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Trading  | December 4, 2017

While many in the ‘resistance‘ have vociferously denounced the Senate tax reform bill in the last 48 hours, former Treasury Secretary Larry Summers took the proverbial biscuit by warning that “thousands will die as a consequence of this new tax bill.

The Congressional Budget Office estimated that the tax bill could reduce insurance coverage by 13m people, which to be conservative we can round down to 10m people.


Recognising all the uncertainties – for example, the fact that the group becoming uninsured as a result of the individual mandate repeal is likely to be healthier than the group Sommers et al (2014) study in Massachusetts – if we treat the 176-830 range as implying that it is safe to assume that 1,000 more uninsured means one death, the conclusion would follow that the tax bill will result in 10,000 extra deaths per year.

After serious backlash from his over the top comments, Summers took to CNBC to defend it:

“I think this bill is very dangerous,” he said on CNBC’s “Squawk Box” program.  


“When people lose health insurance, they’re less likely to get preventive care, they’re more likely to defer health care they need, and ultimately they’re more likely to die.”

But was met with some skepticism. Summers debated the issue on air with Ken Langone, the Home Depot founder and benefactor of the NYU Langone Medical Center. Langone said he doubts that Summer’s fears will come to fruition, citing quality of care and increased life expectancy.

“Frankly, this argument that people are going to die is a little bit more emotional than I think the issue calls for,” Langone said.

So Summers’ (and Steyer’s) are convinced this is bill means armageddon for America, but Bloomberg’s Jonathan Levin , Andrew Pollack , and Drew Armstrong take a slightly less emotional and more analytic approach at who the real winners and losers may be from the GOP tax reform bill.

The tax bill passed by Republicans in the U.S. Senate over the weekend may boost profits for industries from banking to retail to fossil fuels. It also could put the squeeze on hospitals and renewable energy firms.

While the plan is still subject to revision, the centerpiece of the existing legislation is a reduction in the corporate income tax rate to 20 percent from the current 35 percent, along with a provision that allows some companies to bring back hundreds of billions of dollars in foreign profits at a lower rate than they otherwise would’ve paid.

The Senate bill preserves the alternative minimum tax for corporations after originally proposing to eliminate it. With the regular corporate rate now set to drop to 20 percent — the same as the corporate AMT — it’s unclear if companies would be able to use research and development credits to lower their tax bills.

The bill, which underwent a raft of last-minute changes late Friday and early Saturday before passage, may still see more alterations as Senate and House leaders begin work to reconcile their two versions. President Donald Trump also weighed in Saturday, unexpectedly saying the corporate tax rate in the package could reach 22 percent.

Here’s how sectors may fare under the legislation as it stands:

Asset Managers

Stocks of U.S.-based asset managers rose to a record last week on optimism about the tax overhaul. Among the top gainers were Federated Investors Inc., Bank of New York Mellon Corp., Franklin Resources Inc., Waddell & Reed Financial Inc. and Eaton Vance Corp.

That’s in part because asset managers typically pay tax rates of 30 percent to 35 percent, according to data compiled by Bloomberg. It’s higher than many other industries because the firms generally qualify for few deductions, Gabelli & Co.’s Macrae Sykes said last week.

Assets managers also benefit from rising equity markets, as higher prices increase the value of the holdings they manage and improve the performance of their funds.

Asset managers with foreign earnings could see particular benefits from the Senate bill, according to Rory Callagy, a senior vice president with Moody’s Investors Service.

As a group, they’d also gain from the bill’s tax cuts for individuals — as well as changes to the alternative minimum tax and restrictions on the estate tax. Those provisions would give individual investors “more of their income and inherited wealth” to put into mutual funds and exchange-traded funds, “helping managers grow assets and related fees,” Callagy wrote.


Lenders including JPMorgan Chase & Co. and Citigroup Inc. have rallied on news of the bills’ progress in Congress. “Banks would be one of the clearest beneficiaries of this tax reform bill,” Isaac Boltansky, an analyst at Compass Point Research & Trading in Washington, said in an email early Saturday after the Senate amended the bill.

If Republican promises of faster economic growth are realized, banks will benefit with corresponding loan portfolio expansion, Boltansky said. Moreover, as corporations that pay relatively high effective tax rates themselves — with fewer available deductions — banks also stand to benefit a great deal from the reduced overall rate.

Banks would pay slightly higher rates than other types of companies under a new tax on certain payments to overseas affiliates. However, they’d benefit from a last minute change to another aspect of the so-called base erosion anti-abuse tax, or BEAT, which stipulated that payments involving derivatives wouldn’t count toward triggering the levy.

Another provision would eliminate the deduction for Federal Deposit Insurance Corp. premiums by banks with consolidated assets above $10 billion.


Drug and biotechnology companies would be among those benefiting from paying a reduced tax rate on repatriated earnings.

The money isn’t likely to go to workers, though. Senior executives from Pfizer Inc. and Amgen Inc. have said they’ll use a lower tax rate and cash inflow to return money to shareholders through buybacks and dividends. The new tax regime could also set off a mergers-and-acquisitions boom, as flush war chests give large drugmakers the means to snap up assets they’ve had their eyes on.


The Senate bill’s repeal of Obamacare’s individual mandate won’t help health insurers and hospitals, which are already working to cope with the Trump administration’s efforts to undermine the law. Ending the individual mandate — a requirement that all Americans carry health insurance coverage or pay a fine — is likely to raise the number of uninsured.

For health insurers, that means the only people who will buy coverage are those that need it most — typically sicker, more costly patients. In response, many have already started to raise the premiums they charge, or to pull back from some of the law’s markets.

Hospitals have less flexibility. Any increase in the uninsured means a decrease in the number of paying customers. Sick people still show up at the emergency room for care, though, and hospitals often have to write off their unpaid bills.

