By Samuel Taube with Alexander Green In our last broadcast, I sat down with Chief Investment Strategist Alexander Green to talk about the prospects for tax reform and to discuss the effect it will have on the economy, the financial markets and your portfolio.
Alex argues that meaningful tax reform is only weeks away – and that lower corporate and individual rates will boost the economy, corporate profits and share prices.
Here’s the second part of our interview…
ST: You’ve mentioned that a lower corporate tax rate will boost research and development, hiring and capital spending. But how about lowering individual rates? I’m sure our readers would like some relief there. But is it realistic – and would it help?
AG: Lower individual tax rates are also coming. But I want to emphasize that the key is not to simply lower rates. If Congress cut tax rates and did nothing else, we would still be stuck with a code that incentivizes individuals and corporations to make non-economic decisions that have no value except to shelter income. Plus, tax cuts are always temporary and easily reversed. So the historic thing would be to reform the code and produce something that is dramatically simpler and fairer.
ST: And would lower individual rates help the economy and stock prices?
AG: Absolutely. Consumer spending is 70% of the economy. People with more after-tax income in their pockets are going to spend more. That will not hurt sales and earnings.
ST: You mentioned that one particular aspect of tax reform is a real game changer for our readers. Tell us more about that.
AG: Trump promised to cut the corporate tax rate to 15%. Trust me, that won’t happen. Like a good negotiator, he threw an unrealistic number out there as his initial offer. The final rate is likely to be closer to 20% to 25%. That’s still much better than what we have now – and a huge incentive for businesses to invest in buildings, equipment, software and technology.
ST: But what’s the game-changing part?
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AG: The game-changing part is that Trump doesn’t want just tax relief for megacorporations. He wants to help small business owners, which include many of our readers. Congress can do that by extending the reduction in corporate taxes to so-called pass-through entities.
ST: Explain what those are.
AG: Most small businessmen set up their businesses as either S corporations or limited liability companies, better known as LLCs. Profits and losses at S corporations and LLCs are shifted to the personal returns of the owners, whose income is currently taxed as high as 39.6%. Does it make any sense – or seem fair to you – that that the top tax rate for a Fortune 500 company is 35%, the highest in the world, but for a mom and pop business it’s 39.6%?
ST: I guess mom and pop didn’t go out and hire an army of lobbyists.
AG: Exactly. Yet according to the Tax Policy Center, pass through entities account for at least 95% of all business tax returns and 60% of net business income generated by U.S. …read more
Source:: Investment You
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