The Details Of The Proposed Tax Plan

On this week’s show, Karl discusses the details of the proposed tax plan and who really benefits from this plan.

Transcription of Show:

Hey Hey, welcome to the Eggerss Report. It’s your investing playbook. Thank you for joining me. We appreciate it as always. My name is Karl Eggerss, I am the CEO and President of Eggerss Capital Management. We are a registered investment advisory firm. We are independent, and we do not sell any products; which is very important, especially given the fiduciary rule that is kind of in limbo right now, but it is certainly something that has been talked about the last few months and even years. And something that is going to change the industry and is changing the industry in a positive way for you. We of course have always been registered investment advisors here at Eggerss Capital Management. And that essentially means that we don’t work on any type of commission. Essentially, people pay us for our advice. Whether it’s through financial planning or whether it’s through actual asset management. As opposed to products being sold to you via annuities, front end load mutual funds, things of that nature.

So we’re seeing a big change right now and in fact, we’re getting a lot of phone calls from folks saying, “Hey, my current advisor wants to change some things around, and I’m not real comfortable with it. Can you take a look at it?” Well what they’re doing is, they’re actually changing from front end loaded mutual funds with not a ton of transparency, and in terms of how much the advisor is getting paid; and of course, a lot of conflicts of interest in our opinion. And they’re changing to a fee structure on the retirement accounts. And they’re doing this primarily because they’re being forced to do so. Which is very interesting, so, folks calling us have the right questions and are asking the right questions; and we’re helping them out and steering them in the right direction, whether it’s with us or someplace else.

If you’d like to get a hold of us; 210-526-0057 is our telephone number. Our website is E-G-G-E-R-S-S And, we have lots of stuff on our website. We’ve got a blog; we’ve got investor education. We’ve got financial planning if you want to know more about that. We even have a free, organize your finances tool. And really, what that is, is, you link up your accounts, you put in your income, your goals, etc.  And, it’ll even do a look back into your checking account and your credit card, to see where you’re spending your money. That is a free tool on our website. So if you go to, under the financial planning section, you will see that.

And if you’re curious about the security of it, really what it does is it’s really just an aggregator. So if you’re already logging into your credit card, you’re logging into your brokerage accounts, your 401Ks, your bank accounts; it’s doing the same thing, you give it the credentials to log into these places for you, it’s just all in one place. And, we’re hoping to have an app by the end of the year, so that you will be able to see this on an app. And then from that, we use that same system to actually do our comprehensive financial planning. So when folks come in, we put them through that system already, and then what we can do is analyze whether people should be doing their 401Ks pretax, post tax. Whether they should be using the raw component in their 401K; whether they should be doing Roth conversions, when to take social security, what their taxes might look like in the next several years. Obviously looking at their investments and making recommendations there.

Karl Eggerss on CBSSo, we use that same tool. So it’s a very helpful tool right on the website. And of course, all of our articles are on there; our podcasts are on there. And of course, any interviews we do on the radio, or television. I did a television interview this past week on a local San Antonio CBS affiliate, discussing the proposed tax plan. And we’re going to talk about that in depth in a little while about the tax plan, because that was a really big … big news topic this week that could impact all of us. And I think will impact all of us to some degree. Again, our telephone number; 210-526-0057. And by the way, we have; we have on our Twitter feed. @karleggerss is my handle. We also have an ETF Charts, is the handle. It’s a newer Twitter feed that we have, just to put charts of ETFs. So if you’re curious about some technical patterns and things that look interesting to us; or maybe things that are getting dangerous, we will post that chart on there.

And we post the same pictures on our Eggerss Capital Management Instagram feed as well. So, lots of different ways to get our information. And we thank you guys for listening. We have all types of new listeners each and every week. And of course you can get all of the information on iTunes as well. There’s even a way to subscribe to iTunes right from our website on Well, like I said, the big … really, news topic this week was the proposed tax plan coming out. And we’re going to talk in depth in a little bit about it. Really the negotiations, the compromise that we’re seeing is probably the most encouraging thing coming out of it. One of the other big news items this week was really the federal reserve basically calling what’s going on right now with interest rates, with inflation, a mystery. And … Which kind of tells you all you need to know; they don’t really know what to do with this particular economy, and … in terms of what they’re doing with interest rates.

