Something’s been on my mind recently in the wake of tax reform passage, and I’m worried. Not about the implications of the tax plan, but about how politics seem to be clouding some investors’ judgment.
My team and I have been on the front edge in talking about tax reform. We have been committed to making sure you understand what the changes mean for you – your take-home pay, your taxes and your 401(k).
While I’m a Certified Financial Planner, not a CPA or any other type of tax expert, I have employed multiple CPA firms to guide me through the tax changes so that I can explain them to you. It’s important to us as investors to understand the potential impact on the economy of these vast changes.
So, here’s my concern: I’m worried that many of us are politicizing the economy. In my professional experience, this is never a good move. When we let our emotions get the best of us, we tend to invest irrationally.
I’m floored by how people have politicized the topic of economics. According to polling data, almost half of the country is so blinded by their dislike for the new administration that they won’t even admit the economy is doing well. I believe those polls as I hear this sentiment all the time in both my personal and professional life.
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Trust me. This is not a new phenomenon, or unique to the Trump administration. Things were pretty much the same when Obama was in office. Folks who didn’t like our former President couldn’t come to admit that, during Obama’s time in office, the economy was doing well. While the same thing is happening today, it seems more palpable and extreme.
My “hate mailbox” has been filled to overflowing ever since I started talking about the impact of tax reform. One email described my team as “libertarian, Trump-loving scum.” Another opined that all of the tax cuts were going to the filthy rich. And yet another said, “You are blinded, sir, by rose glasses and Republican red lies.” Maybe I should know better, but I was a shocked by these politically-charged messages.
I have tried my best not to bring politics into this. Instead, I’ve looked at economic history data points and trends to discern whether we are going to end up with more money in our pockets. Case in point – post-2003 and the Bush-era tax cuts. After this round of tax reform, Americans netted about $350 billion in savings. And what about our current tax cut? Preliminary data indicate that Americans will save a collective $1.5 trillion.
And let’s not forget American businesses. There is real reform here that could fundamentally impact the business segment of the economy. With lower taxes for small business owners and 100% expensing, the reform incentivizes companies to buy now, and invest in their businesses – not merely pay down debt. New entrepreneurship is likewise being incentivized, as many small business owners will be eligible for a 20% deduction on their business income. On the corporate side, tax reform encourages companies to bring the $2.6 trillion of cash sitting offshore back home.
These critical pieces of the tax reform give our economy incentives to grow. And since we’ve been stuck for years averaging 2% or lower GDP growth, it seems to me that we needed to implement new ideas, regardless of what party or President took that initiative.
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I have said that tax reform could double our GDP growth rate over the next two to three years, just like we saw following the 2003 Bush tax cuts. These changes are more substantial than what we saw in 2003, but, given the similar scope, I believe examining GDP before and after the 2003 cuts is an illustrative (if not predictive) exercise.
The current package equates to a $205 billion stimulus to the US economy for 2018. This number is equivalent to just over 1% of GDP. Back in 2002 and 2003 (before the Bush cuts), real GDP growth averaged 1.5%. Following the cuts, however, real GDP rose to 4.0% in 2004 and stayed above 3.0% in 2005 and 2006. Using this historical data, my team and I came to believe a similar impact could be felt in the coming years, particularly since real GDP has averaged around 2.0% in 2016 and 2017.
When investors politicize the economy, they risk losing out on such growth. I’ve seen it happen to both Republicans and Democrats. I’ve seen it happen when the politics indeed had nothing to do with the economy. Turning back to Obama, when he was elected again in 2012, the S&P was up about 32%. If you let your distaste for our President at the time guide your decision- making and just stayed in cash, you missed out. The market was up 22% last year under President Trump. If you let your dislike for our current leader sway your investment decisions, then you too missed out.
Moving beyond the numbers, here is my final takeaway: do not (and I mean do not) let your love or hate of who’s in the White House cloud your financial judgment. Base your investment decisions on the current state and prospects of the economy, both in the US and around the world. That’s what matters.
Listen to my podcast on this here.