Life after Tax Reform, from Micro, Macro, & Beyond
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Life after Tax Reform, from Micro, Macro, & Beyond

When you think and talk about the Trump Tax Reform Plan, you will hear only an agreement to disagree from pretty much everyone. For every GOP saying Middle Class Tax Cut was a primary result, you have someone from the DNC saying it wasn't nearly enough and is horrible (worst Bill ever rhetoric). For every Democrat saying it was a Tax Break for the Wealthy, you have many Republicans who counter that was where the money was and who creates jobs. For every Deficit hawk saying this will explode the National Debt, you have an opposing view that says Growth will increase Tax Revenue overall & it's much to do about nothing. I could go on forever, seemingly. So let's just face this simple truth, we are very split about the Tax Reform Law and what, in the end of the day, it will do for us- or more importantly, to America.

So put that aside and take a very small step back, we need to look at what it triggered that most people are either not aware of or not talking about nearly enough, IMHO.

*Corporate tax rates were cut from 35% to 21% right? Wrong. The effective rate was calculated by CNBC to drop from 23% to 9%. Say that out loud for a second, 9% Corporate Tax Rate in the US. Now think about how many Corporations on the planet will WANT to be here, how many Corporations will not benefit by any Inversion (moving HQ to another Country to export back to US for tax benefit reasons), & think about how much pressure it removes off the middle tier Corporations (ones that aren't in the profitable elite, but actually need a tax break to compete, expand, or thrive. BIG win for all, and it will protect jobs assuredly, if not allow for more job expansion or creation.

*Repatriation was talked about by both parties for different reasons, but now it is a reality. It will allow Corporations to bring Foreign made profits home into the US with only a 15% tax rate. Why is that important? You need to consider a couple key components. Money here can help our Economy truly, where abroad it mainly cannot. Money in banks here allows for a higher degree of bank confidence, and a higher amount of domestic loan ability. Access to those multi-Trillion dollar surpluses allow for plant expansion, job creation, marketing investment, greater dividends or buybacks- all of which will help drive an American economy in multiple ways. 

*Small business creation will be taxes at a single digit rate and then expanded up to the 25% level as it grows itself and can afford it. It is the single greatest moment to open up your own business in the history of America. You have more chance to succeed now than ever before.

*The amount of 401K distributed (whether forced by age or selectively chosen by the account holder) as the Boomers come of age will be another positive gain, as they will get taxed at a lower rate and obviously have more money to spend on whatever it is they choose. And collectively, the amount of money they will withdraw, save and spend is not small potatoes. They are the single biggest generation and the first to be 401K reliant as opposed to pension based.

*Blue State Tax Pressure will help efficiency and accountability for all parties involved. "Moocher" states will probably get a smaller slice of the Federal pie as this tax plan benefits them mainly, while "Donor" states will probably get more both in fairness & for relief. Either way, the States will need to adjust to the new normal & plan for this reality moving forward. Tax more & your states taxpayers will feel it directly, so money decisions will have a real time impact. Spend less & your state will be more competitive to draw more migrants and businesses into it. 

*Elimination of the ACA (Obamacare) Mandate allows about 8 million people to not pay the penalty tax (and NO it doesn't force anyone off Health Care or take it away from anyone) & keep that money to do what they WANT with it, not be FORCED to put it into the government money shredder for now personal gain. That is more money for discretionary spending pumped directly into our economy in some way. 

I could keep going about internal pieces of the Tax Reform that will help, but let's shift to things slightly outside the Micro. How does this Tax Reform help when combined with other dynamics? We'll call this the Macro Economic impact.

*Immigration policy changes (skip the pro or con of this) has dried up the migration of undocumented/illegal immigration, reduced the refugee inflow & possibly removed 60,000 Haitian refugees from the US who have been here about 7 years since the hurricane destroyed their home country, HB-1 visa holders spouses will no longer be offered/allowed to migrate by design nearly as easily, and the rate of legal immigration is targeted to be cut in half. The near future will have some semblance of Immigration Reform which is likely to formally curtail certain loose practices as opposed to expand migration to what we have had or more. Again, you can't get caught up in the pro or con of the migration policy shift. You need to just think economically for this conversation as we aren't making the rules, but adjusting to playing by the new policy shifts under the Trump Administration. Think about the labor market forces competing for domestic workers and causing a much need labor wage inflation. THIS is a much needed, long overdue healthy impact for all US workers. Countering that, you need to consider fewer immigrants mean less dollars being spent by them. But combined with the tax reform plan, you will see labor wages improve via market forces and no one is directly speaking to that actuality. 

*Full-time job creation in the US will be a direct result of the tax plan. Companies will need to rethink how they market themselves to labor forces. If the money is there via the Tax Reform plan Corporate Tax Cut, it now becomes "show me the money" time for their workers or someone else will. Competition is the only healthy way to improve labor wages, as any forced minimum wage hike or universal living wage plan will always fail as it cannot pay for itself in any way without killing the host itself.

*The labor participation rate will increase as with an increase in labor wages comes the incentive for non-productive citizens (people not currently performing a formal paying job function) to get back in the labor market as new jobs with better wages become a reality. A rising tide raises all boats, and in this case increased labor market participation helps both businesses and employees, while simultaneously dropping those utilizing government support programs for various reasons.