The odds are that they would height in December again, but they keep giving mixed signals as they always do. You hear them talk out of this side of their mouth, and then the other side of their mouth. And then you hear one fed president say one thing, and another one say the complete opposite. So the markets get confused, but what we do know, is that the economy continues to improve, albeit a little slower than we would all like. But it is continuing to improve gradually. We’re seeing some good things. We’re not seeing any signs of a recession imminent. And so given that, they are trying to normalize interest rates. Where normal is, is the debate, but they are certainly not tightening. Remember, what they’re doing is, they’re raising interest rates very slowly, right? They were at zero essentially, and they’re raising them slowly, slowly, slowly. These are short term interest rates they’re tinkering with, not long term interest rates.

Where long term interest rates come into play is, when they were doing quantitative easing; where they were buying billions of dollars of bonds, and they were trying to keep interest rates low. They were trying to help the banks out. They were trying to grease the wheels of the economy. And, a lot of people believe that didn’t work at all. Some people believe it did work. Regardless, they started in October of 2014, which was three years ago; said, “We’re going to stop doing quantitative easing. It’s already been three years.” But, they were taking all of the interest they were receiving on these bonds that they owned, and reinvesting it buying more bonds. So they were still doing easing. Now what they’re saying is, “We’re going to stop doing that over some time frame. We’re going to stop re-investing that money.”

And, the market’s certainly handling it better now than it would have three years ago. Remember, in October of 14; we did see a stock market that got very dicey. And then of course into 15, we had a very volatile time in 2015. Primarily due to the fact that they did end quantitative easing. So, but they have acknowledged the fact that they think it’s a mystery. And really, it is a little interesting that given everything they’ve done; we still are seeing the velocity of money very slow. Which means we don’t have a lot of inflation. Velocity of money is if I buy something from you, that dollar goes from my wallet to your wallet, then you take that money, you go buy a refrigerator with it; and that dollar bill goes from your wallet to Best Buy’s wallet, let’s say. And then Best Buy takes that dollar and hires an employee with it. So how fast that dollar is circulating through the economy can be tracked.

And, the faster it goes, theoretically, the more potential inflation we might have. That’s not happening. We’re seeing it very slow and lethargic. So, it’s a little concerning right? That we’re not getting the type of growth and inflation that we would like, which tells you there’s there issues. It’s not just the … The Fed is not the puppeteer to control how fast the economy grows. They think they are, but they’re starting to figure out that maybe they’re not. So they’re saying, “Look, we’re going to normalize rates, and let’s let this economy do what it’s going to do.” Which transitions into that it’s not monetary, it’s fiscal stimulus we need. You know, we need tax reform. We need healthcare reform. We need promotion of growth and promotion to add jobs. We need companies to have that incentive to do so, and it’s just not happening right now.

Healthcare seems to be on the back burner, but of course, we’ve got tax reform right there in front of us. Which is something that may be done in 2018. So, as far as the week was concerned, the things that have … It’s been really interesting to see what’s been working and what is not working. It is very clear to us, that the market is starting to price in that a tax cut will come in some form or fashion. And you look at what’s happening; look at the small caps. The small companies, primarily measured through the Russel 2000 IWM is the ETF that I kind of watch just to see what small caps are doing. And, those are up over 10 to 11 percent, just in the last month or so. So, we’ve got a huge move in one month. Ten percent for an index is a big old move. But why small caps? Because, those are the ones that might benefits the most. Part of the tax plan is going to really help small businesses. And, again, we’re going to talk about that in a minute.

