That being said, the world is now quite different than it was on November 8. How has this reality affected our companies? In short, not much, but let’s review some of the possible “talking points” involving the new administration’s policies. Keep in mind that all of these proposals are, for now, just media speculation and Sunday talk show fodder. But let’s tally up the potential pros and cons.
Deregulation - The new administration, and the Republican-controlled congress, are on record intending to reduce business regulation, and in general to create a more business-friendly climate than existed under the previous administration. Whether those intentions actually translate into greater business activity remains to be seen.
GDP and inflation - If we tally up the current proposals, we come up with two modest positives, one modest negative, and several minimal impacts. That doesn’t mean that the actual proposals, when they are detailed and make their way through the political process, won’t come out quite differently, but for now, it’s more good than bad. Rather than obsess over the latest news coming from Washington or Palm Beach, my advice to our co-business owners is to keep an eye on consumer spending, both here and abroad. That’s where our cash streams, and their trajectory, will be determined.
Corporate tax reform - At first glance, the new administration’s explicit goal of lowering US corporate tax rates to around 20% or so is clearly a positive. Nominal US corporate tax rates are among the highest in the developed world, and this measure is seen as a way to boost US investment spending, as well as get some of that cash stored abroad by US corporations back into the US. That’s all good, and the SVD portfolios do own a number of companies with tax rates in the 30s, including some of the nation’s largest telcos and utilities. Were their tax rates to decline materially, that would free up a great deal of cash for further investment and shareholder payments.
Ahh, but there’s a rub. To offset the lower flows coming into the US Treasury, administration officials are apparently considering getting rid of or significantly lowering the tax deductibility of interest payments. (For over a century, the US tax code has encouraged companies to take on debt by making payments to bond holders tax deductible. In contrast, profits distributed to equity holders (dividends) are only made after taxes have been paid. The consequence has been to structurally disadvantage dividend collectors.
For the complete analysis, including Federated Investors' perspective on the proposed Border Adjustment Tax (BAT), immigration reform and other topics, download Federated Investors complete commentary. Or, review Nuveen's views on where to find value in 2017.
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Read Federated Investor's full commentary here.