The "Christmas gift" that Trump promised to the American people has finally been delivered today!
On the 20th (local time), the U.S. Senate passed the "most aggressive tax cut bill in U.S. history" with a 51-48 vote, and the House of Representatives followed with a 224-201 vote. Now, only a signature from Trump is needed for it to become law.
Following the passage of the tax reform bill, Trump issued a statement calling this historic legislation an extraordinary victory for American families, workers, and businesses. He stated that the unemployment rate will continue to fall, the stock market has hit record highs, workers' wages will soon rise, and through tax cuts, powerful momentum will be injected into the U.S. economy.
So, according to the final version of the Republican tax reform plan, which taxes were actually cut? The following outlines the differences between the final Republican tax reform bill and the current tax system.
What has changed in the tax reform?
What is the impact of the tax reform?
1. Corporate Tax
New Tax Law: Reduced from 35% to 21%, effective in 2018. The scale of the tax cut is quite significant for businesses.
Impact: According to estimates by the Tax Policy Center (TPC), the tax reform is expected to boost corporate profits, potentially reducing the taxes payable by businesses by nearly $2 trillion over the next decade, which is undoubtedly beneficial for large U.S.-listed companies. At the same time, the major corporate tax cuts will also make the U.S. more attractive for the repatriation of overseas businesses.
2. Individual Income Tax
New Tax Law: Individual income tax maintains seven tax brackets, but the tax rate for each bracket is reduced.
(Overview of tax cuts for typical U.S. states and households)
Impact: Personal disposable income will increase, which is conducive to personal consumption behavior. Since 67% of U.S. GDP comes from personal consumption, the reduction in individual income tax rates may be reflected in future growth in personal spending.
3. Estate Tax
New Tax Law: The estate tax exemption threshold has been increased from the original $5.5 million to $11 million.
Impact: The doubling of the estate tax exemption will intensify the immigration of wealthy, high-net-worth individuals and families from around the world to the United States.
4. Overseas Corporate Profits
This part is directly beneficial to the U.S. dollar. Currently, if U.S. companies repatriate overseas profits to the U.S., they must pay a 35% tax. New Tax Law: 15.5% for cash and 8% for non-cash assets.
This can be compared to the 2004 "American Jobs Creation Act," which also encouraged the repatriation of overseas profits through tax cuts. The difference is that the 2004 act reduced the rate to 5.25%. While the scale of this round is not as large as the previous one, after more than a decade of accumulation, the current volume of overseas profits is enormous. Regarding the 2004 instance, only $300 billion was repatriated, yet the U.S. dollar appreciated by 15%.
Impact: According to 2015 statistics, U.S. overseas retained earnings have reached $2.5 trillion. Once repatriated due to lower tax rates, it will increase the demand for the U.S. dollar in the short term, causing the exchange rate to rise. In the medium to long term, these funds will increase investment, create jobs, promote re-industrialization, thereby driving economic growth, reducing deficits, and allowing the economy to enter a virtuous cycle.
Asset Allocation Strategy
With the implementation of the tax cut plan, the U.S. economy will receive strong support for consumption and investment growth, and its economic performance is likely to outperform the rest of the world. At that time, the performance of its asset prices may also, supported by economic fundamentals, be superior to the Chinese market.
Allocation Strategy:
U.S. Dollar: From a fundamental perspective, coupled with U.S. interest rate hikes, it is positive in the medium to long term. After the tax reform, global capital will flow back to the U.S., and the U.S. dollar is likely to appreciate; increasing holdings of U.S. dollar assets may be the general trend.
U.S. Real Estate: The new tax law doubles the estate tax exemption. This is particularly important for Chinese people. Leaving real estate to children and grandchildren is a traditional concept for Chinese people, but the U.S. estate tax is very high, causing many Chinese people to be unable to leave real estate to their descendants. The new bill is indeed good news for the Chinese community.
U.S. Stocks: They may not necessarily rise in the short term because the market may have already priced in the news. However, in the medium to long term, the benefits of tax reform will permeate all aspects of the economy and businesses, which will inevitably be reflected in corporate earnings reports and ultimately in stock prices.
Future family asset allocation will inevitably move towards diversification, one aspect of which is global allocation. The U.S. tax reform is not just shaking the economy of one country, but the global economy and the individual assets associated with it. Understand the impact of U.S. tax reform to avoid the risks it brings as much as possible...
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