The Dividend Cafe - Tax Reform and Your Portfolio

Episode Date: November 16, 2017

Tax Reform and Your Portfolio by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. for all of the normal market stuff. There's a lot of material there this week that is utterly fascinating. I say that because I wrote it myself. I would never mislead you. No, in all seriousness, I want to talk on the podcast about tax reform. Let me just stay on that subject. About five minutes ago, the House just passed their bill

through the House of Representatives. It received the majority vote it needed. And yet there isn't a whole lot of market discussion of that in the Dividend Cafe written because really the market has to wait for what happens out of the Senate. And so I think that the charts, the subjects about where we are in the bull market cycle, the subjects about where we are in the bull market cycle, things on Japan, things on Saudi Arabia. There's a real diversity of topics covered at DividendCafe.com. So please go there, look at it. It's a very readable week, just this one week. If you hate the written blog and you only like the podcast, then fine, we'll get the podcast to cover everything every other week.

For this week, I'm just going to talk about tax reform. And then you go to the website, dividendcafe.com, to see all this other material that I think is very pertinent and so forth. On the tax reform front, as I just said, the Senate becomes the next issue. Okay. Frankly, there's no way the House was even going to vote today until they knew they had the votes. So there was no suspense in it. We knew that they had whipped up the votes and the Senate now has a different plan. And there's a couple of variables in there that are, cause it isn't very different. It isn't way off, but there are a couple of variables in there that matter. One of them being the Senate's plan to punt the implementation of corporate tax reform into next year. Well, that's a big deal. Excuse me, into 2019, the year past

next year. That's a big deal because I think that there's a real historical precedent for making clear and a signal to market of something that's changing, but then delaying the change, thereby altering and manipulating otherwise rational economic action. I think that in 1982, when House and Senate passed Reagan's first tax bill and then delayed its implementation, it really delayed a lot of very productive behavior because people quite obviously saw that they could do such and such an economically beneficial act and receive the income at a lower rate if they just delayed doing it. So then it caused a recessionary, contractionary activity in the second half of that year. It was just stupid. And frankly, this is different. I don't think it's that severe. You're not talking about this massive marginal income rate reduction across the whole society. It's more limited in scope.

But do I believe that it would make no sense to tell companies that they are going to be receiving a lower marginal rate on their EBITDA, but then to do so a year out. I think it is very troublesome. I suspect they're going to fix that. And one of the big things they did this week, by the way, is put in a backdoor repeal of the Obamacare mandate. The way they did that is they basically just said, we're not repealing Obamacare, we're just making the penalty for not having insurance zero. So it's effectively taking it out.

And what that does is save, I think it's $438 billion of the subsidy the government's presently paying. And so therefore that gives them a lot more wiggle room within their $1.5 trillion allowance they have to get this tax package done within Senate parliamentary rules. There is some disagreement between the Senate and House plan around the edges. I don't want to minimize them because some of them I think are significant, but it is true. They're not that significant.

They are close enough. because some of them I think are significant, but it is true. They're not that significant. They are close enough. And the political pressure, if the Senate gets their vote, see, that's going to be much trickier. I'll explain why in a second. If the Senate gets their votes, there is very little likelihood that the House is not going to go along with what the Senate's done. They will make some tweaks in conference, but the political pressure for the

House to kind of get in line is going to be severe. I will remind people historically that the Bush tax cuts of 2001 and 2003, the conference lasted a grand total of three days with one and seven with the other. I don't think we're looking at a 30, 45-day type process. So I believe that they're going to get this to vote within a week or two. And the reason I believe that is this Alabama fiasco. I think that right now it is extremely questionable that there will be a Republican senator filling that position in Alabama after the special election. It isn't a foregone conclusion, but it appears to most people that there is, at best case, a real vulnerability around that. And what that does is make the Republicans say, we've got to get this done before that election.

So with the House's vote complete, the Senate then votes, let's assume early the week after Thanksgiving, they conference three to seven days, they can have a bill on the President's desk by the end of November, let alone early part of December. That's my prediction. And I think that corporate tax reform in most of the healthy and market stimulative and pro-growth supply side aspects as written into both the House and Senate plan, I think it's going to be held together. And to the extent that there's many tweaks, I think they're going to be minimal. The individual side, I think, is really troubled. There's some good things, there's some bad things. And the politics of it are keeping most of the

good things from getting much better. Excuse me, the bad things from getting much better. A lot of House Republicans, including ones I'm talking to quite frequently, are saying that they're going to use the conference opportunity after the Senate passes their bill to make those adjustments. But that's not going to be very easy to do. So all things considered, from a market standpoint, I think that we're very likely going to get a bill passed quite soon. From an investor standpoint, I think that's going to be positive, not just right away around some kind of rally on the news, but I think what it means to the pro forma earnings and growth prospects and capital expenditures that you're going to see out of corporate America. I

think it's a positive. Individual taxpayers, a lot of people are going to see out of corporate America. I think it's a positive. Individual taxpayers, a lot of people are going to benefit. Many more are going to benefit than aren't. And then as far as high earning taxpayers and some of the high income tax states, I think they're going to pay more, probably a lot more. So it's a mixed bag individually. It's a wonderful bill corporately. That's my summary. And I think it's about to become law, but there's still some pushback. There's still going to be some tweaking. You still have some Republican senators that are going to hold tight and use leverage to kind of make adjustments that matter to them as you would expect them to do. And then we're going to follow up with it next week. We're going to have a special podcast to address Thanksgiving a little bit. And in the meantime, reach out to the Bonson Group anytime, any questions, market, politics, portfolio, asset allocation, personal finance.

It's what we do. And thank you for your understanding this week about the sole subject of the podcast. Hope it's been helpful, and I hope you read DividendCafe.com. This is David Bonson, Chief Investment Officer of The Bonson Group. Thank you for listening to The Dividend Cafe, financial food for thought. not an offer to buy or sell securities. No investment process is free of risk and there's no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion,

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