Trump tax cuts will stimulate the economy, but concerns persist
Trump's tax plan is showing some early signs of market stimulation, but concerns persist about its long-term effects.
Love him or hate him, President Donald Trump held true to his campaign promise of cutting taxes. Plenty of working Americans will get more money back in their tax returns in 2017, partly thanks to a reduction of the tax withholding rate, and significantly lower tax rates taking effect this year will mean even bigger returns next year.
"From the near-term perspective, I think you're seeing stimulation, particularly on my end — people are taking money out of markets now, investable income from bonuses or whatever it might be and putting it into hard assets," said Cody Vichinsky, co-founder at Bespoke Real Estate. "My segment, being ultra-luxury real estate, is not prone to impacts of policy in the same ways as other areas. It's much more about emotion … They sentimentally are feeling a little more financially free or capable to invest that money into an asset."
Bespoke Real Estate is a high-end real estate brokerage that only sells properties in the Hamptons that cost more than $10 million, with a median sales price around $27 million. Vichinsky said the impact of cuts here and there is less important to his clientele than a general optimism bubbling up in domestic markets, noting that indicators like retail sales are on the upswing, which he said is driving investor confidence upward.
"People are benefitting across the entire spectrum, whether they're a lower tier of wealth or luxury, ultra, ultra high-tier," he said. "People have retained a little bit more of their income, whether through their tax savings or their bonuses, and they can go put back more into the economy. … The data says to me the markets are moving at a better pace than they have been."
But after the cuts are in place, along with planned decreased funding to various government agencies and social services, the outlook might get a bit dicier.
"The interest rate hike and the addition to our national debt based on the tax cuts, the long-term analysis of that is on people's minds for sure," Vichinsky said.
Trump's plan included a 20 percent deduction in the tax rate for so-called "pass-through" entities, where income "passes through" to an owner who pays an individual income tax rate under the old code. Some say that aspect of the code is a big stimulant for markets like real estate, while others question its long-term effects.
Main Street Alliance, a network of small business owners, said there are more risks than benefits in that deduction and the tax plan in general for their members.
"The national median income for a typical business is $50,000 — these are the bodegas and auto mechanics who are likely to see hikes in their health insurance premiums that far outweigh any small tax cut they may receive," the group said in a new report on the impact of the Tax Cuts and Jobs Act. "Income from pass-through businesses skews heavily to the very wealthy, with 70 percent of pass-through income accruing to the top 1 percent of income earners — these are the hedge fund managers and Wall Street lawyers who are also pass-through income earners."
Overall, the Alliance said, they expect small business owners to be impacted negatively more than they will gain from the cuts.
But Vichinsky said he thinks individuals can look to short-term benefits from the cuts, if they're willing to put in the time to understand it.
"There's a ton of misinformation out there because most people don't have the wherewithal or the adeptness to read tax policy. There are a lot of things people have to know from a nuanced perspective to capitalize on the tools I'd say are embedded in this policy that can help them save money," he said. "At the same time, you're reading all these big headlines in the news, but you have to boil it down to, 'Are you paying more money or are you making more money?'"