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Moody's Pours Cold Water On Trump Tax Reform

Now according to many in Australia, we should be following Donald Trump’s tax cuts, especially for business.

To many in the US and in politics and in business in Australia the Trump tax cuts will have a powerful impact on the US and global economies during the coming year (but if that is the case can they explain why the US dollar is at three year lows and down more than 13% since President Trump’s election?).

Jobs and growth seems to be the mantra from cheer squads and that’s why we should be joining Trump and cutting taxes (and what about imposing tariffs and restricting migration?).

But not everyone in the US believes the tax cuts will be good for America. In fact economists at the Moody’s ratings agency are lukewarm on the subject.

Moody’s analysts believe the tax law will only have a limited effect on the US economy, as companies are unlikely to spend their tax savings on growth initiatives while the tax cut for the wealthy will not trickle down. Moody’s analysts made their comments in a list of Frequently Asked Questions on the tax bill that was published last Thursday. (A report here https://www.thefiscaltimes.com/2018/01/25/Tax-Cuts-Will-Have-Limited-Impact-Economy-Moody-s-Says) Moody’s analysts led by Rebecca Karnovitz, warn of negative impacts for federal US debt, local governments, utilities and homeowners. For example they point out that:

“First, with the US economy close to full employment, the extent to which any fiscal stimulus can substantially increase growth is limited…."“A significant reduction of federal tax receipts will be credit negative for the US government, while the impact on US companies will depend on how they deploy cash windfalls from the corporate tax cut."

"Second, we do not expect corporate tax cuts to lead to a meaningful boost in business investment, which has remained tepid despite a supportive economic environment characterized by low interest rates, low inflation and strong corporate earnings. We believe it is likely that US nonfinancial corporates will prioritize activities such as share buybacks, M&A and paying down existing debt over investment beyond that already planned.

"Third, while we see household consumption as the primary channel through which the tax cuts will impact growth, this will be muted. More than three quarters of the $1.1 trillion of individual tax cuts over 10 years is expected to go to those making more than $200,000 a year in taxable income. This group represents 5% of all taxpayers. These individuals are likely to spend a relatively small portion of their tax savings on current consumption, limiting the impact on the economy.”

Moody’s analysts the US government faces a faster rise in debt costs than previously believed because of a combination of the larger deficits resulting from the tax bill; the Federal Reserve’s efforts to normalise monetary policy by raising interest rates and unwinding its balance sheet: ““As a result of the legislation, we expect deficits to widen faster than under our pre-passage baseline, resulting in faster accumulation of federal debt, a component of general government debt,” said Karnovitz.

For companies , the bill will be credit-positive, if they use cash savings to reduce debt or make disciplined acquisitions, said Karnovitz. If they aggressively increase shareholder rewards, it would be credit-negative. If they opt to hold a lot of cash on their balance sheets, it could be either.

And that’s where research by Marketwatch.com last week is interesting (https://www.marketwatch.com/story/share-buybacks-spike-dropping-a-strong-hint-at-what-ceos-plan-to-do-with-tax-savings-2017-12-08): “Long-term investors and workers hoping that the tax overhaul and repatriation holiday will encourage investment in growth and a rise in wages should brace for disappointment. A spike in share buyback and special dividend announcements in the past 10 days reveals that companies are more likely to use any money saved on an all-too-familiar item: shareholder returns, Marketwatch reports in detailing the $US62 billion of buyback plans from just 10 companies.

We don’t hear about these plans here from media outlets who seem unable to do the necessary legwork on what corporate America will be doing with the gains from the tax bills. But they will not be doing what Scott Morrison, Malcolm Turnbull and the rest of the cheer squad for Australian company tax cuts claim is happening - far from it.

States, especially New York, California and other high tax locations will suffer because of the $US10,000 cap on taxpayers being able to deduct state and local taxes from the Federal tax bill. Moody’s warns that this could see taxpayers and consumers in these states cut their discretionary spending, thereby reducing state and local sales tax income. Sales tax revenue accounts for an average 40% of state revenues, according to Moody’s.

Home prices will likely be hurt, too, as the lower cap on the mortgage-interest deduction reduces the tax incentive for home ownership at the higher end of the housing market.

“Some local markets could face meaningfully slower gains or even modest declines in values, a negative for mortgage performance,” said the analyst.

For utilities Power, water, gas companies), meanwhile, the lower tax rate means they will receive less money from customers, while the loss of bonus depreciation will reduce tax deferrals. “We expect that most utilities will attempt to offset negative financial implications of the tax bill through regulatory channels or through changes in corporate financial policies,” said the report.

This is analysis we have not seen in Australia about the impact of the US tax cuts - and Moody’s work is considered to be top notch and well supported by the ratings group’s extensive data base.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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