Parts of the wealth and financial services sector haven't exactly fallen over with enthusiasm over proposals put out this week to cut corporate and certain personal tax rates.

Wealth managers have responded with skepticism to proposals by the Trump administration this week to slash corporate taxes to 15 per cent from their current 35 per cent level, a move that would take the US from being one of the highest corporate taxers to one of the lowest. Trump also plans to cut taxes on individuals.

This week officials proposed one of the largest tax cuts in US history. Treasury Secretary Steven Mnuchin has stated the goal of the cuts is to stimulate economic growth - which could have a big impact on numerous corporate fields, such as mergers, investment funds, real estate investments, as well as pesonal wealth planning.

The measures include a one-time tax on about $2.6 trillion of earnings US firms have sent abroad, responding to controversy about how corporates such as Google, Apple, Starbucks and others have chosen low-tax jurisdictions.

The US adopts a worldwide, rather than territorial, approach to tax - contrasting with the practice of most other nations such as Germany, the UK and Canada. The existing 35 per cent corporate tax rate, which can be even higher when state exactions are taken into account, contrasts with an OECD average corporate tax rate of around 25 per cent. Countries such as the UK have continued to lower corporate rates. Organizations such as the Washington DC-based CATO Institute, a free market think tank, have argued that if policymakers are irate at firms parking earnings overseas, the simplest solution is to cut rates and encourage earnings to be repaid to shareholders, enriching the US domestic economy.

However, an issue is how such a shift might be paid for if for a period of time there is a shortfall on revenue. In some ways the argument is a repeat of the controversy around "supply-side" economics in the 1980s Reagan era, when income tax rates, particularly marginal rates, were slashed, with the promise that the boost to economic growth would make the cuts pay for themselves through higher revenues. Similar policies in cutting top corporate and personal taxes were pursued by the Thatcher government in the UK.

“Yesterday’s announcement fell far from the market’s expectations as it lacked sufficient detail and no explanation of how it was going to be funded.  The Trump administration still has a long road ahead to get the tax reform through. Although there is agreement in both parties that the tax system in the US needs reform the President will need to make compromises to win supporters from each party. In particular the US government remains heavily indebted and therefore is unlikely to allow significant tax cuts without significant cuts in spending," Adrian Lowcock, investment director, Architas, a UK-based firm, said.

Capital Economics, a consultancy and forecasting firm, said: "President Trump’s latest proposal for tax reform does not provide us with a reason to alter our forecast that the S&P 500 will end this year lower than it is now, as margins are squeezed by rising wages and a rebound in the dollar. His plans are little changed and are still likely to be watered down significantly."

Hussein Sayed, chief market strategist at FXTM, the international foreign exchange firm, said of the announcement: "Trump's big tax reforms and tax reductions on Wednesday proved to be not so big, at least from Wall Street’s perspective. US equities shrugged off earlier gains after flirting with all-time highs, the dollar pared back some gains, and Treasury yields declined slightly from a two-week high."

The market’s reaction to the core principles of President Trump’s tax plan, which included a cut to corporate tax from 35 per cent to 15 per cent, isn’t based on the `buy the rumors, sell the news' phenomenon, but it reflects investors’ skepticism that the proposed cuts will be very difficult to pass through Congress."

"The lack of details contained on Trump’s single piece of paper was perceived as a publicity stunt for the President as he celebrates his first one hundred days in the Oval Office, and unfortunately, seemed more of a wish list than a serious starting point," the strategist continued. "Many economists agree that it’s almost impossible for the proposed plan to be revenue-neutral, and that’s why Democrat and Republican deficit hawks will stand against it. Although I think we will see some sort of tax cuts and reforms, it’s not likely to occur by August this year, and of course won’t be of the proposed magnitude, which is likely to be a negative factor to the US dollar and equities," he added.

Other measures
As far as taxation of individuals is concerned, the administration proposes to meld the existing seven income-tax rates to three, cutting the individual top rate to 35 per cent from 39.6 per cent. It would also end a 3.8 per cent net investment income tax that applies only to individuals who earn more than $200,000 a year, repeal the alternative minimum tax and eliminate the estate tax, which currently applies only to estates worth more than $5.49 million for individuals and $10.98 million for couples (source: Bloomberg, other).

The plan would eliminate the federal income-tax deduction allowed for state and local taxes.

(Editor's comment: It is a shame that some of the comments about the Trump tax proposals, particularly on corporate tax rates, have been so pessimistic or dismissive. Because whatever else one can say about the President's agenda, slashing some of the highest corporate tax rates in the world and encouraging US businesses to bring back home money that has been parked offshore, often to the detriment of economic efficiency, is not just popular with stockholders (ie, millions of people with their 401(k)s and other funds, but good policy. Trump can take a leaf from the Ronald Reagan playbook. The "Gipper" famously simplified and cut tax rates in the 1980s, and while yes, the deficit ballooned, that was as much about spending on defense as it was about tax cuts. Corporate rates of 35 per cent, or even more, are ultimately a tax on the wider economy. People, not legal entities, pay taxes. If policymakers want to stop endless finagling of the tax system by "base erosion", or "corporate inversions" (see here), or other tactics, the best solution is to cut tax rates and simplify the system. Such a step will also remove some of the deadweight costs of tax compliance, and improve the supply side of the US economy. Sure, there is the issue of political will. But with a Republican majority in both the House and Senate, now is the time to challenge what Milton Friedman called the "tyranny of the status quo".)