But, that’s why I think small caps are going up. You’re also seeing interest rates rise. We saw one of the biggest jumps in rates on long term rates this week that we’ve seen in quite a while. So, when we say that the market’s taking the QE … End of QE in stride; the bond market, maybe not so. So we’re seeing interest rates rise. And there’s again ways to play that. And so, it’s kind of been … And by the way, when interest rates rise, you’re seeing the banks do very well. So banks were up almost four percent this week. Regional banks, regular banks, whatever it might be. The other thing that’s doing very well is oil and gas. Since the bottom of let’s call it Mid-August. You’ve seen the XLE, which is the energy sector ETF, jump somewhere around ten percent as well. So we’ve seen small caps energy and interest rates kind of go up. Which to us tell us that, we’re seeing the market pricing in some good things here.

Now, from a technical perspective, XLE looked very good. Energy could be topping out short term. If you’re investing it; I’m still not concerned about it. But short term, we could see it pull back. And we could see small caps pull back. They’ve had a big move. So those are some of the big winners on the week. Home construction did very well this week. Bio-tech did very well this week; even retail has bounced back quite a bit. Retail stocks up about 11 percent since mid-August as well. So you can see we’ve kind of had this little shift here. Some of the things that had a tough week would be some of the international markets. Which, we’ve seen primarily because the dollar has bounced back.

Remember the US dollar got really beaten up and it had … it bounced back. And because of that, you see gold sell off. You see international stocks sell off. You see treasury bonds sell off. You see utilities sell off. Telecom; all of that income trade and things that benefit from low rates and a weak dollar. Those are all getting hurt right now. So we saw those kind of the weakest areas of the market. Overall, the Dow Jones kind of had a mediocre week, but we certainly saw a much stronger September than people thought it would be. Because remember, over the last hundred years, September is notorious for being very, very weak. And that certainly was not the case this September. And that’s one reason why you can’t just follow seasonal factors all the time. They play a part, and people watch them; but there are much bigger issues at hand than simply looking at the calendar to determine if you want to buy stocks or sell stocks.

So I want to spend some time going through the new proposed tax plan that we saw this week. And, I was asked to go on television earlier in the week and do an interview. And, it was a little difficult to talk about this in three minutes. So I had to cram as much as I could in, but I couldn’t obviously go into details and really say some of the things that I wanted to say, just because of the time constraint. We do have that interview by the way, posted on on the blog section of the website. And you can go watch that, very short. So I wanted to take some time here to expand upon what I was discussing. And, this tax plan is … It’s interesting.

I think first and foremost, the most interesting thing about it is the fact that there is what seems to be some compromise going on. Which is something that we haven’t really seen a lot of the last several years up in Washington DC. But, we are seeing compromise. And we know this because, the skeleton of this tax plan is a little different than what we had originally heard. For example, one of the main things about this tax plan is, getting some of these foreign dollars; these companies have a lot of money overseas, and if they bring it back they’re going to have this big tax. And so we heard about a tax holiday. Well now, it’s looking like if they bring it over there’s going to be potentially a ten percent tax. So, this is something that is not a tax holiday, but it is lower than what it would normally be under the current rules. So again, that’s a compromise.

This would mean tremendous amount of money coming back into the United States, and being able to be used on companies building new plants, research and development; potentially new jobs, et cetera. So that’s one big component of this. But, let’s stand back for a minute and look at this. People are asking me, “Is this going to be good for individuals?” And it’s really interesting; remember, what we’re doing is we’re seeing the current tax brackets narrow down to just three. So they’re proposing a 12% tax bracket, up from the current ten. A 25% bracket, and a 35% bracket; but there is the potential for another, higher bracket. And so, this is meant obviously for the Uber rich. And that is something that the Democrats would like to see. So that is still being negotiated as far as I know.

Now, before you look at this you’d go, well wait a second; the top bracket’s going to be 35, that means that the current top brackets of 39.6% is going down. So the rich are getting richer, and the ten percent bracket is going up to 12, so the poor are getting poorer. At first glance, that appear to be the case, but keep in mind that the standard deduction; which right now is $12,000, would be going up to $24,000. Okay? Actually it’s $12,700 currently, it would be going up to $24,000. So it almost doubles the standard deduction. What that means is, a lot of people are going to be able to use the standard deduction. And, their taxes are going to get much simpler to calculate. Here’s the rub though, before you celebrate too much and say, “This is great. The standard deduction is going up.”

