President's Blog: Pay Attention!

9/13/2017

And your clients will be asking you questions about taxes on a regular basis now that Congress is back in session and President Donald Trump has demanded it act on tax reform. 

 

There are two types of investors – those who pay attention to current events and those who don’t. Advisors will get unsolicited calls from those investors who are paying attention (”What should I do?!?!”) but advisors also need to make phone calls to those investors who are not paying attention but should be. 

 

The reform of the U.S. tax code, an action promised by President Trump during his campaign, reaches front and center now that reform of the American health care system has been put on hold by the inability to come up with a system the majority of Congress could agree to. President Trump thinks tax reform will be easier to accomplish than health care reform, since there is always an agreement among Americans that they pay too much in taxes.

 

That is especially true of corporate America, which appears to be the big winner in early talks regarding tax reform. President Trump has talked about reducing the tax bite for corporations from a top rate of 35 percent to a top rate of 15 percent.

 

The theory is that a lower tax rate for corporations would work as a boost to the American economy, but the boost initially would come in stock market prices. Any tax reform that reduces corporate taxes is expected to result in a significant upward movement in a stock market that is already at record highs. 

 

Investors heavily invested in the stock market will be anxious to know how to manipulate the promise of corporate tax cuts into increased personal profits from stock market purchases and sales. Advisors need to have a primer ready for all investors to explain to them just how they should proceed as each step of the tax reform process takes place. 

 

The problem with tax reform is similar to the problem that occurred with health care reform. It is a step-by-step process, and there will be daily reports indicating positive or negative movement of the reform program. Each daily report will produce a reverberation in the stock market, and advisors need to have some plan to solidify an investor’s portfolio to guard against the fluctuations that will come. 

 

The tax reform is going to be argued at the same time Congress is considering the 2018 Congressional Budget, which is likely to produce arguments to make the health care reform discussion seem like a mild discourse. Since personal income tax is responsible for 47 percent of federal revenues and corporate taxes provide 11 percent, the budget conversation and the tax reform argument will collide into an explosion of confusion for investors.

 

Advisors need to be prepared to discuss all of this with the well-informed investor and the not informed investor. These conversations could take a long while, but could be profitable for both the investor and the advisor.