Questions and Answers about Trump’s Tax Plans
Has the stock market been rising on the back of a promised tax cut by President Donald Trump? The answer is yes…and this could result in a stock market correction.
Let me explain…
The Trump administration has proposed slashing the income tax rate on businesses from 35% to 15%. Of course, if this happens, it will give a major boost to the earnings of publicly traded companies, which increases shareholders’ value.
But investors need to ask three questions regarding the proposed tax cut for businesses.
1. Will the proposed tax cut actually make it through Congress and the Senate?
The way things are right now, there is unwillingness to move on anything at the Senate and the House of Representatives. One of the biggest indicators of this was when President Trump failed to repeal Obamacare.
2. Will the proposed business tax cut do any good to the U.S. economy?
If the U.S. government does lower the corporate tax rate, it will bring in significantly less revenue. This would result in much higher deficits and it would, ultimately, mean a much higher national debt.
3. Does the corporate tax cut help “Average Joe” American?
Corporate tax cuts help companies and their shareholders, but it’s unclear how much the “Average Joe” American—who doesn’t own stocks—is helped by lower corporate taxes.
Over the past many years, American companies have been amassing huge sums of cash, and they are not willing to put it to work (except for buying back their own stock). Will lower taxes mean companies will just stockpile even more cash, rather than invest those funds in their businesses?
Tax cuts are great for businesses. It gives them a chance to earn higher income and essentially reward their shareholders.
But, the Senate and Congress might be less interested in the benefit to businesses owners, and more concerned about how these tax cuts impact our national debt, our economy, and average Americans. What I’m saying is: these proposed tax cuts will have a slim chance of becoming law.
Since November 2016, key stock indices like the S&P 500 have soared 14% on the rumor of better times for corporate America, the backbone of which are lower taxes. If the tax cuts are voted down, it could cause a mass exodus from the equity markets, and a big old-fashioned stock market correction.