Remember, President Trump had originally wanted $30,000; so 24 is another compromise. But, they’re potentially going to eliminate the personal exemptions. So keep in mind the standard deduction under the current system was 12,700 for a married couple. $12,700. So you got that. And then if you had two kids, you had basically $16,200 more in personal exemptions. Because, you get a $4,050 exemption for each person that you claim. So, you have four kids, well you are already at almost $29,000 in total deductions and exemptions. Under the new system you’d be at $24,000. So the more kids you have, the more you will be hurt by this tax plan. All things being equal. So, that’s very interesting to get rid of the exemptions. So yes, the deduction is going up, but the exemptions would potentially go away. So, those are a couple of big things right off the bat.

Overall, and remember a couple of things here; number one, trying to eliminate the estate tax. The death tax they call it. That is something that a lot of people don’t pay this, because most people don’t have 5.49 million dollars in their estate. But, it is something that would be eliminated. Eliminating the AMT; the alternative minimum tax, is something in here as well which would be eliminated. Nothing really on the capital gains side. So, again this is mostly dealing with income tax. But, one of the other things that we saw in here is that some of the deductions would … other deductions would go away. So, eliminating most itemized dedications. Charitable gifts would still be on the table, and home mortgage interest would still be on the table. But a lot of things going away.

So, here’s the biggest part of this thought; so when you first look at this you say, “Well would I, as a W2 employee of a company, benefit from this plan?” It’s going to be marginal. It depends how many kids you have, on your income of source of course, and where the brackets end up being; what the income brackets are. But it may be kind of neutral for most people, not a big difference. However, the idea of this plan is to really have it be beneficial to small businesses and large corporations, and have a trickledown effect on the overall economy; which of course would benefit lower income folks. Now, that’s a big if right? Because, do we know we’re going to get dramatic economic growth from this? We don’t know that. So, the biggest thing in here to me, besides this money coming from overseas, this repatriation of dollars; is …

What we’re seeing is, there’s a lot of you out there that are small business owners. And this is something I wasn’t able to get to on my television interview. But, right now; if you have an S-Corp for example, and you make a profit in your S-Corp. That income from the profit goes right on to your personal tax return. So whatever tax bracket you’re already in, your business is in that tax bracket too. Now that’s not the case for C-Corporations, but S Corporations it is. So S Corporation is a pass through business. What they’re proposing is a 25% rate for pass through businesses. So you could see businesses have a lower tax rate than personal. That’s going to help out small businesses quite a bit. In addition, a 20% corporate tax rate is another thing.

And remember, Donald Trump wanted 15% corporate tax rate, and through negotiations now, we’re sitting at 20%. The current rate is 35%. Now, people against this plan are saying, “This is not fair because, corporations already pass all those taxes on to the consumers, so we’re not really going to see much difference there.” Again, we have one of the highest if not the highest corporate tax rates in the world. So all we’re doing is going back to getting our corporations more competitive. The idea of this whole plan is … definitely leans towards large and small businesses. And the idea being that we get more economic growth, which in turn, helps the economy, creates more jobs, and more income for everybody. That is the idea.

So, the other part about this that’s interesting is how they’re going to pay for it. There is some concern that we don’t have the dollars to pay for a tax cut. And the Republicans are saying, “we’re going to have so much economic growth that we will have more revenue coming in to pay for this.” And that is a big if. In the short term, it looks like we could get a bump in GDP growth if this goes through. Long term of course, it’s hard to predict. And a couple other things are; is it going to happen in 2017 or 18? It looks like it’s probably a 2018 item. And they could make things retroactive to 2017, so again that would help a lot of us out. But really, if you are an individual working at a company right now; and let’s just say that you are working at a company, you’re approaching your retirement. The kids are gone right now. Your bracket could change but, if you’re a married couple, before you were getting a standard deduction of 12,700. And you were getting two personal exemptions which added up to 8100 dollars. So you had $20,800 that came right off your income, right off the bat.

