Road To Stimulus

Markets extended gains last week on proposed tax reform. What was it about the thinly detailed proposal that drove markets?

Tax reform has been a major agenda item for the Trump administration since day one. After the failure to get healthcare completed, his administration is in need of a win.

The importance of tax reform cannot be understated. GDP has been running at a sub par 2% for several years now and cannot endure much tighter monetary conditions. The Federal Reserve Board(FRB) is preparing to reduce their balance sheet and potentially raising rates later this year. Both of which are moves that tighten monetary policy. Fiscal stimulus in the way of tax reform could go a long way in offsetting FRB moves.

The proposal lacked details, however it was a necessary step for the administration to rally support. A few of the things we do know are:

  • The corporate rate would be reduced from 35% to 20%, a far more competitive level.
  • Pass through corporations would be capped at 25%, an effort to help smaller businesses.
  • The 7-bracket system (10,15,25,28,33,35, & 39.6) would be reduced to 3 (12,25, & 35).
  • Standardized deductions would be doubled and many itemized deductions would be eliminated.

So, what does it mean?

The fiscal stimulus is viewed favorably regardless of the details, given FRB activity. The corporate rates are important because it is viewed as a major cut that would hypothetically balloon the deficit. The unknown number of companies that would repatriate to the US as a result of the modified rates could greatly offset the lost tax revenue. The real unknown, which makes analysis of the proposal difficult at best, is where the cut-offs for the various tax brackets will land.

More is to come as this makes its way through the house and senate, but the release of a road map definitely motivated markets to go for a drive! Ha ha, get it, go for a ‘drive’??? never mind…


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