- The Tale Of Tax Reform
- To Spend Or To Save? That Is The Question
- Emerging Markets Are Taking On More Debt
We’ve been doing some de-cluttering at my house, adapting to life as empty nesters. During a review of some long-forgotten storage bins, I found the very first tax return I ever filed. It listed income of less than $2,000, earned lifeguarding and shelving books at the campus library. Happily, I had a $160 refund due to me; I used the money to buy an engagement ring for my girlfriend. She said yes, in spite of the modest cost of the diamond.
Today, our tax considerations are far more complicated. That’s partially good news; we’ve been fortunate to progress from those modest beginnings. But determining our liability is not simple. The reform of the U.S. tax code that passed late last year adds a substantial degree of difficulty.
It may be many months before individuals and businesses figure out how the new rules affect them, and several quarters before we understand the cumulative impact of the bill on the U.S. economy. But we’d offer the following initial insights from what will likely be a year-long exploration.
1. Whatever the merits of tax reform, the timing might be questioned. The U.S. economy closed 2017 on a very strong note; real economic growth for the final three quarters of the year proceeded at a pace of better than 3%. This is well in excess of long-run potential growth and unusually robust for an expansion of advanced age.
Consumers have been buoyed by job and wealth creation, and businesses appear to have a renewed commitment to investment. Both trends predate the likelihood of tax reform, and are therefore founded on more fundamental incentives. Some might contend that the American economy does not need additional stimulus at this time.
2. Reform will have its biggest impact in 2018, but effects will dissipate quickly from there. The attraction of immediate expensing for capital expenditures will pull some of that activity forward into 2018, but partially at the expense of future years. The diminished incentive for corporations to leave international profits overseas will deepen the pool of capital available to invest this year.
The reaction of households will occur in two stages. Those whose returns will be enhanced and simplified by the expanded standardized deduction will be the first to benefit. Reduced tax withholding should be implemented within the first three months of the year; history suggests the additional cash flow will be spent, not saved.
Those diagnosing the cross-currents of curtailed deductions, alterations to estate taxes, and the lingering presence of the alternative minimum tax may take a bit more time to arrive at an adjusted trajectory for spending and saving. Earners in the upper reaches have a lower propensity to spend, so the deferral may affect investment more than consumption.