Balance Sheet vs. Income Statement Effects
“It’s too soon to tell.”
–Chinese premier Mao Zedong in the late 1940’s, when he was asked what he thought about The French Revolution.
I know what Mao Zedong would have said about the gargantuan, $1.3 trillion tax reform bill just passed by the Republicans (zero Democrats voted in favor).
In truth, it’s likely to take a couple of tax or even business cycles before the effects are clear.
In other words . . . years.
As bad as the early press is, I do see one mitigating circumstance — assuming it doesn’t suddenly go “poof!”
That is, the pronounced wealth effect rippling through the middle and upper echelons of the U.S. economy right now, thanks to the record stock market (never mind various, dubious sideshows, like the current mania for Bitcoin and other so-called crypto-currencies).
“Trump Bump?”
To see how such gains might play out, imagine a middle-aged, middle class couple who has managed to squirrel away a couple hundred grand in their 401(k) or other retirement plans.
Call it $300k.
With the stock market up over 30% since Trump was elected, those retirement accounts suddenly may be worth closer to $400k — a $100k pop.
That’s what economists call “the wealth effect.”
Change in Itemized Deductions
Now imagine that that same taxpayer lives in New York or California — both high-tax states — and owns a more expensive area home with a commensurately bigger mortgage, and larger property tax and interest payments.
Once the dust settles, imagine that someone with that profile gets hit with a 20% tax hike as a result of the new tax law, due to newly-limited itemized deductions (farfetched, but just suppose).
If they formerly paid $15k – $20k in federal taxes, now they’ll pay another $3k to $4k.
Not great for any household’s cash flow — but a drop in the bucket compared to the big jump in their 401k.
Paper Profits
In fact, the bigger potential negative is long-term.
That’s when any stock market gains may prove to be ephemeral, while the yearly tax bump becomes entrenched.
P.S.: And yes, I realize this is a totally amoral, just-the-economics analysis of the new tax laws.
See also, “Term of the Day: “SALT Deductions.”
