May 20, 2019
Now that tax season has passed, it’s a good time to look at the performance of President Trump’s tax reforms.
Prior to him taking office, the corporate tax structure in the U.S. had plenty of firms shifting profits overseas and parking them there as long as possible. The 35-percent tax rate on domestic corporate income that American corporations are charged is among the highest in the world.
Under President Trump’s new tax laws, firms are allowed to bring overseas cash back to the U.S. and only charged a one-time fee – it’s known as repatriation.
Well, the firms that wanted to do it have done it already. Thus, we cannot count on that activity to pump up the stock market any longer. Repatriation dividends and stock buyback activity is likely done (or close to it).
This activity also affected the treasury market. Repatriated overseas cash was heavily invested in U.S. T-bills, which later had to be sold so cash could reenter the U.S. banking system.
The sales occurred at the same time that other forces impacted short-term interest rates, all of which likely contributed to last year’s volatility in interest rates.
In any case, these effects are likely ending. The activity provided a tailwind in the recent past, but it’s done now – another bullish factor disappearing.
We recently hit an all-time high in the market, and perhaps repatriation had something to do with it. But don’t expect much more because the well is drying up.
Add it all up, and President Trump’s tax reforms should be considered successful because they brought home a lot of taxable corporate revenue that otherwise would have stayed abroad. Yes, the party may be over. But it was good that it happened at all.