Tax cut optimism may be overblown

Wall Street Journal columnist notes health care resolution must come first, making any tax reform more distant

Mar 22, 2017 @ 1:31 pm

By InvestmentNews

Even if new health-care legislation makes it through the House and Senate, the timing is likely to push tax reform into next year, pushing tax cuts further into the future, says Wall Street Journal columnist Justin Lahart.

"Investors who are assuming a more aggressive timetable also are assuming companies will have stronger cash flows over the next 12 months than they are going to get," he writes, noting that "the longer the health care debate drags out, the harder it will be to craft a tax-cut package."

The Republican tax plan includes a drop in the corporate tax rate to 20% from 35%, which could lift S&P earnings by 10%, according to estimates from Goldman Sachs cited by Mr. Lahart. If Republicans have to settle for a tax cut in the 30% range, for example, "Goldman estimates it would raise S&P earnings by just 4%," he said.

While companies would like that, investors, "who have given stocks lofty valuations in expectation of something more, might not agree."

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