“…but in this world, nothing can be said to be certain, except death and taxes.“ -Benjamin Franklin
Taxes are certainly top of mind as the Senate plans to vote on a final version of tax reform this week. There’s still uncertainty about what will ultimately pass, but as of now, it seems at least a couple market moving things are baked into the tax cake.
It seems very likely the final plan will lower tax rates for both large corporations and small businesses, with corporations seeing a maximum income tax rate of 20% and 25% for small businesses. Clearly, this is market friendly, and stocks have liked the news all week.
It also seems very likely that state and local income tax deductions will be eliminated. This affects individuals disproportionately because state income taxes vary from 0% in FL to over 13% in CA. But by itself, this is negative for consumption and thus the markets.
However, it’s also hard to say what the overall impact will be since there are other moving parts. For instance, while personal exemptions may be eliminated (negative for consumption) the standard deduction is expected to double (positive for consumption).
There may also likely be changes to itemization, affecting everything from mortgage interest to medical expenses. In the end, the changes will impact each taxpayer differently depending on circumstances.
On the surface though, as of now, the overall changes look to benefit businesses and the wealthy the most. Historically, that has been short-term market friendly. But longer-term nothing is certain, that is except for death and taxes.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice of any kind. Investing is inherently risky and involves the risk of potential loss.