Stocks ended the week with gains. Large company U.S. stocks outperformed both international and small company stocks. The rise was apparently fueled by progress on the compromise tax bill bringing Republican holdouts onboard. The belief is that this will pass both the House and Senate next week. As we understand it the bill will:
- Lower tax rates for most people.
- Nearly double the standard deduction to $12,000 single and $24,000 married.
- Eliminate exemptions.
- Doubles the child tax credit and make more of it refundable for low income people.
- Allows for but caps the deduction at $10,000 for a combination of:
- State and local income taxes and property taxes. Or
- State and local income taxes and sales taxes.
- Eliminates the personal mandate to buy health insurance.
- Allow 529 accounts to be used for elementary and secondary education.
- Allow for the deduction of interest on up to $750,000 in loan value of a primary mortgage down from the current $1,000,000 limit. Currently existing mortgages (starting before December 15th) of up to $1,000,000 are grandfathered.
- Eliminate the deductibility of home equity loans.
- Lowers the C corporation tax rate from 35% to 21%.
- Provides a one-time fire sale for repatriation to the U.S. of past foreign earnings. Corporations would pay 15.5% on cash and 8% on illiquid assets bringing them into the U.S.
- Eliminates taxes on foreign earnings going forward which brings the U.S. in line with the rest of the world. This should stem U.S. companies from locating overseas, the so called tax inversions.
- Provides a deduction of up to 20% against income for pass through entities such as LLCs, S Corporations. The actual mechanics of this is fairly complicated and limits the deduction for high earners subject to things like wages paid.
- In 2022 requires corporations to amortize rather than expense research costs.
- Limits the deductibility of free food and beverages that some companies provide to 50%, the same as restaurant bills.
The unknown is exactly how much the cost of these may be offset by increased growth. While most economists would agree that these changes will have a positive impact on growth, it remains unknown exactly how much of the costs will be offset by growth. Importantly, many of the individual tax breaks sunset in 2025, with the corporate tax cuts being largely permanent. Of course anything that is “permanent” can be changed but congress would actually have to, heaven forbid, pass a law to do that.
The sunset provisions were done for a couple of reasons. First, to keep the total cost of the cuts in the bill below $1.5TN which is necessary to pass the bill with only 51 votes. Secondly, to push the decision to extend or make permanent the parts that the Democrats would want to keep to a future congress. Such is the nature of politics in the U.S. We saw it with Obamacare putting the benefits up front and the most onerous aspects to a future administration. I lament the time when many things on the U.S. could be done on a bipartisan basis. Also, I would point out that nothing here addresses the crumbling infrastructure in our country. The amount of spending currently is not keeping up with the rate of deterioration of roads and bridges.
The Federal Reserve met this week, and ask expected, raised short term interest rates .25%. The FED kept its estimate of future rate increases the same with three quarter percent increases in 2018. There was no indication of a change in FED policy or a more aggressive tightening based on the likely tax cuts. The FED is scheduled to increase the amount of maturing bonds it will allow to fall off the balance sheet to $20BN in January. Four European central banks also met this past week and left policy unchanged. While Mario Draghi, head of the ECB, acknowledged that the eurozone is experiencing expansion, inflation is still below the 2% target and is expected to be 1.9% in 2018. The ECB’s bond purchases are scheduled to go through September.
In the numbers, this week:
- The Labor Department reported:
- The producer-price index for final demand, a measure of prices that companies receive was up 0.4% in the month of November and 3.4% from a year earlier.
- Consumer prices rose 0.4% in November from the prior month and 2.2% from the prior year. Most of the increase was due to a 3.9% increase in energy prices.
- Industrial production rose 0.2% in November while October’s industrial production was revised to an increase of 1.2%. From a year earlier, industrial production rose 3.4%. The November increase was attributed largely to increased oil and gas production and a 0.2% increase in manufacturing.
- First time claims for unemployment fell 11,000 to a seasonally adjusted 225,000. The four week moving average of claims fell 6,750 to 234,750.
- The Commerce Department reported:
- Retail sales rose 0.8% in November and are up 5.2% over the past year.
- The Energy Information Administration’s Weekly Petroleum Data report is here wpsrsummary (14). In addition, the EIA reported:
- Weekly field production of crude oil rose 73,000 barrels per day in the prior week.
- Natural gas in storage fell 69BNcf last week from the prior week.
- Baker Hughes reported that oil drilling rigs fell 4 to 747. Gas drilling rigs increased 3 to 183.
Please call us if you have any questions.
Loren C. Rex, CFP®, AIF®, MA Erik Smith
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
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These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.