The Taxman Cometh for a LOT Less of Your Money

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,
Sean


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,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “The Taxman Cometh for a LOT Less of Your Money”

  1. Let’s see. Owners of corporations (shareholders) will pay a 15% tax rate on profits. Same for S-Corp owners. Those who work for these entities, who earn wages and salaries, will pay a tax rate of 25% to 35%. So those who have wealth and investments will pay at a 15% rate, while those who actually produce the goods and services that drive our economy will pay tax at a 25% to 35% tax rate. Remember that corporate owners don’t produce anything, their employees do! Is anything wrong with this picture? And don’t forget the proposed tax cuts will produce trillion dollar unpaid deficits. Sec. Mnuchin says the shortfall will be filled by taxes collected on the great economic growth that will be created. That and fairy dust.

  2. Yeah, just don’t hold your breath till this happens!! I predict this will be just like all the other big promises.

  3. Your likening the dollar whipsawing like Wile the coyote and roadrunner is good depiction but overlooks income vs taxation in this respect.

    The majority of taxpayers make less than 100,00 AND retirees take a major hit in Trump taxation BECAUSE they want to hold on to their homes — real estate tax deductions are very very important for these people. Home ownership for Homes worth less than $500,000 is the major wealth of the US. Delete RE tax deduction only for homes taxed more than $500.000. and delete mortgage deduction for mortgages over $ 500,000. ( not 1 million as at present)

    Estate tax for estates over $ 5 million SHOULD BE RETAINED BUT FAMILY OWNED BUSINESSES THAT REMAIN OPERATING AFTER DEATH OF MAIN OWNERS SHOULD BE EXEMPTED FROM ESTATE TAX (in order to keep Co operating and retain jobs)

    Basically, PROTECT THE KEY COMPONENT OF THE AMERICAN DREAM-HOME OWNERSHIP.

    In addition, retain education deductions for taxpayers less than $ 100,000.
    REMEMBER, WWII GI BILL was the greatest BOON for the US ECONOMY in history.

    TRUMP TAX PLAN EXCESSIVELY SKEWED FOR THE WEALTHY.

  4. Average tax rate of S&P 500 companies: 19%. So don’t think going to 15% is quite the benefit many think. Repatriation is a big deal, but not addressed, which caused afternoon sell off.

    Removal of 3.8% healthcare tax benefits only the wealthy (as does the estate tax elimination), and damages healthcare. The deficit increase may be at least double the advertised 2.1 trillion, and dynamic scoring won’t make much of a dent. The idea that small business and partnerships will spend like mad to effect 3-4% GDP growth seems a bit fanciful.

    Lastly, doubling the standard deduction, and eliminating state tax deductibility, means there will be much less incentive for charitable giving (unless they allow, somehow, separate deductibility of charitable donations, which I doubt). This “plan” needs some serious rethinking.

  5. All income taxes are regressive to our overall national well being. Yet some taxation is needed to run the country, but not like it’s currently being run. So tax reform is needed. I guess the question is what will corporations do with this lower rate windfall? If they use the extra cash flow to buy back stock to enhance large shareholder values and don’t invest it in plant equipment, jobs, and improving their productive capabilities, then our nation is justified in severely criticizing it.

    Eliminating the alternative minimum tax is a good thing. Is it likely? Probably not. A good compromise would be to go back to the year it first appeared and retroactively adjust it for inflation moving forward. In the early years of its existence, I rarely saw it being imposed on my client base. Now, it must constantly consider when making any tax related business decision.

    Ditto for the 3.8% Obama Investment tax.

    I think a bigger benefit for our nation would be to find a way to allow American corporations that have the $3.2 trillion off shore to bring it home without being taxed on it. While at the same time putting stipulations on how it can be used. Otherwise, if not used to boost productivity, jobs, etc., then heavily tax the wrongly used portions for violating the spirit of the tax free holiday.

  6. The government still needs revenue, and by lowering taxes, it means more borrowing for infrastructure and military, which will increase the deficit and national debt. There is no mention about all the trillions of dollars hiding in offshore accounts, which would go a long way in paying our bills. And again, the talk of messing around with Social Security and Medicare is very frightening. It seems like our elderly will be tossed to the wolves.

  7. Hey Brad:
    I think that any proposal that directly benefits the proposer is disingenuous to say the least. It also has zero proposals for how to add back the potential lost revenue. It seems to me to be a blatant ploy to his political base and for his own self-interest. I’m far from against everything Trump is doing, but he seems so ignorant as to the actual effects of what he proposes that I find it dangerous and somewhat frightening…

  8. DEAR BRAD ,OF ME NOT ME INTESE THE TAXES. I D;ONT HAVE MONEY AND NOT KNOW WHERE ARE IF I HAVE MONEY?HWO HOLD MY MONEY?WAY NOT GIVE OF ME TO KNOW?IF FALL ONE MEKIZA. PALACHINKA, GIUSLEMA OR BANIZA WITH FORMAGIO WILL FEED THE HUNGER STOMAKS AS TO BARABANS…THE ECO FROM THIS BARABANS TO LISEN YOU IN AMERICA?BECAUSE IN EUROPA IS LISEN , BECAUSE IN BULGARIA HAVE PEOPLE , HWO LIVE WITH 50 DOLLARS PENSION OF MONTH.THEM AS TO ME NOT ” PUCA” FROM NOTHING. BECAUSE OF THE HUNGER AND BAREFOOT AND THE MOCASINS NOT TO TAKE OF HIM.. IF OF ONE MILLIONER OR RICH PERSON TOTAKE AND ONE DOLLAR WILL RECEIVE THE SPASTICCONSTIPATION AND WILL TO HAVE DIFICALT WITH DIFICALISATION AND WILL TO HAVE HEMOROIDS…ONE BIG PROBLEM TO THE PEOPLE TODAY AND SPECIAL THE RICHS PERSONS. THE SAVING NOT HAVE, BECAUSE GOD GIVE THIS AS IT IS GIVING AS TO PUNISH THE FIRST IUDEO KING SEUL?WAY???!!!AND NOW I WISH YOU TO DRINK CALM THE COFFE OR BEAR?IS IT NOT IS GUSTO!BEST WISHES!

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