A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)
For those of us waking up every morning to the financial news, 2017 is starting out as a promising year mixed with illusion and confusion. As highlighted in Ed Yardeni’s newsletter, the S&P 500 exemplifies the prevailing bullish sentiment after the elections, rising to a new record high of 2276.98 on January 6 (See graph I below). However, skeptics point-out that the market is naively betting that the incoming administration’s economic policies will be implemented swiftly and that they will have the desired effect. Implementing new policies will often require legislation, so we could start comparing the President Elect’s views with Capitol Hill’s. Last summer House Speaker Paul Ryan unveiled the party’s tax reform plan in a report called “A Better Way”. It called for lowering the top statutory corporate tax rate from 35% to 20%. It would terminate the tax deductibility of net interest expenses, but would allow for immediate expensing of capital spending. Ryan explained their rationale; “Allowing investments to be immediately written off provides a greater incentive to invest than is provided through interest deductions under current law”. While on the campaign trail last year, Trump proposed a lower tax rate, boasting that “no American company will pay more than 15% off their business income in taxes”. Under Trump’s plan, businesses could either expense equipment or take a net interest deduction. Which would work better? Let’s look at the data. According to the Bureau of Economic Analysis (BEA) the S&P 500 corporations had interest expense of $19.87 per share during 2015, which amounted to only 8.8% of their EBITDA. The BEA also reported that monetary interest paid by nonfinancial corporations totaled $486.6 billion during 2015, and that spending on equipment totaled $1.05 trillion during Q3-2016. It would seem obvious that deducting equipment outlays rather than interest expense would serve as a greater stimulus. However it remains to be seen if it is as obvious for President Trump, and if the Oval Office and the Legislature will see eye to eye on this and other economic matters.
by Myrna Rivera, CIMA®
Founder & Chief Executive Officer
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