Investors had a lot to digest over this weekend. The sweeping Senate vote in favour of the Republican’s tax cut proposal has put President Trump a step closer to passing his first significant economic reform by year-end.
This major breakthrough in the White House would likely to underpin concerns over the former national security adviser Michael Flynn’s guilty confession in making false statements to the FBI about contacting with Russian counterparts in the 2016 Election. News reported that Flynn would testify that Trump directed him to make contact with the Russians, which will likely bring further investigation on the president’s ‘obstruction of justice’.
The tax reform will bring down corporate tax rate to 20 percent in 2019 from current 35 percent, and unlike the individual provisions, the change would be permanent. The alternative minimum tax (AMT) for individuals will also be raised to lift the income level at which a tax filter would need to use the AMT. There are several business-friendly tax deduction proposals, which would help to reduce tax burdens for corporates and business owners.
The tax cut will not only boost corporate earnings significantly, but will also increase household spending and consumption by large. Once the positive feedback loop is formed, economy will expand at an even faster pace and inflation will likely to pick up too, resulting in rising interest rates. As a result, overseas capital will tend to flow back to the US chasing for yield in forms of investment and repatriations.
Although a generous tax cut would potentially result in as much as $1.3 trillion fiscal deficits in the years to come, but markets tend to enjoy the near term rally without bothering about what’s going to happen a decade from now.
US SPX 500 – Cash
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