Alexander Green on the GOP Tax Bill and the Paradise Papers

by Samuel Taube, Managing Editor, Investment U

Transcript:

Samuel Taube: Joining us by phone today is Alexander Green, the Chief Investment Strategist of The Oxford Club, and we are talking about the new tax bill, which was unveiled to the public recently. Alex, thanks for joining us again.

Alexander Green: Thanks for having me, Sam.

ST: So what aspects of this GOP tax plan stood out the most to you?

AG: Well, I think it's an enormous positive. Tax reform is long overdue. I am a little disappointed. It's more of a tax cut than real tax reform, but it's a step in the right direction. So let me talk a little bit about what the plan entails as it is now and then talk about how it would positively impact the stock market.

For households, it does a number of things. It collapses the number of marginal income tax brackets from seven to four. The four rates now will be 12%, 25%, 35% and 39.6%, which is still the top rate for people, but only if they earn over $1 million.

It eliminates the alternative minimum tax, doubles the amount of the standard deduction and eliminates the personal exemption - and of course, people who live in high tax states aren't going to like this ­- but it eliminates the state and local tax deduction.

It creates a new tax rate for pass-through businesses, and what it would do is create a 25% tax rate for sole proprietorships, partnerships and S corporations. These are all forms of pass-through businesses.

And they currently pay taxes at the individual rate, but now they'll pay just 25% - but unfortunately only on 30% of their income. The rest they'll pay at the personal income tax rate.

And here's the part that I think is going to spark the biggest increase in economic growth. It lowers the corporate tax rate to 20% from 35% - that's the highest rate in the developed world.

It eliminates most business deductions and credits, and it would implement a one-time repatriation tax on profits held overseas. And of course it would end the estate tax, something that 33 states and even Sweden have already done. So that too is a positive.

ST: I see. So a fairly complex plan, it sounds like. You started to touch on this, but how do you see this affecting the stock market, assuming it becomes law? And how do you see it affecting consumers and businesses?

AG: Well, I should preface these remarks with the fact that, of course, what we actually see signed into law could be quite a bit different from the plan that's been proposed. But it's an enormous positive.

Obviously, when you reduce the corporate tax rate, for instance, it makes it more likely that a foreign corporation will set up a business here or expand operations here.

It makes it more likely that someone will start a business because obviously the simpler and easier you make business formation and expansion - the less friction you have with red tape and other bureaucracy out of Washington - the more businesses you're going to have, and the more businesses are going to thrive.

But I’ll tell you, one of the things I really like about this, which would be a huge plus for the economy, is that the plan as it is now allows for full and immediate expensing for businesses, and that in itself should ignite stronger economic growth because it gives corporations and other businesses a strong incentive to invest in assets that'll grow the business.

So no depreciation schedules and amortization and so forth - full expensing. That's a very positive thing.

ST: I see. Earlier on, you mentioned that there is a one-time repatriation provision to this plan, and I wanted to talk about that in the context of the recent “Paradise Papers” leak, this reveal of all these documents about offshore tax havens.

Do you think that this repatriation provision has what it takes to encourage corporations to bring home some of that $3 trillion in cash that they are holding offshore?

AG: I haven't seen what that rate is going to be, and I don't know if they've even come up with it. But even if they have proposed a specific rate, again, it's all up for negotiation. But yes, it's a positive thing.

Tim Cook, the CEO of Apple, said quite frankly that Apple simply isn't bringing the money back at the punitive rates that the current tax code imposes on businesses. Remember, it’s already been taxed on these profits overseas. Now it’s got to pay another tax to bring it back at 39.6%. Businesses are not willing to do that, and I think for good reason. So it's very much a positive.

And as far as the “Paradise Papers,” it's too soon to know exactly what we're going to learn from that because it was only released on November 5. I know that some companies - Facebook, Apple and others - have been pointed out as already having large offshore accounts, but there's nothing illegal about that.

What we should be doing is making the tax code simple enough, straightforward enough and low enough that businesses don't have this incentive to play this shell game with money held both domestically and overseas. So that's why I think tax simplification is such a positive for businesses and for individuals.

ST: I see. And my last question: What do you think this bill's chances are of becoming law? And if you think it is going to get signed into law, how much do you think it'll vary from the plan that we see today?

AG: I think it'll be pretty close to what it is now. I wouldn't be surprised if, for instance, the state and local tax deduction is put back in there. Perhaps they’ll put a cap on mortgage interest deduction - that might be raised or even eliminated altogether. So I think there'll be some tweaking of it, but I think in broad outline, it will pass along party lines.

I don't expect that you'll see many Democrat votes on it, but I think the Republicans totally whiffed on any type of healthcare reform. They need something going into the 2018 elections to run on. And believe me, I think Warren Buffett said it best: If you're a politician and you can't pass a tax cut, you're probably in the wrong business.

So I would hope that some kind of tax simplification and reduction passes, hopefully by the end of the year, but if not by then, early in 2018. And it will be good for the economy, good for the stock market and good for shareholders.

ST: I see. Seems like a pretty likely outcome. If you would like to stay on top of these trends, check out Alex's Oxford Communiqué newsletter. It combines top-notch investing advice and recommendations. Alex, thanks so much for joining us.

AG: It's always a pleasure, Sam. Thanks for having me.

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