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Forget Trickle-Down Tax Cuts – Here’s Where the Real Money Is

3 | By Shah Gilani

Here’s a real shocker… The House and Senate proposed their versions of tax reform as a “middle-class miracle.” This is the same proposal that’s nothing more than tax cuts for corporations whose massive savings are supposed to trickle down to benefit the middle class and all Americans.

That would be a real miracle. But it’s not going to happen.

Corporations aren’t going to spend their tax cut windfalls hiring more workers, or raising wages, or on massive capital improvements.

They’re going to spend their billions on buying back their own shares, on special dividends, on technology to reduce human labor and liabilities, on mergers and acquisitions, and on more technology to cut more costs as they expand.

There’s only one way to turn unfair tax cuts into a personal miracle.

Here’s the truth about this tax reform miracle, and how to play the continuing market melt-up…

There’s a Miracle, but It’s Not for the Middle Class

The middle class, depending on how they’re defined, won’t benefit by “tax reform.” There isn’t any. Instead, they’re supposed to get their miracle via marginally lower tax bracket threshold levels, whether they remain at seven levels or are reduced to four.

Forget the “filing on a postcard” nonsense that would have necessitated real, extensive, and honest tax reform.

So-called middle-class tax cuts have already been spent on rising healthcare costs and increasing insurance premiums. And the middle class has more increases to look forward to if the Senate’s version of tax reform wins out and the ACA’s individual mandate is repealed (it mandates individuals get insurance or pay a penalty).

Sure, not having to pay a penalty can be considered a savings, if you don’t get insurance. And the government not having to subsidize insured policyholders who can’t afford it would “save” $338 billion over 10 years, according to the Congressional Budget Office. Those cuts help offset lost revenue from tax cuts for corporations, by the way. Then, if more Americans opt out of insurance plans, the cost for remaining families and individuals goes up.

So much for that miracle.

Tax cuts for the middle class will be negatively offset by the potential elimination of deductibility of student loan interest and state and local taxes, which are a big deal to middle-income families living where the good jobs are in high tax cities and states, along with other negative impacts.

So, what would people actually save?

According to the New York Times (not my favorite source, but a credible analysis nonetheless), “People across income brackets would see savings from the Senate plan in 2018. But for many in the middle class, the savings would be relatively small.”

Those savings by income bracket are…

  • Under $30,000: $180
  • $30,000-$50,000: $600
  • $50,000-$75,000: $976
  • $75,000-$100,000: $1,277
  • $100,000-$200,000: $2,113
  • $200,000-$500,000: $4,121
  • More than $500,000: $28,313

Under the House bill about half of middle-class families would pay more in taxes in 2026, says the Times.

The Washington Post explains, according to the non-partisan Joint Committee on Taxation, “80 percent of Americans earning $50,000 to $75,000 would get a sizable reduction in their taxes by 2019 (the average cut would be about $850, according to the Tax Policy Center). Overall, about 62 percent of Americans would pay at least $100 less in taxes in 2019. But the tax cuts for families don’t last forever. The Senate bill has the lower rates for individuals going away after 2025.”

That’s some middle-class miracle. If you make less than $200,000, your annual “savings” probably won’t pay two or maybe three months’ worth of health insurance premiums.

Where to Find the Real Windfall

Corporations, on the other hand, will likely get the corporate statutory top rate of 35% reduced to 20%.

Now, that’s a windfall.

Not that most corporations pay the top 35% rate. They don’t.

According to an analysis of 258 Fortune 500 companies, from 2008 through 2015, by The Institute for Taxation and Economic policy:

“During the 2008-2015 period, eight-year effective tax rates for the 258 companies ranged from a low of -27.9 percent to a high of 47.3 percent….”

“100 of the 258 companies paid zero or less in federal income taxes in at least one year from 2008 to 2015. Fifty-eight of these companies enjoyed multiple no-tax years, bringing the total number of no-tax years to 246. In the years they paid no income tax, these 100 companies earned $336 billion in pretax U.S. profits. But instead of paying $118 billion in federal income taxes, as the 35 percent corporate tax rate requires, these companies generated so many excess tax breaks that they reported negative taxes (often receiving tax rebate checks from the U.S. Treasury), totaling $32.1 billion. These companies’ “negative tax rates” mean that they made more after taxes than before taxes in those no-tax years…”

“Tax subsidies for the 258 companies over the eight years totaled a staggering $527 billion… [That amount is] the difference between what the companies would have paid if their tax bills equaled 35 percent of their profits and what they actually paid.”

Lowering the corporate top rate to 20% only makes sense if tax subsidies are eliminated, if offshore sheltering is eliminated, if accelerated depreciation is reined in, if stock options must be accounted for honestly, if “manufacturing” is properly defined, and if end-arounds of the corporate alternative minimum taxation rules are eliminated.

All that requires massive tax reform. And that won’t happen in our lifetimes.

So these quick, chop-chop corporate tax cuts are touted as miracle-making, trickle-down benefits the whole economy will prosper by.

Really, that would be a miracle.

Here’s What You Do

What’s going to happen next is that tax cuts will flood already flush corporations.

They’ll enjoy a 10-year run of record low capital costs, record profit margins, and record profits (especially at giant tech companies) with even more ways to raise cheap capital, fatter profit margins, more profits, and more cash to plow back into their pockets.

By pockets, I mean their stock options packages, the price of their stocks, and the dividends they throw off. It will create more and more momentum, lifting markets higher and higher.

That’s the “miracle.”

Riding the market higher is the only way middle-class Americans are going to get their share. Now and moving forward, if you aren’t in the market, you’re losing money.

That’s exactly why my Zenith Trading Circle members are following my recommendations, week after week.

Members like Stephen W. of Grantham, who made 125% on one trade. Or Michael C. of Norcross, who made over $1200 on our FOSL play, calling the process “very simple, with only a few clicks.”

With everything we now know to be almost certainty in 2018, there’s no excuse not to do everything you can to learn how to get into the market and play it smart. Click here to see more about what we’ve accomplished with Zenith so far.

In the meantime, I’ll be here, sharing what I know to be true whenever I can.

Sincerely,

Shah

3 Responses to Forget Trickle-Down Tax Cuts – Here’s Where the Real Money Is

  1. roslyn goldner says:

    Dear Shah,

    I want to thank you for putting some of the facts out in a clear, unbiased manner. I, and I’d
    guess you are also concerned about a tax reduction in the face of mounting debt that will mount further in our need to support our military ad help all sections of our country in dealing with the devastations due to hurricanes and other events out of human control.

    Your insights re where and when to invest are superb, ad thanks for sharing these with us.

  2. Sutherland MacLean says:

    Your analysis of the new tax bill reveals some flaws. The happy ending I predict is that the 20% rate will double past revenues to the gov. due to exploding prosperity, which is far superior to the leftist-communistic party of statism, higher taxes, and economic stagnation given us by the democrat left.

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