Well, that is going up to 24,000. So you would be in good shape. If you had six kids in the household, you’re going to lose a lot of exemptions. So again it depends on how many kids you have. They have not determined the income range yet for these different brackets. So they are proposing 12%, 25, and 35. Much simpler. And again, perhaps CPAs would be against this plan, because a higher standard deduction means a simpler tax bracket … Or, excuse me, a simpler tax form to fill out. And a lot of people could do their taxes themselves. So we’ll see how that goes. But, all in all; what do I think about this? I think if it stands the way it is, obviously getting rid of the death tax, getting rid of AMT, dropping the corporate tax rate to get our companies more competitive around the world and simplifying things; I think are all positives. But it’s not something across the board where everybody’s getting a tax cut. That’s not the case.

But I do believe that by simply looking at the brackets, is a little too narrow minded when you look at this whole package. You can’t simply say, “Well, if I’m in a ten percent bracket, my taxes are going up.” That’s not necessarily the case. There’s a lot of other moving factors. So you can’t look at this in the vacuum and just say, “My bracket’s going up.” So overall though, taking away the exemptions and some of these other things, it is simplifying the overall tax code, but the other part about this too is it’s not necessarily permanent. Some believed that it would become permanent. But it’s not a permanent plan. So that’s kind of the skeleton of it. Right off the bat, and I think again, this is really geared towards businesses and really to me it’s a classic trickle down plan.

And so of course, you’ve got some Democrats that hate it, and you have some Republicans that love it. Overall I think it’s a step in the right direction. I think it will add growth. I think the biggest thing we’re going to see is that small businesses owners would benefit. And then secondly, having all this money come back in the United States. I mean you think about Apple; and I don’t have the figures in front of me, how much money Apple has overseas right now that they don’t bring back over. In fact, Apple borrows money. They have bonds. They borrow money because it’s cheaper for them to do that. Pay interest on that money; than it would be to get taxed overseas, bring that money back over here. So what would happen is; they could bring that money back over, an use it to again, build new facilities, hire more people, do more marketing. That would be a big, big boost.

So, I think it is something that over time could be a dramatic boost to the economy in the short term though. Some of the numbers are suggesting that maybe we get a point three percent bump in GDP; which is still a lot. But, the big growth might come as we move along in future years. So that’s a little run down on really what we saw this week … with the tax plan and obviously if you look at … and we mentioned it earlier; if you look at the small cap stocks, which have been going straight up. They have been pricing in a tax reform I believe that’s why. Because again, this really helps small companies, it really helps small business owners. And we’ve seen a huge run in the small caps stocks. In fact, we’ve seen really just since August 21st, so a little over a month; we’ve seen over a ten percent move in the Russell 2000, which is the small companies … 2000 of the smallest companies. Not smallest, but smaller companies.

And, that is a really big move in a short amount of time. And I think it’s because of this tax plan being tossed around. And pieces of it being leaked out, and then we got the announcement and the stock market continued to move to highs. So that was probably the biggest thing that happened this week. All right guys, thank you for joining me. I appreciate it as always. Hey, don’t forget to go check out our Face Book page. Our Twitter; we also have two Twitter accounts, one is @Karleggerss is mine. The second one is at ETF charts, is that one. We’re on Instagram. You name it. And the easiest way to look at all this; just go to; and on the top there’s all the social media, and of course we have our blog, financial education, which goes to all of our podcasts, our articles we write, any the interviews we do. All of that.

So, we always appreciate the feedback. We thank you for following our work, and again, we’re trying to make things improved as always, is continue to move forward and give you more and more really streamlined information that we think is important to you. Not a lot of fluff. So if we have something to post, we will post it. If we don’t, we don’t. So, all right. Have a great weekend everybody. Don’t forget, if you need us; 210-526-0057. And our website is Have a wonderful weekend. We’ll see you right back here next week on the Eggerss report; it’s your investing playbook.

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