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Tax Cuts to Boost GDP: How Much, For How Long?

Mark Vickery
Whether companies put their tax cut windfalls to work to grow their businesses or merely turn them over to shareholders via buybacks and dividend payments, either way it's good for the stock market.

Wednesday, December 20, 2017

Ahead of today’s opening bell, the Dow Jones Industrial Average is trading up another 100 points as the market expects Congress’ massive tax bill to pass both houses and wind up on President Trump’s desk today. This “pricing in” of the tax cut passage seems to haver no end in sight: the Dow has risen nearly 5000 points in the past year, roughly 7000 points since Trump was elected.

The question for 2018 is: How high can market indexes like the Dow be expected to rise? After all, the effects of the massive corporate tax cut from 35% to 21% have yet to be implemented — all this “pricing in” remains speculative until action is taken.

Clearly, this major legislation will boost growth, and whether it does so because companies put their tax cut windfalls to work to grow their businesses or merely turn them over to shareholders via buybacks and dividend payments, either way it’s good for the stock market. But how much will growth be boosted, and for how long? That’s the issue analysts are grappling with here at the end of calendar 2017.

A company like FedEx FDX — trading up in today’s pre-market following yesterday afternoon’s Q2 earnings and sales beat — has already indicated it will increase spending on its various logistics and delivery businesses with the windfall payout the tax cut will grant. This, in turn, could bolster fortunes for goods and services companies who supply FedEx. Longer-term, this would point toward growth not only on FedEx’s bottom line, but in GDP overall.

Other companies, like Coca Cola KO for instance, have already indicated it will simply reward shareholders with what it reaps from the coming tax cuts. At first glance this makes Congress’ efforts on this bill look fairly inessential — after all, corporate profits have been enjoying record earnings quarters for a while now; there was no real need to prime the pump like this.

But, whether or not you believe in supply-side economics, the “wealth effect” investors will feel from these increased dividends and share-price backstops will likely increase consumption, drive up retail prices and generate GDP growth all by itself. It may not be a “rising tide lifts all boats” scenario, but stock market participants necessarily see this tax bill as a win-win.

Mark Vickery
Senior Editor

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