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Has the republican tax plan failed investors? – The colorful fool



History was written on December 22, 2017. For the first time in over three decades, President Donald Trump put into effect a comprehensive overhaul of US tax legislation. This law, known as the Tax Cuts and Jobs Act, fulfilled a major promise during Trump's campaign to pass tax cuts on to working Americans and businesses to fuel growth in the US economy.

Although you can read about the tax The law on cuts and employment details, the main reason being that it lowers the company's top tax rate from 21% to 21% and the federal income tax rate and / or individual taxpayer marginal rates many believe that they owed less in federal income tax in 201

8 and beyond. The idea is that companies with more disposable income will use this money to hire, expand, and share better wages. Given that consumption accounts for around 70% of US GDP, more taxpayers with extra cash could lead to better GDP levels through increased consumption.

  President Trump addresses Congress with Vice President Mike Pence and the House Speaker, in which Paul Ryan claps behind him.

Source: Official photo of the White House by Shealah Craighead.

Trump's tax reform?

At first, the stock market seemed quite excited about the passing of the tax cuts and Jobs Act. But since Wednesday, October 24, the iconic Dow Jones Industrial Average and the broad based S & P 500 (SNPINDEX: ^ GSPC) have declined since Trump's contract bill. This begs the question: Has the republican tax reform denied investors?

The Good

In a sense, things could not be better for the US economy. According to the Bureau of Labor Statistics report for September, US unemployment fell to 3.7%, the lowest level in nearly 49 years. Understandably, the labor force participation rate is declining, which has an effect on the unemployment rate. However, it seems that during the presidency of Obama, the turnaround in the labor market during Trump's presidency continued, if not accelerated.

In terms of growth, US GDP growth picked up dramatically in the second quarter. Since companies were able to earn comparable profits more than in previous years and taxpayers could and did spend more on their wages, the GDP growth rate was 4.2% yoy. This is the fastest GDP growth since the third quarter of 2014.

Gains were also recorded on listed equities. Thomson Reuters data showed S & P 500 earnings per share increased 24.8% year-on-year in the second quarter. This was the second-fastest EPS growth in the S & P 500 share year-on-year since the end of 2010, surpassed only by growth per share in the first quarter of 2018. In other words, investors appear to receive the expected data (ie higher corporate profits).

  A person carrying a tax reform folder

Source: Getty Images.

The Bad

Then the republican tax plan had quite unintended consequences. At the top of the list was the assumption that companies would use their extra income to hire new workers, raise wages, and expand their businesses. Instead, most of the money goes into share buybacks, richer dividends, or simply, as it were, under the mattress. The real problem is that the federal government can not control or dictate what companies do with their extra income.

Earlier this year, Just Capital analyzed the responses of 137 of the [1000] [1000] companies that were referring to what they had in mind to do with their additional income. Only 7% offered plans to use their additional benefits for salary increases and / or one-time bonuses, while another 19% said they would use their extra income to create jobs. In comparison, 57% planned to make that additional profit by repurchasing ordinary shares or increasing their dividend.

The data from CNN is even more harmful. In the second quarter, listed companies bought a record $ 436.6 billion in treasury stock. The next higher amount? That would be repurchases of $ 242.1 billion taken in the first quarter of 2018. In short, the two largest quarters of corporate buybacks in history have occurred since the signing of the Tax Cuts and Jobs Act.

  A halfway empty hourglass on a table next to a calendar.

Source: Getty Images.

The honest answer: It's too early to say

: Did the republican tax plan deny investors or not?

The honest truth is that we just do not know it yet. For as much evidence as we have on both sides of the coin, the fact remains that it takes time to determine the success or failure of a tax incentive such as the Tax Cuts and Jobs Act. When a tax incentive that determines the size of the Tax Cuts and Jobs Act is in effect, it usually takes 18 to 24 months for success or failure to be determined.

At this point, it is clear that this is the case It is not a complete failure, as it seems to have an upward effect on corporate profits, and it is not a complete success, as this additional corporate income is not going the way the Republicans hoped , Next year, we will gain a little more clarity and be able to pinpoint whether the biggest overhaul has been going on for more than three decades.


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