Forget the Border Levy. Here's the Really Big GOP Tax Idea
This article by Noah Smith for Bloomberg may be of interest to subscribers. Here is a section:
Currently, when companies borrow money, a large portion of the interest they pay on those loans is tax-deductible. The House plan would eliminate that deduction. Like the border adjustment, this change was proposed by Berkeley economist Alan Auerbach in a famous 2010 paper, “A Modern Corporate Tax.”
How would companies finance themselves if interest payments weren’t tax deductible? They would take on less debt and issue more stock. That would require some big adjustments, but in the long term it would probably be a good thing for the stability of the economy.
Deducting interest on one’s mortgage is one of the primary tax incentives, along with long-term capital gain of home ownership in the USA. Eliminating the interest deductible on mortgages is a political non-starter as a result, however if such a measure is incorporated into any reform of the corporate tax code it would result in some considerable nuancing of the overall bullish outlook for the banking sector.
Lower corporate taxes, higher interest rates, deregulation and fiscal stimulus are all positive for the banking sector while the loss of interest deductions would temper enthusiasm. The S&P500 Banks index has eased back over the last week in what has, so far, been a shallow reaction relative to the breakout; mirroring the performance of the wider market. Stripping out the risk of Trump’s agenda getting mired in Congress when the debate about how to raise the debt ceiling comes up within the next two weeks, potential for a pause following such an impressive rally is looking more likely than not. .
The KBW Regional Banks Index has mostly paused since its explosive breakout to new all-time highs which has allowed the overextension relative to the trend mean to be at least partially unwound. A sustained move below the psychological 100 would be required to question medium-term scope for additional upside.
The Dow Jones Utilities Index, which one might assume would face competition from higher rates, surged last week to retest its highs. The Index has been in a choppy uptrend for much of the last few years and a break in the progression of higher reaction lows would be required to question medium-term scope for continued higher to lateral ranging.