According to House Ways and Means Committee Chairman Kevin Brady, the House is moving forward on a single unified tax reform plan.
So I recently sat down with our Chief Investment Strategist Alexander Green to get his views on what this means for the economy, the stock market and your portfolio.
ST: Earlier this year, the Republicans found that reforming Obamacare was much more complicated than they thought it would be. They couldn’t get it done. Is tax reform really going to happen this year?
AG: Absolutely. It needs to happen, and it will happen. If it doesn’t, what will Republicans run on in 2018… “Elect us – we can’t even get things done without partisan gridlock”?
ST: Healthcare is a big sector – nearly 20% of the economy – but tax reform is the whole economy. If they can’t get healthcare done, how will they get tax reform done?
AG: There is actually more agreement among Republicans on tax reform than there is on healthcare reform. All conservatives want to simplify the code, reduce individual and corporate rates, and give U.S. corporations an incentive to repatriate foreign earnings. It’s a shame that billions of dollars of corporate profits are sitting in cash overseas when those companies would love to bring the money back here to invest in factories, equipment and labor. But the tax penalty is simply too high.
ST: Is tax reform really that big a deal? Has it been overhyped?
AG: No. It’s hard to overestimate its value. Tax reform will have a huge impact on economic growth, investment and corporate profits. And – not incidentally – those are exactly the elements that drive stock prices higher.
AG: Let’s start with the basic idea that anything the government does to incentivize people to start or expand a business is a good thing. It means more money is available for research and development, factories, employees, office space and capital investment.
Yet our corporate tax rate – at 35% – doesn’t just make us less globally competitive, it actually drives U.S. companies out of the country.
ST: How so?
AG: Some firms do a so-called inversion, in which they actually move their headquarters overseas. Others agree to be acquired by a foreign buyer to – once again – relocate overseas.
Burger King moved to Canada after its 2014 acquisition of Tim Hortons to avoid $275 million in corporate taxes.
Budweiser was bought by InBev – now Anheuser-Busch InBev (NYSE: BUD), the maker of Stella Artois and Bass – and now calls Belgium its corporate home.
Ingersoll-Rand (NYSE: IR) is based in Bermuda. Liberty Global (Nasdaq: LBTY.A, .B, .K) is headquartered in the U.K. Seagate Technology (Nasdaq: STX), Accenture (NYSE: ACN) and Chiquita Brands are all based in Ireland. And I don’t think it’s because the Dublin area is a good place to raise bananas.
ST: Right. Are corporate tax rates really that much lower overseas?
AG: Dramatically lower. In Ireland, for example, trading income is taxed at a top rate of 12.5%. That’s roughly a third of our corporate tax rate.
ST: How about those who say that tax reform will only worsen the budget deficit and our economic situation?
AG: When Ronald Reagan signed the last major tax reform into law, it was designed to be revenue neutral. It eliminated tax shelters and sparked growth, leading to the biggest economic boom in modern history.
And here’s the important part: Tax revenue went up, not down. The budget deficits under Reagan – as with all the presidents since Reagan – were due to both parties’ inability to rein in spending. But Reagan’s tax reform led to greater tax revenue, not less.
ST: If Republicans really do agree on the value of cutting taxes – and since they control the House, the Senate and the White House – why hasn’t this happened already?
AG: Because what Congress is working on is not cutting tax rates, but reforming the whole infernal code. The damn thing is more than 74,000 pages long. Nobody understands it all. Not the high-paid tax experts. Not even the folks working the help line at the IRS.
And it’s a huge time suck. The IRS estimates that the average taxpayer spends 13 hours preparing his or her return.
ST: Don’t remind me.
AG: So you have a tax code, loaded with breaks for political players and special interests, that nobody understands. And an army of IRS agents – with all the powers of the federal government at their disposal (including asset seizure) – monitoring and enforcing our compliance. The wealthy and connected are gaming the code. And the rest of us feel like suckers. It’s a crime, really.
ST: So when do you think tax reform will happen?
AG: Expect the president to sign a tax reform bill before the end of September.
AG: Yes, because there is one particular break that will be more difficult to pass… But it will dramatically increase your net income and capital gains by dramatically reducing your federal income tax liabilities. Best of all, it will apply to the majority of our readers.
Editor’s Note: We will run the second half of this interview – including Alex’s discussion of the specific game changer you can expect from the upcoming tax reform – in [our next broadcast].
— Samuel Taube
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Source: Investment U