At 2 a.m. last Saturday, the Senate finally passed its version of the tax reform bill by a narrow margin of 51-49. Senator Bob Corker was the only Republican who voted against it, but apparently this was as a result of some fairly intense negotiations with party holdouts and required major concessions. Passage of the Senate was a major achievement and a big step toward getting the bill on to the president’s desk before Christmas. So, what does this mean for precious metals? First, let’s examine what the bill actually does. 1
What’s in the Tax Plan?
Following are the highlights of the Senate tax plan:
Corporate Taxes
The bill cuts corporate income taxes from 35 percent to 20 percent starting in 2019, although on Saturday the president mentioned that 22 percent might be the final figure. There is also a proposal to change the current taxation on all income made by U.S. corporations worldwide to taxation only on income earned in the U.S., which would put us in line with most other countries.
Personal Tax Brackets
The bill reduces the current seven-bracket system that spans from 10 percent on the low end to 39.6 percent at the high end to a four-bracket system. These would be the new brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent.
Deductions
Standard deductions for both individuals and couples would double, personal exemptions would be eliminated, state and local tax deductions would be prohibited, property tax deductions would be limited to $10,000, the child tax credit would double, and the mortgage deduction for mortgages up to $1 million would remain.
AMT and Estate Taxes
The original bill proposed to repeal the alternative minimum tax (AMT), but the version that passed maintained the AMT; however, it raised the threshold for exemption. The Senate version also does not do away with estate taxes entirely but raises the threshold to exempt all but the richest taxpayers.
Healthcare
The bill repeals the individual mandate to purchase health insurance, a key tenet of Obamacare, and expands medical expense deductions.
How Will the Tax Plan Influence Gold Prices?
While equity markets seem to love the tax plan, the high is likely to be short-lived. Most nonpartisan economists believe the GOP plan is unlikely to stimulate much economic growth without a massive infrastructure plan, and the Congressional Budget Office estimates that the Senate plan will add $1.47 trillion to the deficit. 2
An ever-growing chorus of economists and market observers are warning that the party in equities will soon come to a close, and the hangover for investors will be brutal. 3 Time to book your seat on the flight to safe haven assets while precious metals prices are softer, because when the stock market bubble bursts, the cost of that ticket will skyrocket.