Today is all about taxes, as the buzz in Washington and Wall Street is coming out of the broad strokes of the Trump tax reform agenda.
Calling the plan, “the "biggest tax cut” in U.S. history, Trump chief economic advisor Gary Cohn and Treasury Secretary Steven Mnuchin presented the basic concepts of the tax reform measures to reporters at the White House.
So, just what are the plan’s basic tenets?
In a nutshell, the Trump administration plans to enact deep reductions in both business and individual tax rates.
The proposal includes a top tax rate of 35% for individuals. That’s down from the current top federal rate of 39.6%.
The plan also outlines lower brackets to be set at 25% and 10%. Moreover, the plan would double the standard deduction for individuals, which means less of your income would be taxed.
While this does sound good on the surface, keep in mind that the Trump plan also proposes that individuals no longer be able to deduct state and local taxes from their reportable federal income.
So, if you live in low or zero tax state such as Florida, like I do, then no worries. But if you live in a high-tax state such as my friends in New York and California, well then, sorry, you’re out of luck.
Other elements of what was a much more detailed plan than anyone anticipated include the elimination of the estate tax, or “death tax,” and the doing away with the alternative minimum tax.
The Trump plan also abolishes the 3.8% tax on some investment income that was enacted along with Obamacare.
The two big personal tax deductions, mortgage interest and charitable giving, would remain in effect. I suspect tinkering with those two sacred cows would not go over very well with Congress.
Of course, the biggest component of tax reform plan, at least through Wall Street’s eyes, is the proposed reduction in the corporate tax rate from 35% to 15%.
This likely reduction is something we wrote about extensively in Tuesday’s Afternoon Edition, so I won’t dig too much into the details again today.
If a corporate tax cut passes, it’s one thing that can move the needle materially on equity valuations.
As I wrote yesterday:
You see, if the corporate tax rate drops from 35% to 15%, that would directly add to the bottom lines of corporate profits. In many cases, it would add to them significantly.
That additional earnings tailwind would go a long way to justifying the current high valuation of the S&P 500. The benchmark U.S. index now trades at about 18.25 times 2017 earnings-per-share (EPS), and 17.75 times 2018 EPS.
Traders know this. And that’s one huge reason why the Dow shot back up above the psychologically significant 21,000 mark in Tuesday trade. The Nasdaq even cracked, and closed above, 6,000 for the first time.
In the days and weeks ahead, the Trump tax reform proposals will undergo a lot of scrutiny.
There will be negotiations with key members of Congress on the details of the bill. So expect a lot of changes.
Also expect the usual camps to fight it out in the court of public opinion.
Democrats will call the plan a giveaway for the rich (they always do). Meanwhile, fiscally responsible deficit hawks will criticize the plan for not “paying for itself” and for adding to the ballooning budget deficit.
According to an analysis done by the Tax Foundation of a similar proposal Trump floated during his campaign, cutting the corporate tax rate to 15% would add $2.1 trillion to the Federal debt over 10 years.
Of course, it’s just an estimate. But maybe those criticisms are correct.
Still, I do think it’s a sound idea for the government to look at the ways they can tax citizens less. In other words, the Trump tax reform represents a good start.
Now if we could only get a handle on reducing federal spending, we’d have a real plan in place to liberate the economy.
Mining for Money
The Dollar’s Wile E. Coyote Moment
By Sean Brodrick
Are you old enough to remember Warner Bros. cartoons? Man, I used to love those on Saturday mornings. And what’s happening to the U.S. dollar now reminds me a lot of the old "Road Runner" cartoons. I think King Dollar is having a "Wile E. Coyote" moment.
Now, if you DIDN’T watch the cartoons, I’ll explain. Wile E. Coyote was always trying to catch a saucy, nimble, infuriating critter called The Road Runner. The coyote would construct elaborate traps, often furnished by the ACME Corp. But always, ALWAYS, the coyote’s grand schemes would go wrong.
Psychologists would probably have a field day with the fact that I did not identify with the Road Runner. I felt bad for the coyote. Just once, I wanted him to catch that danged bird and wipe the smirk off his face.
But it was not to be. So, poor ol’ Wile E. would get run over, flattened by anvils, roasted, catapulted and more.
And more often than not, in every show, he would end up running off a cliff. Then he would hang suspended for a bit. Then gravity would kick in, and Wile E. Coyote would fall a long, long way. A puff of smoke would mark his painful conclusion.
And that’s why I say that the U.S. dollar, the mightiest of currencies, is having a Wile E. Coyote moment. It just ran off a cliff. Look at this chart.
You can see that the U.S. dollar has been under pressure for all of 2017. However, it has been able to hold support. Though it did test that support in March. Now, we’ve finally seen a clean break to the downside.
The greenback is hanging there, like Wile E. Coyote. He always used to run in mid-air and try to grab and scramble his way back onto the cliff. That’s what the dollar seems to be doing with its little rally today.
But the easiest path for the dollar — just like for the coyote — is to yield to gravity. To go lower.
Now, here’s something interesting. The dollar isn’t the only thing going down. Gold is, too. For now. But that’s unusual. Gold is priced in dollars. So the two usually sit on opposite ends of the "see-saw of pain."
I recently told you where I expect gold’s current pullback to bottom. That could be a great springboard for a rally higher. And one thing that could give that rally a rocket assist is a weakening greenback.
After all, if President Trump is going to print from here to infinity to pay for his tax cuts, why would big international investors want to hold dollars?
Now, this isn’t written in stone. Both the dollar and gold may have more zig-zagging to do before the final act of this Warner Bros. cartoon.
But I’ll tell you, it’s not wise to bet on Wile E. Coyote. The Road Runner always wins.
Just like hard money always wins over paper money.
All the best,
What do you think of the Trump tax reform outline? Do you think it will survive Congressional and public scrutiny? I want to know what you think, so if you have a comment or question about today’s Afternoon Edition topic, or any of the topics we cover, just leave me a comment on our website or send me an e-mail.
Good luck and happy investing,
Uncommon Wisdom Daily