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U.S. Tax Policy Takes Center Stage

Wells Fargo Investment Institute - November 2017

Darrell Cronk, CFA, President of Wells Fargo Investment Institute and Chief Investment Officer for Wealth and Investment Management discusses potential changes to U.S. individual and corporate taxes—and what the changes could mean for investors.

Transcript: U.S. Tax Policy Takes Center Stage

This information is made available with the understanding that Wells Fargo and its affiliates are not engaged in rendering legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that may have tax or legal consequences. 

The last major reform of the U.S. tax code was passed in 1986 under President Ronald Reagan. The goals of the Trump administration to simplify the tax code are largely the same as those three decades ago: reduce the number of tax brackets and allowable deductions while also lowering overall rates. 

As tax policy is debated and negotiated in Washington over the coming weeks and months, U.S. investors are watching closely for key policy choices, including: what the income cutoffs are for the new proposed brackets, whether there will be a bracket for higher-income taxpayers, the size of the child tax credit, possible limits on state and local tax deductions, and the amount that can be invested tax-advantaged in 401(k) plans. 

Lower individual tax rates could give households more cash to spend, potentially benefiting consumer goods and service companies. Housing could be negatively impacted if the mortgage deduction is less than the new standard deduction for many taxpayers. 

Title graphic: Corporate Taxes 

U.S. corporate income tax rates are among the highest in the world. So lowering them would potentially enable U.S. companies to be more competitive globally. We think it’s likely
we will see a corporate tax rate dipping to 25% or lower from the current marginal rate of 35%. Smaller firms would likely benefit more than larger ones from this reduction, just as U.S.-based firms would likely benefit more than multinationals. 

One area where we see some bipartisan support is repatriation of overseas profits, in which multinational companies that have parked their foreign profits overseas bring them back to the U.S. for usage and taxation. Some policymakers have already proposed incentives to encourage companies to repatriate these overseas profits. 

Shareholders of multinationals with large overseas assets, particularly U.S.-based technology companies, are poised to benefit from repatriation. 

In addition, if a corporate tax package includes a deduction for capital spending, that could really boost corporate earnings. 

Title graphic: Investor Implications 

Our modeling of equity market earnings indicates widely different market outcomes, depending on how these policy choices are settled. We expect to narrow down the outcomes as tax negotiations progress. 

Already, though, financial markets are discounting some progress on tax reform. Be sure to follow the Wells Fargo Investment Institute for the latest tax policy developments and investor implications.

General Disclosures 

The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request. 

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