Market Is Discounting Tax Reform, Say CEOs

Equity markets have rallied strongly since the election last year. However, tax reform is not built into the expectations yet, and passage of a bill may give markets another boost, according to CEOs of top U.S. financial firms.

“If nothing gets done on the corporate tax, that’ll be a big disappointment,” said James Gorman, chairman and CEO of Morgan Stanley.

“Even if it is not built in, that’ll take a lot of energy out of the market,” he warned during a panel discussion at the annual meeting of the Institute of International Finance (IIF) in Washington on Oct. 13

President Donald Trump and Republicans want to get a tax reform bill passed by the end of the year. However, the Congress could disappoint the business world and the stock market.

The United States has the highest corporate income tax rate among developed nations.

According to the tax reform plan announced by the Trump administration, the top corporate tax rate will be cut from 35 percent to 20 percent. This is below the 22.5 percent average worldwide corporate tax rate.

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Trump’s promises, including tax reform and deregulation, have raised business optimism since the election and encouraged companies to invest and hire in the United States. Business has already seen significant efforts at deregulation by the Trump administration.

Despite rising business optimism, however, markets are still pessimistic about the chances of the tax reform bill.

“Market is discounting tax reform,” said Laurence Fink, chairman and CEO of BlackRock. “If we do the tax reform, the market will have another leg up.”

“We must get it done. We need to simplify, we need to be more competitive, we need to modernize it,” Fink said at the IIF panel.

He believes U.S. stocks trade at a premium when compared with equity markets of other countries, because of the quality of U.S. companies.

“If we had a good modern tax policy with an effective tax rate that is substantially lower than where it is … I think the U.S. equity market will be trading at an even bigger premium.”

The Dow Jones Industrial Average has soared nearly 25 percent since the election, trading at all-time highs in 2017.

“The U.S. has gained more than 5.2 trillion dollars in Stock Market Value since Election Day!” wrote Donald Trump on Twitter on Oct. 16.

According to James Gorman, strong fundamentals and positive earnings have lifted the market this year. “It is not a surprise. The economy is doing better. Earnings are doing better. So at the same multiple, the market is going to do better,” he explained.

Cash Trapped Overseas

A more competitive tax system will attract more investment in the country, which will eventually drive jobs and wage growth, according to Jamie Dimon, chairman and CEO of JPMorgan Chase.

“Four trillion dollars have been reinvested overseas,” he said at the IIF panel. “A big chunk of it might have been brought back, had it been free to come back here.”

Companies prefer to keep their money offshore rather than reinvesting it back in the United States under the current worldwide system, which taxes foreign earnings as soon as they are repatriated.

The tax reform plan proposes a shift from a worldwide tax system to a territorial tax system to prevent double taxation of foreign income and create a level playing field for American corporations.

“Building a plant here versus building a plant in a jurisdiction of 15 percent is a 50 percent return on equity difference,” Dimon said.

The U.S. tax system also puts American companies at a disadvantage in the global mergers and acquisitions market.

The United States has lost nearly 5,000 companies and $510 billion in business assets in the last 12 years, according to a study released by advisory firm Ernst & Young (EY).

The EY report estimates that with a 20 percent corporate income tax rate, U.S. companies could have been a net acquirer in cross-border mergers and acquisitions.

Fixing Dodd-Frank Is Critical

Bank executives also call for regulatory relief. Although U.S. banks are better capitalized today, they believe fixing Dodd-Frank is critical to economic growth.

“We don’t need to redo and rewrite all the rules,” said Gorman. “We just need to make some sensible changes that enable this financial system to be as competitive as it needs to be.”

Gorman said it makes sense to have mechanisms like stress tests and periodic reviews to avoid a financial crisis.

“The question is, what should the periodic review look like? In our case it is 45,000 pages,” he said.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a complex set of banking regulations, enacted in 2010 by the Obama administration that is designed to prevent a repeat of the 2008 financial crisis. But the act added layers of complexity to the financial regulatory structure, increased regulatory costs, and affected the economy in negative ways, according to industry experts.

“No major companies are asking for a re-write of Dodd-Frank,” said Dimon.

But a calibration is needed, he said. “Companies spend billions of dollars, and we don’t see the positive benefit to the U.S. government.”

The legislation, which aimed to end the idea of “too big to fail,” has instead hurt small banks, small businesses, and consumers.

More than 900 community banks have merged or failed in the last three years, according to estimates.

From The Epoch Times

 
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