At times it seemed the fractured GOP would never agree on a tax plan, but finally we have one to chew on. We are in the process of analyzing today’s release of The Tax Cuts and Jobs Act. It’s a far cry from the kind of tax code simplification the GOP has campaigned on; we’re still trying to figure out the plan’s true meaning for small-to-mid size businesses as well as multinational corporations.
A link to a New York Times story on the tax plan:
To summarize some of the plan’s salient features:
– Collapses seven tax brackets into four: 12%, 25%, 35%, and 39.6%;
– Increases standard deduction from $12,700 to $24,000 for married couples ($6,530 to $12,000 for singles);
– No changes to 401(k) contributions;
– Eliminates the Alternative Minimum Tax (AMT);
– Caps mortgage interest deduction for new mortgages up to $500,000;
– Doubles estate tax exemption from $5.49 million to $11 million per person;
– Lowers corporate tax from 35% to 20%
The lower corporate tax rate is a win for stocks, especially those with simple, domestic operations paying the full rate. A fall in corporate tax rate from 35% to 20% represents a 23% jump in earnings, all things equal.
What requires further analysis are corporate deduction limits and exactly how foreign income will be taxed. Corporate interest deduction will be limited, and the plan calls for 10% minimum tax on global income and a 12% one-time tax on liquid earnings accumulated overseas (defined as what?), payable over eight years (illiquid equity overseas will be taxed 5%).
We are figuring what all the changes mean for the companies we keep (looks good on balance, so far), and we hope to find new investment candidates benefiting from the proposed rules.
Clear winners are lower earners; and some higher earners could pay more taxes going forward.
Of course, the deal isn’t done yet, and there’s a chance enough GOP members could dissent. However, odds are the general framework released today should stick.