The investment implications of tax reform - J.P. Morgan Asset Management
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The investment implications of tax reform

Contributors Dr. David Kelly, John Manley
In brief
  • The 2017 Tax Cuts and Jobs Act should soon be signed into law. While much of the motivation for tax reform has come from a desire to cut corporate taxes, most of the net benefits will accrue to individual taxpayers.
  • For individuals, while upper-income households should see the biggest benefits, a broad reduction in taxation should spur stronger consumer spending growth, particularly in 2018.
  • For corporations, a lower U.S. corporate tax rate along with 100% expensing of capital spending should boost investment, although with the repatriation of overseas earnings mostly flowing to shareholders, the total impact on capital spending will be limited.
  • The combined impact of increased consumer and business spending could boost real GDP growth to 3%+ in 2018 with even lower unemployment, putting upward pressure on wages and inflation and leading the Federal Reserve to raise rates faster than expected. This, alongside rising wage costs, could limit gains in U.S. corporate operating earnings.
  • Tax reform’s long-term impact on productivity growth should be modest and, given the impact of a retiring baby-boom generation in limiting labor force growth, real GDP growth should slow to 2% in 2019 and beyond, leading to higher fiscal deficits.
  • In the near term, a faster-growing U.S. economy and a steady increase in U.S. interest rates suggest a continued tilt towards stocks over bonds. More specifically, small companies should benefit more than large, as should high-tax sectors like banks, telecoms and consumer discretionary stocks. Municipal bonds in high-tax states should see a small positive impact.
The proposed corporate tax cut would put U.S. more in line with average

2017 corporate income tax rate by OECD country

Source: U.S. Congress, OECD, J.P. Morgan Asset Management. Data are as of December 18, 2017.

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