Former President Donald Trump’s signature legislative achievement was a tax-reform package that padded corporate profits and helped power stocks to one record high after another, and if he’s reelected, investors may well be treated to a sequel.
Trump has an overwhelming lead in the Republican primary for president, and he and others in the conservative movement are already planning how they can reduce corporate taxes further.
The 2017 tax-reform package cut the top corporate tax rate from 35% to 21% (various deductions often mean companies pay a much lower effective tax rate), and on the campaign trail Trump has promised to lower it even further to 15%.
See also: New Hampshire GOP primary: Haley tries to turn the tide, as Trump cruises toward the 2024 nomination
That’s an even steeper cut than the 18% rate proposed by the Heritage Foundation in their Mandate for Leadership, a guide published ahead of presidential election years that synthesizes the conservative movement’s policy goals.
Analysts believe that a Trump victory in November would likely mean that Republicans did well enough down the ballot to take back the Senate and maintain their House majority, giving them a governing trifecta similar to that which passed Trump’s first tax cut in 2017.
The promise of a fat new tax cut may be one reason why business executives at last week’s World Economic Forum in Davos were eager to predict a Trump victory in media interviews last week, and investors could be forgiven for salivating over the possibility after their experiences with the 2017 tax cut.
The measure helped reduce the tax burden for American owners of businesses large and small, but was particularly generous for the large multinational firms that compose the S&P 500
SPX,
given their outsized profits.
The median effective tax rate for S&P 500 companies fell from 31.2% in 2017 to just 20% in 2018, according to John Butters, senior earnings analyst at FactSet.
In the first quarter that the new tax law was effective, the changes saved S&P 500 companies $12.8 billion in taxes, according to a 2018 Bloomberg analysis.
Google parent Alphabet Inc.
GOOG,
realized $1 billion in savings in that quarter alone, while Bank of America Corp.
BAC,
saved $709 million. Netflix
NFLX,
saw its effective tax rate fall from 20% to 3%, while Ford Motor Co.’s
F,
fell from more than 12% to just 3%.
The changes helped make stocks look cheap by historical comparison, with the price-to-earnings ratio of the S&P 500 falling from 20.85 to 17.62 from 2017 to 2018, according to FactSet.
While a Trump victory could be bullish for stocks, the outlook for bonds is somewhat different, given that another round of corporate tax cuts would help add to an already soaring federal budget deficit.
The 2017 tax reform, which Republicans argued would pay for itself as increased economic activity also boosted tax receipts, was passed in a much different macroeconomic environment.
The Federal Reserve had only just begun raising interest rates when the law was passed and consumer prices were rising at a modest 2% per year, putting little pressure on lawmakers to concern themselves with the federal deficit and debt.
Today, the federal funds rate is at a more than 20-year high, while the government will pay upwards of $900 billion in interest costs to investors in U.S. government debt, up from $350 billion in 2021, according to David Kelly, chief global strategist at JPMorgan Asset Management.
“Rising interest payments have been the biggest reason for a sharp increase in the budget deficit recently,” he wrote in a recent note to clients. “However, any attempt to reduce the deficit in the long run…would have to rein in spending on defense, Medicare, Medicaid and Social Security while raising taxes.”
Without those measures, “the deficit and debt will continue to worsen, gradually adding to the underlying level of real interest rates” and putting downward pressure on bond prices, Kelly added.
In 2016, Trump won the presidency with a campaign against cuts to Social Security and Medicare, and it appears that the Republican Party has adopted this message more broadly after several unsuccessful campaigns to cut such entitlement spending.
Heritage’s Mandate for Leadership may be instructive in this regard. The 2017 version called for aggressive reforms to Medicare by changing the program into one of defined benefits to one where the government gives seniors a fixed amount of money to help buy insurance and also argued for raising the Social Security retirement age, among other reforms.
The report published ahead of the 2024 election drops those suggestions, while Trump’s opponents in the Republican primary have also shied away from any detailed arguments over how spending should be cut to finance further tax reductions.
