Tax Reform and Its Economic Implications

Posted this early this morning, before the revelation regarding Michael Flynn's pending testimony regarding the President and Russia -- which has the market selling off notably (relative to the lack of volatility the market's experienced this year). Of course there'll be commentary coming your way as dusts settle. 

In the meantime, a little something to ponder: While, clearly, traders are reacting to the potential for political uncertainty to come, we have to acknowledge that the world has been rife with political uncertainty throughout 2017. Of course this feels different/dramatic, but, in the end, will it actually culminate in political certainty? Well, it ultimately has to, one way or another. And, in the end, the market likes certainty. We'll keep you posted....

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We've been reluctant, here on the blog, to weigh in much on tax reform and its market implications. Mainly because, up until very recently, the likelihood of either plan passing -- in the forms presented -- was nil, as neither would wash given the "Byrd Bath" rule (has to be revenue neutral in 10 years to allow for a simple majority vote). Now, apparently, it looks as though the ultimate plan will somehow wash, and, thus, we're on the cusp of tax reform becoming reality.

While our friends in the tax business are keeping us abreast moment by moment, we're still not inspired to weigh in much on the particulars. I.e., the noisiness/volatility of political processes keeps us mum till something's official.

Now, that said, we are inspired to say -- the visible market reactions on virtually every tax reform headline we've seen the past few days notwithstanding -- that, frankly, for our (long-term investing) purposes, it's simply not necessary. In fact, for economic growth and jobs purposes, it is utterly unnecessary at the moment.

Now don't take that the wrong way, we all want tax simplification (big time!), and, yes, while we can debate till the cows come home, lower corporate tax rates (to the extent that they translate to lower corporate tax payments) will leave more capital in the private economy. Whether you believe that society is better off with the private sector, as opposed to the public sector, commanding more capital depends on personal proclivities that we'll not explore at this time. And whether it stimulates enough growth/future tax revenue to ultimately pay for itself remains to be seen: Frankly, my rabid capitalist tendencies aside, I'm skeptical.

Back to the present unnecessariness of a stimulative tax bill:

You see, the U.S. economy is actually doing quite well at the moment, while the jobs market is as healthy as it's ever been --- and, friends, that's not open for debate. Therefore, a tax plan whose title encompasses economic and jobs growth at a time when both are firing on most cylinders conjures up images of a pulling forward of economic activity (that would've occurred over a longer period), rising inflation, higher interest rates and so on.

In a perfect world, such presumably stimulative measures would be reserved for the next recession. Implementing them during an expansion (some would say in its later phases) could -- after a likely surge in activity -- actually move up the timetable for the next recession, while, alas, leaving the powers that be with less ammunition with which to combat it.

Lastly, and make no mistake, PWA being a pass-through entity, my partner and I stand to -- to some extent -- personally gain by what's being presented (so, personally, nobody here is complaining). A gain that'll ultimately pass through to the benefit of our clients (provides additional capital to keep our systems state of the art, and some) and to the benefit of our employees (higher wages, etc. [don't tell em :)]. And that's the story throughout the world of U.S. small businesses. It's just that, at this juncture, the economy simply doesn't need it -- which might have us adjusting to the prospects for the next recession sooner than we otherwise would have.

Stay tuned...