As we are all aware, as of Noon (est) on Jan 20, 2017, there’s a new President in the US, Donald J. Trump. Putting political ideologies aside, some of his and the GOP’s proposed changes could impact the finances of Americans and those living outside the US.
First is the repeal of Obamacare. This order was signed yesterday. However, no replacement plan has been put forward. So unwinding and replacing Obamacare will take some time. The Congressional Budget Office (CBO), a nonpartisan body, put out a report last week indicating that the repeal of Obamacare without an adequate replacement would leave 18M people without health insurance. Insurance premiums likely would rise for those insured because healthy people would probably opt to wait to get health insurance until they actually get sick – leaving the burden of health insurance premiums to a smaller group, thus, driving up premiums. This is a waiting game. And a note, some people think Obamacare and the Affordable Care Act are different. But they are actually the same thingd, just with different names.
The other item that will have a significant impact on finances is tax reform. Trump and the GOP’s proposed plan indicates a drop of the US federal corporate tax rate from a high of 35% to the 20% range. This significant cut should mean corporations have additional funds to invest, pay out as dividends, or use as share buybacks. There is also a repatriation tax of 10% proposed to allow companies such as Apple, Google, Johnson & Johnson, etc… to bring cash that they have overseas to the US. Currently, these companies would face a larger tax hit if they repatriated overseas cash to the US. There may also be some changes to corporate expenditures such as denying interest expense deductions but allowing corporations to fully expense capital expenditures such as the purchase of machinery or intangibles. This may entice corporations to take on less debt but invest more in machinery or intangibles but some corporations need to take on debt to invest in these things. So it may just end up being a wash.
It is uncertain whether these changes will create new jobs. Companies may certainly have more cash to invest in machinery and technology. However, this may not necessarily create more jobs. Rather, it may allow a company to become more efficient, thereby benefiting shareholders. Often times, the biggest cost for corporations is labor. If companies can invest in technology upfront and automate processes, it saves them the cost of ongoing labor. It results in higher profits which makes shareholders happy. For example, much of the production in the US auto and steel industry is automated which is a large reason there are less auto and steel jobs in the US. If these companies have more cash to spend, I don’t think they’re going to hire more people just for the sake of hiring more people when they can invest in technology to further automate their production. Thereby increasing efficiency and profits.
Companies bringing cash from overseas may also not create additional jobs. I say this because many of the companies with cash overseas have currently been issuing bonds at cheap interest rates and instead of using the proceeds from these bonds to invest in new jobs, they’ve just been using the proceeds to pay out additional dividends or buy back shares. This enriches shareholders. I think that if companies are able to bring money from overseas at a tax rate of only 10%, they will use those proceeds to pay out more dividends and buy back more shares. This doesn’t necessarily create more jobs. But it does make shareholders better off because they have more cash in their pockets (due to dividends) or a bigger piece of the corporate pie (due to share buybacks).
So if the above corporate tax measures are imposed, I believe shareholders will benefit the most. I think this will skew the tax system even more to individuals that invest in corporations, whether private corporations or publicly traded corporations. As you will note, I discussed this my post: One of the Ways the Rich Stay Rich.
There are also proposed changes to the US federal personal tax brackets for ordinary income (e.g., employment income), reducing the brackets from seven to three and having the highest marginal rate at 33% instead of 39.6%. The tax rates wouldn’t decrease for everyone though. If you’re single and have income between $112,500 and $190,150; or married filing jointly and have income between $225,000 and $231,450, you may see your marginal tax rate rise from 28% to 33%. The tax rate reductions may be offset by allowable expense deductions such as the mortgage interest deduction (this may no longer be allowed). So the decrease in allowable deductions may offset the decrease in the tax rates. Thus, individual taxpayers on average, may end up in the same spot as before.
There is also proposed major infrastructure spending on roads, bridges, airports, tunnels, etc… This combined with a cut to corporate taxes should have an inflationary impact as the expected tax cuts and infrastructure spending should stimulate growth. Theoretically, the US Fed should then start increasing interest rates to combat inflation. Bond yields should start moving up (they already have). An increase in interest rates generally does not bode well for corporations and individuals holding debt, particularly floating rate debt. So an initial period of growth may be accompanied by higher interest rates which make it harder for corporations and individuals to pay back debt because of higher interest rates. And also makes it harder to refinance debt because of an inability to service debt due to higher interest rates. So it may be a good time to cut back on personal debt over the next few years. In addition, I’m becoming more conscious of investing in companies that have significant debt on their balance sheets because their interest payments may take up a significant amount of their operating income in the years ahead.