Don’t Spend that $4K Tax Raise Just Yet…

The Senate’s passage (51-49) of the budget blueprint last week paves the way for Republicans plan to tinker with the tax code with just GOP votes, which means that tax negotiations have entered a new phase. Last week, the President’s Council of Economic Advisers argued thatPresident Trump's tax plan, which aims to reduce the top corporate tax rate from 35 percent to 20 percent, would boost the average American family’s income by $4,000 under . Critics, including former treasury secretary Lawrence Summers, questioned the $4K promise.

On his blog, Summers wrote “The claim is absurd on its face,” for a simple reason: The cut will cost slightly less than $200 billion a year and while there is some question whether some of that $200B will go to shareholders and some to workers, it’s hard to see how 150 million workers could see a $4,000 raise, a benefit of $600 billion or “300 percent of the tax cut!  To my knowledge, such a claim is unprecedented in analyses of tax incidence.”

In addition to the corporate tax cut, there will also be renewed chatter about a reduced tax rate applied to overseas income held by US multinational enterprises (MNEs), which would encourage those companies to repatriate the money and spend it freely in the economy. Considering that there is around $2.6 trillion at stake, the potential impact on the economy could be great. But according to Capital Economics, “a sizeable share of this repatriated income would be used for share buy-backs, as was indirectly the case during the 2004 tax holiday… MNEs would not use much of the money to invest in physical capital in the way that President Trump would like.” IN addition to share buy-backs, companies could use the tax savings to increase dividends or pay down debt.

MARKETS: “There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done,” according to Treasury Secretary Steve Mnuchin. He also said that if the deal gets done, stocks will keep rising, but if Congress fumbles, “you’re going to see a reversal of a significant amount of these gains.”

That prediction remains to be seen, but last week, the bulls were in charge, pushing all of the US stock indexes to records and nudging the Dow above 23,000 for the first time ever. In the process, the blue chip index logged its 53rd record close of the year, the most since 1995. And stocks have moved higher with very little downside action. The S&P 500 hasn’t had a decline of at least 3 percent since Nov. 7, 2016 (240-day span), the second-longest period without a single-session drop of that magnitude since the 241 days from Jan. 26, 1995 to Jan. 9, 1996, according to Pension Partners.