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Investment Perspective: Revolution

| January 02, 2018
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REVOLUTION

One word could describe Donald Trump's presidency: Revolution: Revolution against the "establishment" and "status quo."  Here are a couple of examples

Corporate Tax Rate.  Since 1993, the top corporate tax rate has been 35%, one of the highest in the world. This has forced US companies to expand overseas. Both sides of the political spectrum knew it was a problem, yet nothing was ever done.  Now the rate is 21%, and full expensing of business investment for tax purposes is law. These changes will boost the incentive to invest and operate in the US, leading to more demand for labor.  This is a revolution.

Deduction of State and Local Taxes.  Under the old tax system, tax payers could deduct state income taxes from their taxable federal income. So for high tax states like California (tax rate 13.3%) and New York (12.7%) the effective marginal rate was about 8.0%, not 13.3% or 12.7%, the true cost being carried by taxpayers in other states.

Now taxpayers are limited to $10,000 in state and local tax deductions (with a 37% top federal tax rate). The financial pain of living in high tax states is now exposed. This change, combined with a larger standard deduction, will launch an overdue revolution in the policy choices of high tax states as well as the geographical distribution of business activity.

Government Unions.  The Supreme Court is set to rule on Janus vs. American Federation of State, County, and Municipal Employees. It’s likely the Court will rule that all government workers (state, local and federal) will have a choice to pay union dues, or not.  When given a choice, many workers stop supporting the political activities of unions. This would be another force significantly altering the balance of power.

Whether you agree with these developments or not, the U.S. hasn't seen economic policy changes like this in a long time. The forces that support markets and entrepreneurship over government control are reasserting themselves.

(Source:  Monday Morning Outlook - Brian S. Wesbury, Chief Economist/Robert Stein, Deputy Chief Economist, First Trust Advisors) To view this article, Click Here

*The commentary above is the opinion of First Trust Advisors. Forward looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.  Past performance is no guarantee of future results.

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