2018 – More of the Same from 2017 Only Different

As I sit here the morning of January 1st and try to contemplate 2018, I first looked back at 2017.

While the list of changes and things that no one once contemplated for 2017 is long, perhaps the biggest 2017 uncontemplated change was the 3% quarterly economic growth, a.k.a. Gross Domestic Product, or GDP growth.

President Jimmy Carter famously gave an Oval Office address wearing a sweater to warn the American people that the energy crisis was the new normal, and we would just have to get used to not having the cheap energy for heating our homes and fueling our cars that we once had.

President Obama famously said the equivalent about growth. Following the Government precipitated housing fiasco of 2008 – 2010, we Americans were told we were just going to have to get used to economic (GDP) growth in the 2% range. The halcyon days of 3% and 4% GDP growth were in the past.

Maybe President Trump did not get the memo. Trump was sworn in on January 20, 2017. For the calendar quarters ended June 30th, September 30th and (likely) December 31st, GDP growth was 3% or better. That growth outlook was based simply on Trump’s promise to “do something”.

That was before the tax cut passed.

The MSM (Main Stream Media) focused on the bright shiny object called “tax cuts for the rich”.

The reality is that the most important tax cuts went to larger and smaller corporations in the form of lower rates, but most importantly, to a change in the method of corporate taxation from world-wide activity to territorial activity.

First, the lower US corporate tax rates are significant. As my students learn, corporate taxes are paid a) explicitly by the consumer as revenue from the sale of products, and services must cover all expenses including income taxes, and b) implicitly by employees and stockholders as the corporation has less cash available for reinvestment in the business. So by lowering corporate tax rates, consumer, employees, and stockholders all got raises. Hard to say this favors the “rich”.

Second, the change to a territorial system of taxation was ever more profound. A territorial system means that US corporations only pay US income tax on income generated in the territory of the United States and not on all income generated world-wide. The foreign subsidiary of a US company would pay tax on the income earned in that foreign country at the foreign country’s tax rate, but not again when the funds were brought back to the US. It is estimated that there is between $2 trillion to $4 trillion earned in prior years and parked overseas that could be brought home. A special lower tax rate would apply to those “old grove” earnings coming home as a result of the tax bill. This change to a territorial basis of taxation, in and of itself, is as profound change in the tax law as the many changes in the 1986 tax law were in their time. Add to the above, the deliberate effort to give smaller businesses, which pay taxes at the rate of the business owner and not as a corporation and whose collective employment equals or exceeds that of larger corporations, a tax rate cut benefit, and you have the aromatic mix of fundamental change that should waif through the years continuing to fertilize economic certainty at the 3%+ level, perhaps even to the 4% and 4%+ level.

That is why I think 2018 will be more of same – a growth outlook – but different, fueled by lower business income taxes at all economic levels.

Just think what might happen to the stock market as a result!

It could be very good year indeed.

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