The Republican tax bill is finally here. For the stock market, the biggest treat is a corporate tax cut from 35% to 20%. That can’t possibly be bad for the stock market, at least over the short-term. But I’m going to try to temper your excitement just a little.
I’m not convinced this bill will change the behavior of businesses very much. Corporations already have plenty of cash and earnings are high. How will giving the business world even more money change their decision-making equation? The best answer to that question is that if taxes are lower in America, businesses will invest more in America. That makes plenty of sense until you realize that Bernie Sanders might be President in 2020. The potential for tax rates to go back up in just a few years might be enough to keep businesses from changing their plans much. Perhaps more importantly, if the tax cuts lead to the national debt increasing (which is entirely possible), businesses will be even less motivated to invest in America.
There’s also the question of whether this is the right time for economic stimulus. We are already at risk for inflation. If the tax cut is successful in stimulating the economy, the economy might overheat. That means higher inflation and higher interest rates – which might be the quickest way to push us into recession. Rather than a tax cut, I’d prefer “tax reform,” which means cleaning up the tax code without cutting overall taxes.
My last point is that the markets have been dreaming of a tax cut since election day. That means it’s “priced in” to the market already. If it fails to pass, the stock market will surely be disappointed. However, even if it passes, the market may not celebrate for long. The successful passing of a tax bill could be like Christmas morning for the markets. But, sometimes there’s a sadness that sets in after Christmas because there’s nothing to look forward to except 3 more months of winter. In the same way, the markets might wake up in the days after the tax cut and think: This is all we’re going to get from Trump – and now we have 3 more years of living with this guy.
Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at firstname.lastname@example.org
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