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October 2017 Market Update

October 2017 Market Update | Steve Cain, RPBG Director - Writer / Editor

October 2, 2017

What a way to end the summer. Three hurricanes – Harvey, Irma and Maria – came in quick succession and devastated a wide swath of the Texas Gulf Coast, much of Florida from the Keys to Jacksonville, numerous islands in the Caribbean and, perhaps worst of all, Puerto Rico. The fifty-plus inches of rain in Houston put about a third of that city under water at the height of the storm.  The subsequent flattening of the Keys and near-complete collapse of the electric grid on Puerto Rico will make for a very long recovery in all of these locales. It also guarantees a steady and significant flow of FEMA money to these hard-hit areas.

Yet even as the US southeast suffered some of the worst hurricane damage in many years, the economy continues to hum along and the stock market keeps breaking new records. There are probably a number of reasons why the economy continues to perform so well. High on that list is Congress’s push to implement tax reform.

You might think that, after three tries and as many failures to repeal Obamacare, the markets might be a little leery of the current attempt to reform the tax system. But one look at the Dow Jones suggests otherwise. The markets seem to believe that, past failures notwithstanding, the Republican majorities in the House and Senate and a Republican Chief Executive are all that’s needed to get some sort of tax reform across the finish line. It also doesn’t hurt that the primary investors in the markets – notably the billionaire class – like the tax reform proposal a lot.

And why shouldn’t they? While these reforms are being touted as mainly benefiting the middle class, the statistics tell a different story. The Atlantic magazine reports that a study by the non-partisan Tax Policy Center finds that that taxpayers in the top 1% of households by income will reap approximately 50% of the tax reform benefits. Whether it is the reduction in the top tax bracket from 39.5% to 35%, the elimination of the alternative minimum tax, or a dramatically lower tax on corporations, the wealthiest Americans will benefit the most. For the half of all taxpayers at the lowest end of the income scale, the proposed tax reform will net them just 10% of the total tax savings.

But there are still some big hurdles that must be cleared before tax reform becomes reality. It’s much easier to cut taxes than it is to pay for them. The current tax reform plan knows exactly where it would like to see taxes cut. But it is vague about how where it will find the money needed to keep these tax cuts from exploding the national debt.

Of course, there is the well-worn promise that tax cuts will lead to faster economic growth and higher overall tax revenues – maybe this time it’ll even work out that way? Then there is the general promise that the plan will eliminate lots of special-interest loop-holes and deductions. But which ones? Every loop-hole seems to have its own lobbying group, and you can bet they are all gearing up to fight any effort to cut their loop-hole. Already, the ingenious Republican plan to eliminate the deduction of state and local taxes (generally highest in the Blue states like California and New York) is running into major pushback from the many Republican Representatives who live in the more conservative districts of those states.

We can expect a lot more of this before the proposed tax reform plan ever passes, if indeed it ever does. In the wake of the Obamacare failures and the dubious record of Congressional achievements thus far in 2017, perhaps the markets are being, oh, I don’t know… irrationally exuberant? We will know soon enough. Meanwhile, it sure does feel good to see the Dow zoom ever higher – above 22,500 as I write this article. How much longer can it last? My prediction – at least as long as the tax reform plan seems like it might actually pass. 

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