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Trump's Tax Plan to Aid Tech Firms, Increase Debt Load for US

The Senate has finally passed the budget blueprint for fiscal 2018, ironing out difficulties in the path of President Trump’s historic tax reform plan. Trump believes that such an opportunity to benefit the middle class by slashing corporate tax rates comes once in a lifetime. Markets rallied after this development as investors believe that a tax cut will boost the U.S. economy over the long term.

Tax Reforms to Boost GDP

The latest report from Trump’s Council of Economic Advisers (CEA) reveals that the new tax plan will drive the economy to new heights. According to the report, a cut in the corporate tax rate from 35% to 20% will lift the annual GDP growth rate to as high as 5%; the projected range lies between 3% and 5%.

As per Business Insider, the U.S. GDP growth rate was 7.4% in 1984, after which it never touched 5%. In fact, since 1980, the rate crossed the 4.5% mark only thrice. It should be noted that with a lower corporate tax rate, companies will accumulate more disposable income to invest in the domestic market and thereby create more jobs. This will pave the way for further economic growth.

Tech & Bank Bigwigs Set to Gain

According to Moody's, as much as $1.3 trillion in cash has been stored by U.S. firms overseas in order to avoid paying the stiff corporate tax rate. The five top cash hoarders in the country — Apple Inc. AAPL, Microsoft Corp. MSFT, Alphabet Inc. GOOG, Cisco Systems, Inc  and Oracle Corp. ORCL  — have stockpiled 88% of their cash outside the country, notes CNNMoney. A cut in rates will encourage these companies to repatriate cash, boosting the U.S. economy substantially.

Banks also bear a huge tax burden. Among all the sectors representing the S&P 1500 index, financials contribute 25% of tax liabilities, per KBW Research. The investment banking firm believes that the tax rate cut will help Bank of America Corp. BAC, JPMorgan Chase & Co. JPM and Wells Fargo & Company WFC boost their earnings by 20%.

Per Howard Silverblatt of S&P Dow Jones Indices, the consumer staples sector paid the second highest taxes in the S&P 500 index last year — at a rate of 29.1%. Thus, lower taxes will massively benefit consumer staples companies like Tyson Foods, Inc. TSN, Unilever PLC UN and Sysco Corp.  SYY. Tyson Foods sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tax Plan Might Increase Debt Burden

There has been a prolonged debate on whether the baby boomers generation will become a major burden for the Social Security system. Baby boomers are all those who were born between 1946 and 1964, accumulating almost 76 million people at present, according to media resources. Media reports also claim that this generation will make it to the list of full retirement benefits by 2031.

Meanwhile, CNBC claims that Trump’s tax reform will lower revenues by $1.5 trillion in the next 10 years for the U.S. government. Investors should know that, according to The Center on Budget and Policy Priorities, out of $3.9 trillion spent in fiscal 2016, more than $3.3 trillion was funded by the government. Hence, only a nominal amount was borrowed.

However, in the coming years, the government will need to borrow more to support Social Security. In other words, Trump’s tax plan to stimulate the domestic economy will increase the debt burden considerably, raising questions about its sustainability.

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Apple Inc. (AAPL): Free Stock Analysis Report
Microsoft Corporation (MSFT): Free Stock Analysis Report
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