Dear Friends and Family,

The tax reduction and reform bill passed in late 2017 and went into effect January 1, 2018. In some quarters there were great expectations for the economy and securities markets. Although the market has been volatile, it is just about where we started the year. Here’s what happened and what we can expect.

1. First quarter earnings fell for many corporations due to the large drop in corporate tax rates. These corporations had tax loss carried forward on their balance sheets. A corporation that losses money in one year can deduct the loss against future profits. At 35% tax rates the loss of one million dollars is worth and recorded on the balance sheet as $ 350,000. Reduce the tax rate to 22% and the loss is worth $220,000. The $ 120,000 difference was taken as a loss in the first quarter. All these reductions negatively impacted first quarter results and set a poor environment for the stock market until second quarter results were announced. This factor will no longer be an issue after 2018 is over.

2. This year’s earnings are up about 23% over last year. About half is the growth of the economy and half the lower tax rates. As the year ends a new fear is the expectation that next year’s earnings comparisons will drop because there will be slowing economic growth and no additional impact from the tax reductions. Both theories may be wrong. We are a capitalist economy and the lower tax rates are providing more capital for entrepreneurs and investors. New products and productivity drive the economy.

3. The argument against tax cuts is that they balloon the deficit. The pro argument is that we must accelerate growth to generate the tax funds to tackle the deficits. The argument against took a blow when once again the Treasury Department announced that tax receipts increased in 2018 due to higher economic activity. The deficit did rise, but that was due to increased spending not lower tax receipts. This has also been true after prior tax reductions. The success of the tax cuts and the divided political government reduce the anxiety about increasing taxes.

In summary, we believe the tax reductions are the major positive factors for the economy and securities markets going forward. We are hopeful that the other tax on U.S. citizens and businesses that this administration has significantly raised, the tariffs, will also be reduced.

Katz Family Financial