Trump is trying to tackle tax reform


FILE PHOTO: Faith leaders place their hands on the shoulders of U.S. President Donald Trump as he takes part in a prayer for those affected by Hurricane Harvey in the Oval Office of the White House in Washington, U.S., September 1, 2017. REUTERS/Kevin Lamarque/Files
is trying to tackle tax reform.

Thomson Reuters

Following attempts at healthcare reform, we are now seeing
efforts at tax reform, a much talked about topic during the 2016
presidential campaign, come to the forefront in Washington, DC.

In the last few weeks, President Trump has called for tax reform
and we’ve seen the Senate Finance committee schedule hearings on
both individual and businesses tax reform. This week, US House
Speaker Paul Ryan said that an outline on tax reform legislation
would be released during the week of September 25. The forthcoming tax reform
outline is expected to reflect the consensus of the
administration and congressional tax-writers, but it will be left
to the House Ways and Means Committee and Senate Finance
Committee to flesh out the technical details of the tax reform
initiatives and to draft legislation.

This of course raises all sorts of questions over possible
inclusions and solutions, but one of the guiding principles is
for tax reform that makes taxes “simpler, fairer, and lower” for
American families, and provides “lower rates for all American
businesses.” That means the House Ways and Means Committee and
Senate Finance Committee have their work cut out for them as they
try to deliver reforms, but, given the more than $20 billion
federal deficit, deliver adequate revenue to fund the government
and its programs.

One potential solutions to bolster tax related revenue that stay
within the confines of lowering taxes for both American families
and businesses, the Border Adjustment Tax, has been essentially
scrapped. The question now is will there be other proposals put
forth that on their face seem sensible, but in practice do more
harm than good? One such example is the 2014 tax reform proposal
that would change the tax treatment of advertising expenses from
a normal business expense (100% deductible year of) to a 50%
deduction during the year of, with the remaining 50% amortized
over 10 years.

From an investor perspective, this would lead to a radical
reassessment of company income statements and earnings
expectations as advertisers reassessed their spending. Companies
ranging from Facebook, Alphabet, Twitter, Snap, Disney, CBS, The
New York Times, Breitbart, and all the other companies for which
advertising is a key part of their business model would see a
haircut to revenue and profits. Why? Because advertisers, ranging
from Coca-Cola to Proctor & Gamble, will put a crimp in their
spending. With a sharp drop in co-op advertising, grocery stores
and other retailers will have lose significant amounts of
revenue, which will ultimately lead to higher consumer prices
that hurt American families. Odds are we would see big lobbying
dollars on behalf of those companies being spent to quash such a
tax reform proposal from coming to fruition.

But far beyond behavior that would be called cronyism, there is
an economic concern as well. The 2014 IHS study that showed the
country’s $297 billion in advertising spending generated $5.5
trillion in sales, or 16% of the nation’s total economic activity
at the time. Those same economists are likely doing some quick
math as to what the added headwind would be to an economy that
has been growing at a GDP rate of 2%-2.5% GDP over the last few
years and how it would impact future job creation should an
advertising tax be initiated. Perhaps the question to be asked
when contemplating an advertising tax is the following: if, per
the IHS study, every $1 million in advertising spending creates
67 million jobs, how many jobs will potentially be lost if an
advertising tax is passed? 

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