If tax season's conclusion on April 18 left you feeling a little lost, perhaps wishing tax matters could remain front and center in the national conversation a while longer, Wednesday must have been a relief. Top administration officials took to the podium to announce "a once-in-a-generation opportunity to do something really big" with tax policy, and the media went wild with breakdowns, analyst roundups, predictions and opinions pro and con. While we understand the excitement, in our view, all this hoopla makes too much of a loosely sketched proposal with an uncertain future-and one that isn't inherently bullish (or bearish) for the economy and stocks.
First, let's get the details-and the caveats.
Whew! That's a lot to chew on. We wouldn't agonize over the particulars, though. Like any tax reform, it would create winners and losers. But it's impossible to gauge whether the winners outnumber the losers, because there just isn't enough information. The devil's in the details, and there is a long journey from "List of Roughly Sketched Tax Concepts" to fully fleshed-out amendments to the US tax code. It will evolve, likely a lot, as the administration drafts the whole shebang and Congress goes through it with its metaphorical red pen.
The implications for stocks are also hazy. Since even tax "cuts" benefit some (who get the breaks) at the expense of others (who pay for them), they aren't automatically bullish or bearish. Though many perceive tax cuts as an obvious sentiment boost, prospect theory tells us the inevitable losers' disappointment can outweigh the winners' joy. Much also depends on how expectations form around eventual legislation, and how reality compares to those expectations. Pervasive pessimism sets up positive surprise, and vice versa.
Tough sledding likely awaits on Capitol Hill. While Republicans are thus far presenting a mostly united front, deficit hawks may balk if they don't buy the President's argument that faster economic growth will make up for an initial revenue shortfall. And eliminating deductions for individuals and businesses to reduce strain on the budget is a tall order. Every credit and deduction has a fairly large lobby supporting it,[i] and a lot of money will go toward preserving them. Lawmakers, whose primary goal is re-election, tend to bow to such pressure.
Further complicating matters, any lasting tax reform would require Democratic support in the Senate. If the GOP uses "budget reconciliation" (permitting a budget bill's passage with a simple majority), they'd have to make the cuts temporary, since reconciliation is off limits for bills that add to the deficit after 10 years. That sets up more uncertainty down the line, when the changes are about to sunset, a la the Bush tax cuts during President Obama's first term. Those temporary 2001 cuts are why we had the infamous fiscal cliff in 2012, among other annual squabbles over extension. Plus, a new party in power can easily undo laws passed along party lines, as they're an easy political target. This uncertain (and potentially short) lifespan makes it harder for businesses to plan long term, reducing temporary reform's impact.
While the administration and Congressional leadership are gunning for success here, it shouldn't surprise if horse-trading and compromise change the plan significantly before it comes up for a vote (presuming it does). Tax changes tend to move slowly, sapping surprise power-a big reason markets usually discount them well before they actually take effect. As a result, they just aren't huge drivers.
Nonetheless, our outlook for markets remains bright. Stocks have risen without landmark tax legislation, and whether tax reform passes in some form or falls short, the global bull market should soldier on.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.