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 from "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.
Learn How to Turn $500 into $1 Million: This Sunday School teacher's "retirement career" made him a millionaire. This book will teach you how you can do it too. Claim your FREE copy…
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more increases to look forward to if the Senate's version of tax reform wins out and the ACA's individual mandate is repealed (it mandates individuals get insurance or pay a penalty).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...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
- 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 nonpartisan 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.
You can take down extraordinary gains when you understand how Wall Street really works. Shah's been on the inside, and in his free, twice-weekly Wall Street Insights & Indictments, he reveals how to trade the bigger picture for maximum returns. To get his insight and start beating the Street, just click here.
The post Forget Trickle-Down Tax Cuts; Here's Where the Real Money Is appeared first on Wall Street Insights & Indictments.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.