February 3, 2017    6 minute read

Trump’s Tax Reforms: The Rich, The Poor, And The Asset Managers

Who Wins Out?    February 3, 2017    6 minute read

Trump’s Tax Reforms: The Rich, The Poor, And The Asset Managers

Donald J. Trump has already spent more than a week in the White House as President of the United States of America. Many people around the world were doubted his ability to transform his words into actions, but after about a week, it seems that he is performing in line with the arguments and plans he mentioned during his campaign.

His arguments – which on the one hand betray a hostility towards free trade, immigration, regulation, and abortion rights, and on the other hand, a desire to boost the national fossil fuel industry – have resulted in significant protests and resistance in the US.

This article, for example, discusses the impact of Trump’s tax plan on the United States and the rest of the world. Now, though, the question that arises is whether the President has made some tax regulation revisions or anything related to that from the moment he stepped into the White House on January 20, 2017. Particularly, it is interesting to look at what might be the impact on asset management.

In the White House: Words into Action

First of all, it seems that the tax reform plan was not on the top of Trump’s to-do list for his first week as President. The main focus of his week was mainly related to changing the Obamacare policy, infrastructure, the enforcement of the immigration law, and the wall that is to be built along the Mexican border.

Moreover, some memoranda were published related to oil, government human resources, the TPP trade agreement, and the funding of organisations that provide abortions. These first ‘words’ that were put into action have already massively shocked the entire world – but what is the current status of the tax reform plan and its consequences for asset management?

As far as can be estimated, Trump’s tax reform plan will be implemented soon enough. This will hugely impact the global position of the US in terms of taxes. Moreover, taxes have an impact on all stakeholders and everybody participating in society. Governments, companies, customers, and everyday people will be hugely affected when this plan is implemented.

According to a recent article from the Financial Times, the tax reform plan has some quite major drawbacks that impacted the stakeholders mentioned before.

Major Drawbacks

The principle of equality in terms of taxes is likely to be harmed since the majority of the reform’s benefits will be for the top 1% of the country. For a start, the taxes that have to be paid on returns on capital are likely to be eliminated. Furthermore, the tax rate related to extraordinary profits will also be reduced, which is another favour for America’s elite.

Another drawback is related to importing.  Labour and interest costs will not be deductible anymore and this will have a large impact on companies that act in sectors with low margins, since the payment of import taxes will take a huge chunk of companies’ profits.

The tax reform plan will also incrementally harm the global economy in that it makes importing more complex for US companies, and, on the other hand, exporting easier. This protectionist behaviour has major consequences for the position of the US in the world.

The WTO made a clear statement that US treaty obligations will be violated if some of these reforms are implemented, as the taxes charged on income cannot create a favourable position for US exports. The expectation is that other countries will also implement these protectionist acts if this part of the reform plan is introduced, which will lead to a worse-off global economy.

Who Will Suffer?

Dollar debtors will be largely impacted if the dollar continues to rise and tax rates are lowered, especially in emerging markets, and this can lead to financial distress. The major reason behind this is that US assets that are held abroad are mostly held in local currencies, while debts are held in dollars.

Secondly, whilst offshore cash profits that are repatriated back into the US will have a positive outlook in the short-term, this might change entirely as it will have an impact on the governmental revenue. In the end, it could slow down growth and finally impact the middle layer of society.

Moreover, it is being debated whether a tax reform plan is really applicable in the US economic situation because its growth and unemployment rate changes look so promising anyway, as can be seen in this graph:

Unemployment_rate_Bloomberg

(Source: Bureau of Labour Statistics via Bloomberg)

More Work for Asset Managers

Based on the above, it is clear that Trump’s tax reform plan will have a mixed impact on asset management. The plan itself benefits the top layer of American society. The elite will end up with more wealth because the taxes on capital are to be eliminated, which means more will be available for putting into investment funds and other financial instruments.

Furthermore, the tax rate related to extraordinary profits will also result in a better position for the wealthy. This will consequently result in more work for asset managers and eventually more profits that will be generated for the asset management industry.

On the contrary, more demand related to wealth management also results in more competition in the sector, which increases the pressure on individual asset managers and firms. In the end, performance and experience are two factors that lead to success in the future direction for asset management in the US.

However, the tax reform plan could also negatively impact the asset management industry. The protectionist behaviour is already partly resulting in a stronger dollar, and asset managers that are on the selling side might have serious issues. A stronger dollar could lead to a decline in foreign demand.

From the buyers’ perspective, more local currencies have to be inserted to buy the same asset as initially planned. Moreover, the same is applicable for the other side of the coin, namely the debt market.

The Bottom Line

In conclusion, it will remain uncertain what is going to happen in the near and long-term future for the position of America and its asset management industry. However, at present, it can be concluded that President Trump is definitely putting America first. Nevertheless, tax-wise, his business mindset will work against him from a lower and middle-class perspective.

On the other hand, the national elite will likely see a favourable outcome if the tax reform plan is taken into account. Asset managers are still in an uncertain situation that could go either way. From now on in terms of national tax structure and its’ relation to asset management, it will only be the American elite first, the asset managers second, and the middle and lower class third.

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