There is an old story that goes “beware what you wish for…” Things don’t always turn out as expected. In 2017, President Trump proposed and Congress approved a huge tax cut plan… the Tax Cuts and Jobs Act (TCJA). The results have been controversial.
Along those lines I watched a fascinating interview of Tom Lee, head of research at Fundstrat, on Bloomberg four years ago. His insight proved very valuable and accurate. (1)
His feeling is that a Tax cut, as it was being discussed, could be negative for investors long term. “There’s two reasons; First, when cutting tax rate you raise the after tax cost of debt. Leverage becomes a problem for a lot of businesses. Second, because you are cutting tax rates you are effectively giving cash to all businesses, even businesses where you want to reduce allocation.“
His observation was that companies that are currently struggling with cash flow will have a temporary life preserver tossed to them, but it will not change the fundamental issues facing a lot of industries. It will distort markets.
In fact, that is exactly what happened. Companies that were not profitable and not healthy continued to borrow and live off of debt instead of reforming their business models.Continue reading “Trick or Treat? Revisiting The Potential Downside of Tax Reform for Investors”