The expectation tax reform in the United States will pass through US Congress has already buoyed share markets globally, but are investors getting ahead of themselves?
Probably not, according to Diana Mousina, Senior Economist within AMP Capital’s Multi-Asset Group. Though Mousina does warn investors not overestimate the longer term stimulatory effects the Trump Administration’s tax reform agenda could bring to listed asset prices and the US economy more broadly.
Those hoping for the United States’ economic growth engine to get another material boost might have to wait until next year when more detail on the slated $US 1 trillion infrastructure spend is expected to be forthcoming.
In recent weeks, though, markets have begun to price in a 25 per cent chance that US President Donald Trump’s tax reform package will likely pass through US Congress, Mousina describes.
“We think this [market expectation] is quite low… We still think tax reform will get through and all the signs point to this occurring,” Mousina says.
“While we think tax reform will be positive for the economy, we think the speed at which it impacts the economy might be a bit slower than what markets might be anticipating,” she says.
“On our forecasts we think tax reform might be able to stimulate the economy by about 0.2 to 0.3 per cent over the year… It could be even less around 0.1 to 0.2 per cent,” she says.
The Trump administration’s efforts to roll back regulation in some sectors have been received well and has contributed to the positive direction of US equities.
Further, business surveys have an expectation that proposed corporate tax reform may unlock some spending demand and investment.
The key components of the Trump’s administration’s proposed corporate tax reform are: cutting the top corporate tax rate from 35 per cent to 20 per cent, lower the small business tax rate, repatriation of overseas profits, expensing of new capital investments, limiting interest deductibility by some corporates and elimination of some business credits, Mousina outlines in her recent Econosights
If reforms fail to pass, it’s likely the easier to understand and potentially more popular tax cuts could get through, which could broadly have a more stimulatory effect on the US economy, Mousina highlights.
An immediate outcome of tax reform could be a strengthening US dollar which would put downward pressure on the Australian dollar despite the $A’s current strength thanks to a resurgence in demand for commodities from China.
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