After fizzling out in summer, Trump trade resurfaced with the long-awaited tax cut talks last month. In fact, the President proposed the biggest U.S. tax overhaul in three decades that would make America more competitive.
The plan calls for lowering corporate income tax rates from 35% to 20% and reducing the number of income tax brackets from seven to three. While the top income tax rate will be cut from 39.6% to 35%, the bottom tax rate will rise from 10% to 12%. Additionally, the Trump administration proposed a shift from the current 35% worldwide tax system to a territorial system, allowing companies to send their offshore profits back to the United States without incurring extra taxes.
The enthusiasm strengthened last week following the Senate’s passage of the $1.4 trillion budget resolution that paves way for tax cuts later this year or early next year. Though proposed tax cuts are expected to add up to $1.5 trillion to the deficit over the next 10 years, it will create an economic surge, boosting job growth in manufacturing and other sectors. Treasury Secretary Steven Mnuchin claims that increased growth will generate new tax revenues that it will reduce deficits and help pay down the nation’s $20 trillion debt.
Investors should note that tax reform is a key catalyst to keep the bull market alive. As such, hopes of a major tax overhaul have sparked a strong rally in the stock market in a month.