The Dividend Cafe - Tax Plan Revealed!

Episode Date: September 27, 2017

Tax Plan Revealed! by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, Chief Investment Officer at the Bonson Group, recording this week from our headquarters in Newport Beach, California, but heading out to New York City tomorrow, have about 25 meetings with different hedge funds, money managers, portfolio analysts, people that we work with in all aspects of our asset allocation and portfolio management process and doing this annual due diligence trip. So we'll be engulfed in portfolio work for the next 10 days. And in the meantime, we're sitting here a couple days away from the third quarter coming to an end.

So I'm going to focus most of this podcast this week on nine pages, which is eight pages more than the, or I should say eight and a half pages more than the last release. We got about maybe four or five months ago, a little half pager. But here's what we know real quick. And I have a few comments and caveats to make. Essentially, the corporate tax rate coming down from 35%, one of the highest in the world, to 20%. On the corporate tax front, they are talking about a repatriation of foreign earnings where people can move that cash that has been earned overseas back on shore for a one-time tax rate. They did not disclose what that rate would be. We presume it will be something 10% or lower. We believe that represents nearly $2 trillion that will come back on shore should

this all go through. Moving to a territorial tax system, so you would have a 100% deduction of money earned overseas and then just simply pay on your total profits. And business spending, expensing, deduction immediately, full deductibility. Four or five years, though, that's an interesting thing. It will sunset in five years unless Congress were to choose to sort of extend it. So we think that would pull, accelerate into the present a lot of spending that maybe otherwise does not quite create the same degree of tax advantage right now in the new code would motivate and incentivize further capital expenditures. motivate and incentivize further capital expenditures.

Pass-through entities, so-called LLCs, limited partnerships, subchapter S corporations. Right now that flows through or passes through to the individual rates, which are very often near the 40% high tax rate, now would be treated as 25% flat rate. So much better than the present code, not quite as good as the corporate tax proposed code. However, they said for certain pass-through entities. So there was not a full clarity as to who would qualify. There's been talk about doing this only for manufacturing-oriented companies,

which I think would be really unfortunate. We'll see how that plays out. On the personal tax code, going from seven different tax rates to three, with the bottom rate being 12%, the middle rate being 25%, and the high rate being 35%. So a definite simplification and a flattening of the tax code eliminating almost all of the individual deductions but keeping the mortgage interest deduction and keeping the charitable deduction but presumably getting rid of the state and local tax deduction something that will bother a lot of people in high income tax states, but something that a lot of us feel is very good policy in terms of not making low tax states subsidize high tax states.

Repeal of AMT, the alternative minimum tax. They're proposing a repeal of the death tax or estate tax. I will be very curious to see if that actually makes it to the final round. And I think that represents the major highlights. More or less, though, I really do think that this represents pretty good policy. The question is, is it going to come through? What's the final version going to look like and when? And that remains the unknown that the market probably will not be able to get real excited about until they see that path to passage. I suspect that the reason to release a lot of these details now is to give the Freedom Caucus in the House a motivation to vote for a budget bill next month, because if they don't get a budget bill, they cannot attach

budget bill next month, because if they don't get a budget bill, they cannot attach reconciliation and therefore would not be able to get this done with only 51 votes. They would need the full 60 votes. And that's not going to happen. So I think that they're following a pretty good path. But you know, there's any number of things that could come up that could throw this off. In terms of the overall market, as we end up Q3, first of all, I don't know by the time you're listening to this where markets went on the Thursday and Friday of this week. But the reality is that it appears it's going to be another really strong quarter for the markets and probably a pretty good September as well. And across all asset classes in Q3. Fixed income has done okay. Municipals have done particularly well, but we did have interest rates move higher here in the month of September,

affecting some bond returns. And then in terms of the equity markets, international developed has done okay, but the stronger portion of returns being in emerging markets and U.S. equities have had another positive quarter and what's been an extremely positive year. So really all attention this week from a market standpoint has revolved around this tax reform. And it's the big thing we want to be watching. And then now we have a lot to really delve into as it pertains to our interest level from a macro standpoint in Japan and their equity market, our fixed income positioning and the health of the credit markets and the emerging debt markets that have had incredible years. We want to see what the viewpoint of our trusted analyst and so forth is around how frothy those asset classes

may be. Definitely maintaining a very defensive position. We talk about it every week that selectivity, I think right now, is vital. And as far as kind of challenging our own assertions and viewpoints, we'll be doing a lot of that over the next week and a half, following up more. So it's a short podcast this week, but the tax reform kind of took up most of that time and space. Please read DividendCafe.com. There's a lot of elaboration there about everything we've talked about here this week, a few charts, and then, of course, we delve into some other topics that we didn't get into on the podcast. We'll leave it there for the week. Look forward to recording for you next week from New York City. Thanks for listening to Dividend Cafe. Thank you for listening to the Dividend Cafe, financial food for thought.