WEEKLY E-MAIL

11 December 2017

TRUMP’S TAX CUTS AND THE U.S. ECONOMY

By James Milliaros

The much-awaited tax cuts recently passed the US Senate, paving the way for both personal and corporate tax rates to be lowered. It is the most extensive rewrite of their tax code in three decades.

The Senate only approved the bill by a very slim margin of 51-49 votes with most Democrats and some Republicans opposed to the tax bill, primarily due to the cost. Critics of the plan warned that the cuts will send the deficit skyrocketing by dramatically shrinking federal revenues while at the same time implementing plans to boost infrastructure and military spending.

The tax plan will:

• Slash the corporate rate from 35% to 20%
• Create three individual tax brackets with rates of 12%, 25% and the highest rate of 35% for incomes over $225,000
• Allow the majority of Americans to file tax returns on a single sheet of paper
• Roughly double the standard allowable deduction for all taxpayers

Short term, the expectations of lower tax rates to boost company earnings have helped drive the US share market up more than 20% since Trump’s victory in the 2016 election. However the long term picture may not be so positive.

The cost to the federal budget would be massive as it would represent a $100 billion revenue reduction to the U.S. Treasury and result in up to $1.4 trillion being added to America’s debt over the next 10 years.

However the case for the tax cuts is that it could add almost 1% to the nations GDP and a failure to completely pass the cuts would heighten concerns among businesses and investors about the Trump administration’s ability to pass legislation – that could cause a fair amount of uncertainty and potential volatility in financial markets.

If the tax plan becomes law, independent analysis has found 61.7% of Americans would get a tax cut of $100 or more in 2019 while 30.2% would see a change of less than $100 to their tax bill, with the largest average tax cuts going to the highest-income Americans.

Another concern has been features like phase-outs of some benefits, which suggest individual and family taxes could grow in the future. That’s because one trade-off for the tax reductions is the elimination of personal and family tax breaks, such as their ability to write off state and local income taxes.

One may ask, does America really need this kind of fiscal largesse at this time in its economic cycle when almost all indicators are pointing up? In other words, America is fiscally spending big at a time when it doesn’t need to, with the immediate implication being the US Federal Reserve may need to raise interest rates more aggressively than initially expected to keep the possible inflationary effects of the tax cuts in check.

Maybe this is one case when America could learn from Australia.

It wasn’t too long ago when Australia’s budget was in surplus – the surplus was spent on tax cuts instead of saved for a rainy day.

As a result of the GFC, ten years after Australia was last in surplus, the government is still struggling to get the budget back into the black.

James Malliaros
Senior Financial Planner
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

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