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Is Tax Reform Still On the Table?

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RANDY FREDERICK: The failure of the Obamacare repeal and replacement plan has created a lot of doubt about the potential for tax reform. Liz Ann Sonders, Schwab’s chief investment strategist, joins me for the April 4 Schwab Market Snapshot to discuss what challenges the Trump administration may be facing on this issue of taxes and how the markets might be impacted. Welcome back, Liz Ann.
 
LIZ ANN SONDERS: Thanks, Randy, and thanks, everybody, for tuning in.
 
RANDY: So, Liz Ann, with healthcare reform basically off the table for now, the main topic on everyone’s mind is taxes. Now, since you were part of President Bush’s Tax Reform Commission back in 2005, I think you’re uniquely qualified to respond to this topic. So how do you see the Trump Administration actually getting tax reform done in 2017? Especially given their failure on health reform?
 
LIZ ANN: So I think there’s two issues, there’s a timing issue and then there’s a content issue. And I think the timing issue is interesting in that actually there’s rumors that healthcare reform is coming back on the plate in the near-term. Which I think would push the timing a little bit further out, and I’ll get back to the timing in a second. Then there’s the content, and whether there’s actually support within the Republican Party. Because, remember, it was warring factions within the Republican Party that was largely to blame for the failure of healthcare reform.
 
But the good news in tax reform is that on the key component parts of tax reform there is broad agreement within the Republican Party. So you’ve got the notion of taking seven tax brackets down to three, top rate of about 33%, repeal of the Alternative Minimum Tax, the Estate Tax, as well—and then on the corporate rate side, going to a range somewhere between 15- and 20 percent.
 
From a timing standpoint, there’s lots of steps in the process. You need a draft bill by the House Ways and Means Committee. That’s probably not until at least May. The House isn’t likely to sign-off on a bill until at least August, which puts a Senate bill sometime in the fall. And then, end of 2017 is the earliest, we believe, you’re likely to see something, which means at some point this may become more of a 2018 story in terms of its impact on the economy and maybe even the market.
 
RANDY: Well, now, there are obviously two key pieces to this. One is the corporate income tax piece and the other is individual income taxes. Now, assuming we see at least some progress on either or both of those issues, what are the implications for the economy and the markets?
 
LIZ ANN: So I think the corporate side of tax reform is actually, I would call, the lower hanging fruit. Ample bipartisan support I think immediately goes to the bottom line of U.S. corporations. But for now what we understand is that the goal is to keep it packed together, to keep the corporate side and the personal side packed together in an attempt to get reform.
 
Now, the impact on the economy is fairly straightforward. If you lower the after-tax cost of capital that raises the value of capital, and, in general, is seen as an economic positive. The implications for the stock market, though, are a little bit murkier, not least because, as we know, there’s always a number of different forces behind why the stock market is doing one thing or another.
 
We’ve had history where you would expect the market to do what it’s done in the past at times. 1941 we saw tax hikes associated with World War II; stock market went down, as you might expect. Reagan tax cuts were accompanied by a rising stock market. But then you had the Obama and then prior to that the Clinton tax hikes that were accompanied by a strong stock market. You had the 2001 to 2002 Bush tax cuts, which actually saw a weaker stock market. In fact, if you look at the long history of the stock market, changes in tax rates and the stock market actually have almost no correlation, so it reinforces this idea that it’s not just tax policy that drives the markets, but any number of other forces.
 
RANDY: Well, that’s all the time we have for today. Thank you so much for sharing your expertise on this topic.
 
Listen, if you want to hear more from Liz Ann you can get that in the Insights section of Schwab.com. You can follow Liz Ann on Twitter @LizAnnSonders and you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.
Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.
Schwab does not provide tax advice. Clients should consult a professional tax advisor for their tax advice needs.
Investing involves risk including loss of principal.


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