No matter your politics, the majority of Americans agree that the current tax codes could use a pretty thorough overhaul. Unfortunately, there’s little agreement on direction after that point.
The new tax regulations coming down the pike will have long-reaching impact on business owners and individual workers alike, but what will proposed changes do to the economy overall?
Revamping the Corporate Tax Codes
President Donald Trump’s proposed tax structure may feel a bit like the broad strokes of back-of-the-napkin math, but it does put forth some relatively aggressive tax cuts for corporations.
A leading University of California, Berkeley economist named Alan Auerbach notes “With an income tax, one of the key issues is ‘how do you measure income’.
In order to understand overall income, it’s important to follow sales instead of net profit for purposes of taxation. Large corporations have become adept at taking on excess debt to reduce profits and their tax liabilities.
However, if organizations no longer benefit from these legal shenanigans, the impact on the economy may be an overall growth in available tax revenue even if the corporate tax rate is reduced.
Spurring Business Growth
One of the key benefits of reviewing how taxes are assessed for businesses is that there will be less incentive to grow debt and potentially become over-leveraged. This approach can also provide deeper incentives to invest in employees and capital investments.
In the growing spirit of optimism, companies of all sizes are making decisions that are more forward-thinking — with an eye towards ramping up investments in the near future. This also has a notable effect on Wall Street.
The shift in momentum is seen as a positive move by much of the business community, as noted by the overall rise in U.S. stocks throughout 2017 to date. While President Trump’s 100th day in office has come and gone, the positive news for investors continues to roll in.
Between positive earnings announcements from retail powerhouse Amazon and Alphabet Inc., Google’s parent company, and the potential of tax reform, investors are sitting pretty as even more companies are expected to beat earnings expectations and confidence scorecards are at a nearly all-time high.
Beating the Growth Rate
The overall growth rate of the American economy has been relatively dismal for the past few years at only 2%, but many industry insiders see the path to new tax reform boosting that to 3% or even 4% in the foreseeable future.
This all hinges on lowered regulations and improved overall efficiency, without the effect of derailing other very delicate balances in our corporate ecosystem.
Challenges Ahead
While the majority of signs appear to be picking up, there are still some challenges the economy may face from new tax regulations.
Anything that causes a major shift in the value of the U.S. dollar — either positive or negative — can have a far-reaching and global economic impact that is difficult if not impossible to predict.
Any changes to the distribution of wealth caused by new tax regulations could cause individuals to make significant changes to their spending patterns, which can have an appreciable and immediate effect on the overall efficiency of the economy. Likewise, the same changes are unlikely to result in immediate benefits from new tax dollars as that particular part of the shift is a more long-term strategy.
Global Trade Impact
One of the biggest and most unpredictable fronts right now is around global trade. If policies continue to shift towards protectionism, there is the potential of a global trade war that could bring all forward momentum crashing to a halt.
The U.S. has enjoyed relatively favorable relations with trade partners in recent years, and a tightening of these policies again has the potential to produce an unpredictable result. The current administration is moving towards reducing the federal trade deficit through a structured tariff system — something that is unlikely to be embraced by our largest trade partners such as Mexico and China.
Overall, employment indices continue to rise, and the U.S. economic growth rate is modest but confidence remains high. Spending on infrastructure is expected to drive additional employment opportunities, while federal workforce reductions may provide a counterweight. While some policies that are being introduced may seem to conflict, the overall outlook continues to be positive.
The tumult caused by the rapid-fire changes will shake out over the next twelve to eighteen months, with the regulatory relief and corporate tax cuts proving to be strong positive factors in the shift. However, trade and immigration policy proposals continue to raise concerns as we unravel the potential effects of new tax regulations on the economy.
Regards,
Ethan Warrick
Editor
Wealth Authority
