Brian Andrew, CIO, Johnson Financial Group
Racine, Wis. – The U.S. government's pending tax reform bill is a mixture of benefits and budget deficit risk, Brian Andrew, chief investment officer for Johnson Financial Group, told an audience Tuesday morning.
Andrew reviewed pending tax reform during an economic and market update presentation to 36 clients and prospects of JFG's wealth advisers at the Racine Country Club. He delivers about 25 to 30 such updates each year across the state.
The U.S. House of Representatives and Senate have both passed separate, but similar, tax reform plans that will have to be reconciled by a conference committee. Both include a reduction in the corporate tax rate to 20 percent from 35 percent.
Many people incorrectly assume all companies already pay 20 percent or less in corporate taxes, Andrew said. The average rate of the 100 largest U.S. companies is 19 percent, but the average for the next 2,000 smaller companies is closer to 30 percent, he said.
“So, there's no doubt there's a difference between multinational, global companies that can move capital around to seek the lowest corporate tax rate in the world, and companies who do business in the U.S.,” Andrew said. “Those tax rates are different by quite a bit, and this would resolve that.”
Andrew said the House wants that corporate rate cut to start in 2018, the Senate in 2019.
Reducing a company's taxes means earnings will rise, benefitting stockholders; or the business will invest more money, he said. Andrew said the global economy has improved, business confidence is higher, and “that would lead that money toward investment as opposed to out the door to shareholders, because people are feeling better about their businesses. So, from a timing perspective, that may be beneficial.”
Both tax plans create a tax rate of about 14 percent for money that is repatriated, or brought into the country from offshore, Andrew said.
“The idea is that there's about $1 trillion in cash offshore, and if you lower that tax rate” companies would bring that money into the United States to invest or give to shareholders, he said.
The pending tax cuts are far from revenue‐neutral, Andrew pointed out. They would create $150 billion to $160 billion in additional budget deficit next year alone, or $1.4 trillion to $1.5 trillion over 10 years.
“But,” he said, “that money ends up in the economy and maybe adds a quarter to a half‐percent to our economic growth rate if we get (reform), and if those new taxes are effective on the first of the year.”
About proponents' contention that faster economic growth will pay for tax cuts, Andrew said: “I think the real answer is: We're not going to know until we get two years, five years, 10 years down the road as to whether it pays for itself or not.
“And I think that's a real concern on the part of those who pay attention to the size of the federal deficit … any increase in the federal deficit at this point, given its size, has the ability to actually reduce growth because you're just allocating more money to interest expense.”
Both the House and Senate plans would increase the standard deduction and child credit, totaling between $1.3 trillion and $1.6 trillion less in taxes paid over 10 years.
Those tax breaks would partially be paid for by capping mortgage interest deductions and eliminating deductions for state income taxes and local sale taxes. Deductions for property taxes would be capped at $10,000.
As to how middle and lower‐income people will fare with tax reform, Andrew said in part, “the most important issue is that consideration be given to the changes' permanence so that the tax ‘cuts’ look more like ‘reform.’” Both bills end tax breaks for individuals after 10 years but make them permanent for businesses.
Baby boomers and anyone who participates in a retirement or savings plan that includes stocks may benefit somewhat, Andrew said, if companies choose to return some of their tax savings to shareholders.