Investors will probably win big from tax reform - but about half of Americans don't own stocks
- Americans who own stocks will likely benefit from the Republicans' tax plan.
- Most people think stocks will continue to climb if the plan passes before the end of the year, although its passage might be somewhat priced in already.
- There are also several details in the tax bill that might end up helping people who own stocks, including the carried interest provision and the repatriation tax.
- The bottom 60% of American households own just 1.8% of American stock, while the top 1% own over 40% of it.
Americans who get a tax cut won't be the only ones who benefit from the Republicans' tax bill.
Investors are likely to see a boost as well - most analysts expect stocks will continue hitting new highs as a result of tax reform. (Though the bill's passage is probably somewhat priced in already.)
John Lynch, Chief Investment Strategist for LPL Financial sees the reduction in the corporate tax rate as a move that will be "impactful" to S&P 500 returns.
"Banks should benefit from the possibility of higher market interest rates, lower tax rates, and reduced regulation, which could help boost lending," he told Business Insider. "Small caps should also benefit in the coming year from lower tax rates and a stronger dollar."
But it's important to remember that about half of Americans don't actually own any stocks.
Stocks might climb thanks to the repatriation tax
In addition to corporate tax cuts, the repatriation tax may drive stock prices higher, benefiting investors.
The bill sets a one-time mandatory repatriation tax of 15.5% on cash and cash equivalents and 8% on illiquid assets like real estate, which is designed to incentivize US-based companies that do business overseas to bring those profits back stateside.
The final rate is slightly higher than that in the original proposal, but is still lower than the current 35% companies must pay to bring back foreign profits, which incentivizes firms to keep their money abroad.
There are several things that companies can do with that cash once it's back in the US. They can reinvest into core businesses - presumably the option policymakers would prefer - which could lead to economic growth. Alternatively, companies can repurchase their shares, which would be a boost for the stock market.
The last time the US government issued a repatriation tax holiday in 2004, corporations primarily spent the money on stock buybacks. Should that happen again, it would end up giving a boost to people who own stocks.
But even if repatriation is mostly used to pay down debt or to reinvest in core businesses, that could eventually lead to stocks going higher. Either way, investors are likely to benefit.
The bill also keeps a loophole that benefits fund managers
The tax bill keeps the carried interest provision, a loophole for fund managers, even though President Donald Trump said during his campaign that he would close it. It's another way that wealthy investors might end up benefitting from the bill.
With the carried interest provision, investment fund managers can pay a lower capital gains tax rate on their share of their fund's profit. Usually it's around 20%, below the current top income tax rate of 39.6%.
The only slight change to the carried interest provision from the current law is that the assets will have to be held for three years, rather than one year. But that may not matter much, as some fund managers already hold assets for more than three years.
But about half of Americans don't own stocks
Those who own stocks have already benefitted from the rising market.
But most American households do not have money invested in the stock market, according to a recent working paper by New York University economist Edward Wolff, which was cited by the Washington Post.
Only 13.9% of households directly own stock, and 35.4% indirectly own stock (for example, through 401(k) accounts). Just over 50% of American households own no stock,Wolff found. The bottom 60% of households combined own just 1.8% of American stock, while the top 1% own over 40% of it.
This data folds into another trend: Americans who own stocks are much more likely to have a favorable view of what President Donald Trump has done to the economy.
A survey conducted by the left-leaning Public Policy Polling, which recently collected the opinions of 862 registered voters, found that 41% of participants who owned stocks thought their personal economic situation had improved this year, while 15% said it had gotten worse.
By comparison, among those who don't own stocks, just 24% of those in the group said their economic situation had improved, 29% said it had worsened, and 40% said it has remained about the same.