“It’s very quickly discounted… At the stock level, the tax opportunities are transitory at best. I think it’s a great discussion, but I don’t think you’re going to make money. I don’t think it’s a source of alpha.”
Instead of focusing on tax opportunities, one of the market’s favorite trend underwriting the “Trump rally” that broke out after the election, Lee prefers CRAP — computers, resources, American banks, and phone carriers — in 2017.
But Lee’s comments are just the latest of those that doubt how much of a boost a major cut in taxes would be for US corporates and the economy.
Last week, we highlighted commentary from Ben Inker at GMO, who said, “it is neither theoretically clear that it should be nor empirically obvious that tax rate changes have been particularly important to profitability.”
“While tax rates are currently at about their lowest levels and corporate profits just off of their highest, tax rates did their falling in the 1980s and the profit spike was a good 20 years later,” Inker added.
“Given that lag, it strains credibility to argue that the tax rate fall was an important driver of the rising profitability. What you would want to see is a relationship such that when tax rates fall over a period, profits rise. This does not seem to have been the case, as the correlation between tax rate change and profit change as a percent of GDP is positive over 3-, 5-, 7-, and 10-year periods. This means that tax rate falls have generally been associated with falling, not rising, profits.” (Emphasis added.)
Shortly after the election, research out of Goldman Sachs noted that for each percentage point taken off S&P 500 taxes in 2018, $1.50 would be added to earnings per share. But to Lee’s point, these benefits are quickly discounted by markets, and the speed at which stocks rallied after the election should make clear.
The path forward for a tax overhaul, however, still remains murky. On Thursday, Trump said an announcement that will be “phenomenal in terms of tax” is going to be made “over the next two or three weeks.”
And while the long-term benefits to corporate profitability and the economy at large from a tax cut have been questioned, so too have specific elements of the House Republican tax proposal that is expected to serve as a template for a Trump-supported plan.
Speaking at the All Markets Summit on Wednesday, Sen. David Perdue (R-GA) said the border-adjustment tax — which Trump has called “too complicated” — is a “regressive tax, it hammers low-income and middle-income consumers, [and] it doesn’t foster growth.”
Lower corporate taxes, as you’d expect, were cheered by the investor and executive classes as the kinds of initiatives that are needed to, using House Ways and Means Committee Chair Kevin Brady’s (R-TX) words, “leapfrog” the US ahead of the rest of the world.
But the the particulars of this plan clearly pose challenges politically.
And while markets and politics are, to this point, seemingly forging their own paths, as an investment thesis it seems lower taxes aren’t the straightforward money-maker some might’ve initially believed.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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