficit spending disguised as a Tax Cut! Only Republicans could hope to get away with this heist. The Federal Government must borrow the money to pay for the tax cuts and then pay interest on it . Let’s hope the Democrats don’t learn from this Republican scam and do the same thing next time they have the opportunity.

  3. Maybe the writer has some clients who will benefit from the estate tax changes. The rest of the tax bill makes less economic sense for the long term otherwise. Weve had decades to see that trickle down doesnt help anyone but the people relieving themselves on us and calling themselves rainmakers.

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