There have been countless articles on the tax plan, including in wealth management publications, but one of the things that has been little discussed is how the tax package may affect advisors themselves (instead of clients). The answer is that it will likely be positive professionally, as the tax plan may rob one of advisors’ biggest competitors of one of their best products. The introduction of first-in first-out for selling in taxable accounts takes away the tax loss harvesting algorithms from big robos like Betterment. That is one of robos’ key features, and the tax plan may completely remove their advantage there, giving advisors a leg up.
FINSUM: We don’t at all like this component of the tax plan, but it does seem like it will help human advisors by taking away one of robos’ best services.
Here is a very alternative view. While most contend that the tax cuts will have an equivocally positive effect on stocks, and many think bonds as well, Barron’s contends that tax cuts may in fact be negative for both. The argument is that the tax cut is coming at a very toppy time for both the economy and stock market, and instead of helping, it will likely accelerate inflation and lead to a recession. One strategist commented that “I wish they’d pass it with the caveat [they’ll] put it on the shelf and pull it out during a recession.” Bond guru Jeff Gundlach thinks it could be bad for bonds too, saying “A tax cut will reduce revenue, and it will grow the deficit and therefore, it will probably grow bond supply, and perhaps boost economic growth … And if it does … it is going to be bond-unfriendly”.
FINSUM: While tax cuts could lead to a recession, one is bound anyway, so it is not really the tax package’s fault.
Everyone has been very focused on two parts of the current tax deal: its affect on their income (very understandable), and how it will affect stocks (also understandable). However, there is one major effect of the tax plan that has not been discussed much at all—its effect on corporate bonds. The bottom line for companies is that the new tax plan would allow them to bring a lot of money home (reducing their need to issue debt), and at the same time, get rid of the corporate interest deduction, making it more expensive to issue bonds. Because of this, the amount of new issuance looks set to fall, which would likely have the effect of boosting demand, and prices, for existing corporate debt.
FINSUM: This looks like it has the makings for a big rally, as good bonds become more scarce at exactly the same time as baby boomers need more income for retirement.
The cut in corporate taxes contained in the current tax package has been lambasted by many. Founder and former Vanguard CEO Jack Bogle went as far as to call the cuts a “moral abomination”. However, on balance, the good of the cuts outweighs the bad, says Barron’s. The big problem is that the cuts will create a much larger budget deficit for the US. However, the good news is that lower corporate taxes, amongst the lowest in the world, will attract capital to the US, which should help the economy grow. Because companies will no longer be taxed on foreign earned income, they will bring money home and reinvest in the US rather than leaving it abroad.
FINSUM: We completely agree with the corporate tax cut. Having trillions of Dollars earned by US companies sitting abroad for no other reason than poor tax policy helps no one.
The current tax plan has already been approved by the House and is now waiting to be voted on by the Senate. The Senate has been much tougher for Republican initiatives this year as it has more Democrats and the Republicans in the Senate have been more prone to holding out. That said, the Financial Times is saying that US senators are under pressure to pass the current tax plan. Trump is putting major pressure on Senators to push through the tax plan and the Senate is reportedly planning to hold a vote on the package as soon as Thursday.
FINSUM: This kind of story has not been seen much this year as the Senate has stifled many moves. We are skeptical that they are feeling much pressure.