Will Tax Relief Send Stocks Higher in 2018?

Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Tax cut fever already has propelled the stock market higher as we finish up 2017.

Now that the tax bill will become law on January 1, 2018, will Wall Street enjoy another banner year? Or will the maxim, “buy the rumor, sell the news,” be more appropriate, especially given that the market has not suffered a serious correction in years?

In fact, for the first time in history, the stock indexes rose every month last year. (The Dow and the S&P 500 fell slightly in March, but the Nasdaq rose.)

It may take a few months before the economic data kicks in and confirms the positive impact of the “Tax Cut and Jobs Act.” Past tax reductions always have taken a while to show up in the economy. Democrats and other critics of the tax legislation have argued that the tax cut only will help the rich and warned that most companies would use the extra money to buy back shares and raise dividends rather than to pay their workers more. 

But in this case, the new tax bill’s impact has already been felt, as AT&T announced that it is giving all 200,000 employees a $1,000 Christmas bonus as a direct result of the corporate tax savings. And Wells Fargo and Fifth Third Bank said they would start paying a base pay of $15 an hour to employees.

Wall Street was particularly pleased with the anticipated dramatic drop in the corporate income tax rate from 35% to 21%. Personal income tax rates and deductions are far less generous, and are a mixed bag, doubling the standard allowance but sharply curtailing the deduction for state income and property taxes.

My wife and I met recently with Steve Forbes for an annual meeting to discuss current events and next year’s FreedomFest. Forbes told us he was disappointed in the tax bill, which he said makes a mockery of tax simplification. It will add thousands of new pages to the tax code and enrich accountants and tax attorneys. Sadly, he’s right for the most part. Congress should have just focused on cutting the corporate tax rate to 21% and left personal tax returns alone. (Frankly, I’d be happy if the United States adopted a flat 21% individual income tax rate with a generous personal exemption. Now that’s tax simplification!)  

But it’s important to realize that the corporate tax relief is far more significant than personal income tax reform. As my gross output (GO) statistic demonstrates, business is clearly the biggest sector of the economy, with more than 60% of total economic activity compared to 31% for consumer spending. So, a substantial cut in business taxes will have immense benefits in increasing cash flow, profits and job creation. And unlike the personal tax changes, the 21% corporate rate is permanent.

What could kill this bull market? Rising interest rates, for one. The Fed has threatened to raise short-term interest rates, but the U.S. central bank really does not have much room to raise rates very much as long as long-term rates don’t increase. The 10-year and 30-year Treasury bond rates are still below 3%, despite positive jobs reports and a booming economy. Meanwhile, the 3-month T-bill rates are inching up to 1.3%. The Fed is unlikely to create a negative yield curve, which could push us into another recession and bear market. 

While businesses and individuals saw tax relief in this bill, investors did not see much change. From what I can tell, the maximum tax rate on long-term capital gains will remain at 23.8%. 

Overall, the 2017 tax cut is a welcome gift to us during the holidays that will pay dividends into the future.

I wish you all a very Merry Christmas and a most happy, prosperous New Year!

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Upcoming Appearance

Orlando MoneyShow, February 8-11, 2018: I’m delighted to return to the Orlando MoneyShow, where I will be giving a new presentation on “ETFs vs. Mutual Funds, Why You Need Both! (Plus, My Five Favorites).” I’ll also be doing an encore of the “great debate” with Mike Turner on “The Economics Professor vs. the Mathematician: Buy-and-Hold vs. Market Timing.” To sign up for your complimentary tickets, go to Skousen.OrlandoMoneyShow.com.

You Blew It! Democrats Oppose Tax Relief

“The Republican tax bill is simply theft.” — Nancy Pelosi

I had to laugh when I read the Democrats’ response to the Republican tax reform legislation. There are plenty of legitimate issues with this tax bill, but the Democrats have missed the mark in most cases.

House Minority Leader Nancy Pelosi said that the Republican tax cut was “simply theft.” How can keeping more of your money be considered theft?  For years, anarchists have argued that “taxation is theft.” I prefer this alternative: “Taxation is the price we pay for failing to build a civilized society. The greater the taxes, the greater the failure.”

No Democrat voted in favor the Republican tax bill this year. That is in sharp contrast with the 1986 tax reform bill that President Ronald Reagan signed that year. But there’s a difference that goes beyond partisan politics. In 1986, the Democrats controlled Capitol Hill — Reagan had no choice but to deal with the Democrats.

But there is one thing on which I agree with the Democrats: This tax bill is a benefit to the rich! That’s because the rich already pay the vast majority of income taxes. So, a tax cut inevitably is going to benefit them. Moreover, big corporations are likely to benefit a lot from this tax bill, which cuts the corporate tax rate from 35% to 21%. But that will benefit everyone, including workers’ wages, because studies have shown that companies that increase their profits tend to pay their workers more. Trickle-down economics works!

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