Oh No - not another year-end blog!
Oh yes, this is another year-end blog. And to top it, not the kind that is more popular at this time of the year. This is that time when all the pundits are making predictions for 2018. Most do not look back at what they said exactly one year ago, but a very small minority do. And of course, most of them were right. You see, when you predict something with a thousand-and-one blanket caveats, chances are you would be right. I am not ridiculing anyone. If anything, I am a guilty party. There is a big compliance, regulatory load that we financial professionals carry for every word that we put out for public. To be truthful, most of us do not want to mislead the public. And it is very difficult to address a vast array of audiences with different levels of financial savvy that internet opens up. This results in a watered down version of subjects that are already sitting on a number of if-then situations. So if you would like to discuss 2018, please contact me personally. It would be a more meaningful dialogue when conducted for your particular situation.
So, if I am not going to make predictions for 2018, what are we going to talk about? How about what is already behind us? How about the much-awaited tax bill that passed recently? That should be a safe topic. Or, is it? It was a deep surgery. Done in a very short period. And with no broad-based support. The new law runs over 1,000 pages. All these factors make the law more susceptible to unintended consequences.
While much of the motivation for U.S. tax reform has stemmed from cutting corporate taxes, many benefits will accrue to individual taxpayers as well. Although there is no simplification in the number of personal tax brackets, many of them have been lowered. The tax law also substantially reduces scope of personal alternate minimum tax (AMT). And it doubles the standard deduction while eliminating personal exemptions. The key question is, how will this impact consumer spending? As some studies show, many of these benefits will be received by higher income households who have a lower marginal propensity to consume. In addition, tax law front loads many of these benefits. So the maximum impact would be felt most in the next couple of years.
On the corporate end, cutting the corporate tax rate from 35% to 21% definitely makes U.S. more competitive and brings it closer to the global average. However, due to deductions and other factors, most of the large corporations were already paying somewhere closer to the reduced rate. Bigger impact of lower tax rate would be on mid-and-small sized U.S-centric corporations. In addition to lowered tax rate, provisions like expense of capital spending should boost investment spending. However, spending may not be boosted by as much as some expect; the U.S. economic expansion is old and long-term growth prospects are subdued. In addition, unemployment is running at its lowest level and a lack of skilled labor in many areas would make some businesses reluctant to be bold in their plans.
One important and critical change that has come in the new tax law and has not garnered attention is the move from CPI to Chained CPI. CPI is a way to index spending and taxes -- including Social Security benefits -- to the rate of inflation, or the rise in prices over time. There are multiple variants of CPI and currently most programs are indexed to the CPI-U or the CPI-W. Chained CPI is another methodology to measure inflation. Changes in CPI methodology would impact how we consumers feel inflation versus what the official inflation states. And this will have a significant impact on how we plan for our financial goals, especially for retirement.
To have a more detailed understanding of CPI and its variants, Bureau of Labor provides a lot of information and a good set of FAQs here.
And before I close, on a completely different note, a thought provoking idea - can artificial intelligence induce empathy? I, for one, hope it can. And on this note, I wish you and your loved ones very Happy Holidays and a New Year full of happiness and peace, good health and good fortune!