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December 20, 2017 | Global Equity
U.S. Tax Cuts: Pros and Cons

Global Equity Strategist

Olga Bitel, partner, is a global strategist. She is responsible for economic research and analysis across all regions and sectors. She distills macroeconomic and geopolitical developments into actionable insights for global equity portfolios within a multifaceted strategic framework. In addition, she provides insights about cyclical turning points and structural trends as inputs into portfolio construction in predominantly bottom-up investment approaches. Before joining William Blair in 2009, Olga was a senior economist at the National Institute of Economic and Social Research in London, United Kingdom, where she produced macroeconomic forecasts for most Asian economies and led thematic research projects for some of the world’s best-known international organizations, including the Organization of the Petroleum Exporting Countries and the International Monetary Fund. Olga received a B.A. from the University of Chicago and an M.Sc. in economics from the London School of Economics and Political Science.

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Congress has passed a new tax bill, which will provide a significant corporate tax cut in the United States, and domestic sectors should benefit disproportionately. But tax cuts could have a longer-term impact on debt levels, which could negatively affect economic growth.

Pro: Domestic Sectors Benefit

The significant corporate tax cut in the United States will have some clear winners. As shown in the chart below, most domestic sectors, such as retail, telecommunications, and utilities, which have had a relatively high marginal tax rate, will benefit disproportionately from a corporate tax cut.

It is not surprising, then, that we have recently seen a rotation in U.S. equity-market performance away from high-tech, fast-growing companies and those with significant exports (which already enjoy relatively low tax rates) toward more domestic sectors.

 

Con: Longer-Term Slowdown?

Beyond the near-term stimulative effect of tax cuts, we should also consider their longer-term impact on debt levels and the sustainability of accumulated debt. As the chart below illustrates, the Congressional Budget Office (CBO) projects that at some point in the next five years, we will cross the 85% ratio of debt to gross domestic product.

The 85% ratio of debt to gross domestic product is a significant threshold because empirical studies suggest that at this level, we will begin to observe a meaningful slowdown in economic activity.

That is a significant threshold because empirical studies suggest that at this level, we will begin to observe a meaningful slowdown in economic activity. We do not know whether that will happen, but we should be mindful of it.

 

Global Equity Strategist

Olga Bitel, partner, is a global strategist. She is responsible for economic research and analysis across all regions and sectors. She distills macroeconomic and geopolitical developments into actionable insights for global equity portfolios within a multifaceted strategic framework. In addition, she provides insights about cyclical turning points and structural trends as inputs into portfolio construction in predominantly bottom-up investment approaches. Before joining William Blair in 2009, Olga was a senior economist at the National Institute of Economic and Social Research in London, United Kingdom, where she produced macroeconomic forecasts for most Asian economies and led thematic research projects for some of the world’s best-known international organizations, including the Organization of the Petroleum Exporting Countries and the International Monetary Fund. Olga received a B.A. from the University of Chicago and an M.Sc. in economics from the London School of Economics and Political Science.

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