*It allows for a tax policy that applauds America First innovation & celebrates it STAYING IN AMERICA. We can debate the merits of the tax plan, but above reproach is the need to move offshore as we now can compete on the fact of our domestic productivity, laws & policy, & status as the #1 consumer nation in the world. 
Again, I could keep going, but let's shift to what lies BEYOND this Tax Reform plan.

*King Dollar can now return as the multi-national tax competitiveness argument of a weak dollar is now removed. A strong dollar valuation creates buying power to increase travel bang for buck abroad, help our purchasing power of foreign goods, leverages again our trade deal imbalances, & drives foreign investment into the US both directly in companies or indirectly by investment vehicles or purchasing US debt (bonds). The Fed raising rates is another reason this dollar strength goes higher still.

*Trade deals take on a whole new level of discussion. When this Tax Reform package passed, one of the bigger losers was China. As our dollar grows in strength, the Yuan (both foreign and domestic ones, YES- they have two different currencies for strategic reasons) comes under pressure which forces them to protect it more than they already do. Leveraging our dollar against the trade deficit is a really big deal. The one who has the deficit has the stronger hand (that’s us). The one who has the stronger currency has the stronger hand (that's us also). The one who just revamped their international & domestic tax policy to be far less than other true competitive nations will be helped in the short and strategic sense (that's us as well).

*Repatriation helps our domestic banks stress test results, and allows for a greater domestic loan rate and ratio. It also puts 15% of NEW TAX REVENUE into the General Fund (probably earmarked toward infrastructure, although I would prefer Inner-City Poverty as well).

*Strong dollar, low taxes, improved domestic personal tax relief all speak to a much broader economic growth outlook. 

*Better economic outlook translates into better hours and wages, inspired job creation, confident new business innovation, and a robust investment outlook which drives wealth for all via ownership & 401K holdings.

*The millennial generation just got the biggest gift of all. Instead of getting part time work after college and stressing about getting a real job, they are about to be faced with a hiring boom & the most secure economic expansion in their lifetime similar to when the Baby Boomers had in the early 80's. This new economic outlook also translates into home purchases, business creations (they already account for about 53% on new business creations or disruptions), and of course a baby boom for about the next 10-15 years. The might enjoy sharing experiences and leaning toward ideals of socialism now, but as their parents did back in the day- the bug of Capitalism & keeping up with the Jones is about to kick in, simply because it can via the Tax Reform Plan ripple effect.

*Deregulation, followed by tax reform, then followed by a strong dollar policy & trade reforms with China directly, & Mexico/Canada via NAFTA upgrade, investment of the repatriation money both directly & indirectly, and the labor wage inflation driving up discretionary spending will all lead to the single biggest growth since the 90's.

The National Debt we possess today of 20 Trillion Dollars at the Federal Government level and another 4 Trillion Dollar at The Federal Reserve will need to be addressed. It is growing; it is sabotaging future generations, and will not go away by itself. Trump understands that. He also understands you cannot tax it away as that kills the economy. He gets that spending cuts alone can't do it and will also result negatively impacting economic growth. The ONLY solution for dealing with the debt is to grow your way out of it combined with strategically attacking that debt to minimize its growth & damage. Tax Reform (and other policy shifts) increases how we cycle money and helps create growth. Global focus of cost efficiency from all departments and curbing Entitlement growth will minimize the spending damage. The revenue increase against a lower % of Government spending will allow for us to finally address the national debt in a meaningful way.

CAUTION: The fact we will have a higher Fed Funds interest rate will also immediately impact how much our debt costs JUST to maintain it. A historically normalized rate of 3% (which will hit us approximately as soon as 2019 year ends) will cost about 650 Billion Dollars just to pay the interest. Let me say that again- 650 Billion JUST to maintain, not to decrease the principle AT ALL. So dealing with it soon is a must, it is not a want or wish- but a simple mathematical fact of reality. We can deal with it, or end up spending more on Interest than we do on Defense.

That being said, Life after Reform looks very good. Even factoring in the on-going debate between pro and con, you can't ignore the obvious that it will have a meaningful positive impact both directly and indirectly. So enjoy the ride and remember where you stand now (and how others think), the future will tell us who wins the pro/con debate.

And like President Obama said, Elections have consequences.

The first sign of this Tax Reform real impact will be in people's paychecks in February. The second sign will be in GDP growth figures & new business creation in the first couple quarters of 2018. The most telling impact will be how it affects the mid-term elections in November 2018.

"It's the Economy, Stupid" and "People Vote with their Wallets" have never been more true expressions. In November 2018, a substantially improved Economy means the Republicans get rewarded. Or saying it differently, we will find out if people LOVE the extra money in their paychecks & pockets OR if they HATE the direction the Country is going more. We will find out in Technicolor detail which argument of the pro/con about this Tax Reform plan is actually true.

Life after Tax Reform means more than just a Tax Cut. It actually is a battle royal for control of the greatest country on the planet. So may the games begin, and to the Victor go the spoils.
 

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