Private Equity

Because of their use of leverage to juice returns, private equity firms are primarily watching proposals to limit the amount of interest expense they can deduct from portfolio companies’ taxable income.

House Republicans’ bill would cap the deduction at 30 percent of a company’s earnings before interest, taxes, depreciation and amortization. The cap in the Senate bill is stingier at 30 percent of earnings before interest and taxes — a much lower measure than Ebitda. The firms can currently saddle their companies with debt and deduct the full interest cost.

Dealmakers are also watching a potential change in how their personal earnings are taxed. Currently, their cut of profits on private equity investments made using client capital is treated as a long-term capital gain — and taxed at a lower rate than ordinary income — if the investment is held for at least a year. Both the House and Senate bills would lengthen the one-year standard applied to such earnings, known as carried interest, to three years.

Real Estate

For commercial real estate developers and owners, the Senate version brings few significant changes. The biggest revision would create a new tax break for many — a 23 percent deduction on business income, subject to certain restrictions.

The deduction would be available to businesses organized as so-called pass-throughs — including partnerships, limited liability companies and S corporations. Pass-throughs don’t pay taxes themselves but pass income to their owners, who — under current law — pay taxes at their individual income-tax rates.

Many commercial real estate developers and owners have their businesses set up as such. The House would provide a pass-through tax rate via a different mechanism — the disparity will be one of the key differences that lawmakers will have to work out.


The technology industry also stands to benefit from the provision allowing cash stockpiled overseas to be returned home at a lower tax rate.

U.S. companies have $3.1 trillion in overseas earnings, according to a Goldman Sachs & Co. estimate. The largest stockpile belongs to Apple Inc. at $252.3 billion — 94 percent of its total cash. Microsoft Corp., Cisco Systems Inc., Alphabet Inc. and Oracle Corp. round out the top five, data compiled by Bloomberg show.

Dean Garfield, chief executive officer of the Information Technology Industry Council, which represents almost every major tech company, applauded Senate passage of the bill, saying it “moves us closer” to “a more competitive economy.’


Telecommunications companies, which need to regularly upgrade their networks, will be winners if provisions that increase the deductibility of capital investments stay in the final versions of the bill. AT&T Inc. Chief Executive Officer Randall Stephenson said his company will invest $1 billion more in U.S. infrastructure in 2018 if Trump signs off on tax reform.

The reduction in corporate income tax combined with enhanced deductions for capital expenditures over the next five years will allow AT&T to invest more in fiber optic cable to U.S. homes and businesses, he said.


Industrial firms are likely to see the overall package as a positive because of what it would mean for overseas earnings that they’ve left stockpiled offshore.

Both the Senate and House bills have provisions that encourage companies to repatriate past international profits at attractive tax rates. They would then be able to invest more in U.S. operations and pursue growth opportunities and acquisitions. Critics point out that when companies have been given incentives to repatriate earnings in the past, they used the bulk of them on returning cash to shareholders.

Fossil Fuels

Lowering the corporate tax rate and changes to cost-recovery provisions will help spur investment and create jobs, according to the American Petroleum Institute, the industry’s main lobbying group.

The Senate plan would also open a portion of Alaska’s Arctic National Wildlife Refuge to oil and natural gas drilling — a move that lawmakers estimate could yield $1 billion in revenue over the next decade. A final tax plan may also increase sales from the Strategic Petroleum Reserve to help boost short-term revenues.

Environmental groups have questioned the revenue figures and industry interest in drilling in ANWR. Moreover, not every fossil-fuel producer is pleased with the legislation. Robert Murray, CEO of coal company Murray Energy Corp. and a staunch supporter of the president, attacked the bill as a “mockery of tax reform” because it fails to repeal the corporate alternative minimum tax.

“This legislation is much worse than the status quo,” Murray said in a statement Saturday. “Our company will see a significant tax increase resulting primarily from the loss of the business interest expense deduction.”


The proposed tax bill threatens a critical but esoteric source of wind and solar finance: tax equity. In tax-equity deals, renewable-energy developers sell portions of their projects’ tax credits to corporations — often banks and some insurance companies — that can apply the credits to their own tax bills. That market is expected to total $12 billion this year, according to Bloomberg New Energy Finance.

Most tax-equity investors are multinational companies and the issue now is that the Senate version includes a provision that imposes a minimum tax on these companies’ foreign transactions. If they have to pay a minimum tax, they may no longer have any need for the credits acquired through tax-equity deals.

“It literally will grind our industry to a halt,” said John Marciano, co-head of project finance at Akin Gump Strauss Hauer & Feld LLP. “Developers would be fighting for the few remaining investors.”


Retailers expect the tax overhaul to boost demand for their goods and services. Most chains rely on middle- and low-income shoppers for the bulk of their sales, and they say aspects of the legislation on the personal side — like doubling the standard deduction — will give such individuals more discretionary income.

The advantage would be temporary under the Senate bill; its individual tax cuts would expire in 2026.

After successfully lobbying to kill a House plan for a border-adjusted tax that would apply to imports, retailers have fully supported the overhaul. They tend to pay effective tax rates that are higher than industries with significant overseas operations, such as energy and pharmaceuticals, so almost any reduction in the corporate rate is seen by retailers as a boon.


Agricultural groups have been split about the legislation, with the National Farmers Union, the second-biggest such group in the U.S., opposing the Senate bill. While it includes provisions that farmers support, such as depreciation of equipment, some are worried it will eventually result in cuts to insurance and food programs that support the sector.

Deficit-boosting tax legislation may mean less money for other programs. A Congressional Budget Office report released last month concluded that tax legislation would trigger automatic spending cuts of as much as $136 billion in the current fiscal year.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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