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Senate Approval of Tax Bill Drives Bank Stocks Higher


Year-long efforts to fulfill one of the major promises made by President Trump during elections have finally begun bearing fruits. The U.S. Senate passed an amended tax bill on early Saturday morning, which boosted investors’ confidence and led the stock market to rally on Monday.

One of the major changes proposed in the tax bill is a significant drop in the corporate tax rate — from 35% to 20%. This is likely to trigger confidence in the markets and spur economic growth by attracting investments from the companies along with increasing jobs.

However, the lower income groups are likely to see these changes as a downside. The bill repeals individual mandate in Obamacare, which will leave millions of people uninsured by 2027. Further, people are dubious that the last-minute changes might have left space for the accountants and lawyers to take advantage.

Nonetheless, the bill has successfully passed through the second stage and will be presented to a conference committee where representatives from the House and Senate will come together to draft the final bill.

A Narrow Win

The Senate was successful in approving the bill by just two votes, with no support from the Democrats.

In order to win confidence of some Republicans who were being doubted to vote for the bill, several end-moment changes were made. Yet, one of the Republicans, Senator Bob Corker, stood with the Democrats reflecting his concerns over the burden the proposed bill is likely to create on future generations through increase in public debt.

Changes That Helped Get the Majority

Handwritten changes between the lines have been made hastily on the official copy with an aim to get the bill passed through.

Some of the major changes are in reference to pass-through businesses like partnerships, popular with real estate developers. Relief was provided by reducing the percentage of tax deduction for such businesses by 2%.

Another change was with regard to state and local property tax deductible. The senate took back its previous proposal of ending the deductibility and agreed to make it up to $10,000 as agreed by the House.

Further, alternative minimum tax will now be adjusted for individuals and maintained as it is for the corporates, in place of being fully revoked.

Why the Hurry?

Upon failure of the efforts to repeal Obamacare and delay in fulfillment of promises, Trump was gradually losing confidence of the Americans.

With the mid-term elections coming up in 2018, the President sees this tax overhaul as an opportunity to win votes and maintain the majority in the Congress. Thus, he has given his supporters time till the end of 2017, to present the final copy.

What Comes Next?

Having been amended to win the majority, there are quite some differences in the copies approved by the House and the Senate. Republicans would now sit together and agree upon changes in a conference committee after which the bill would be again presented to both the houses for vote.

However, one major rule must be addressed before the bill is passed. A Republican tax bill is allowed to increase the fiscal deficit by $1.5 trillion in the first 10 years only. The Senate backed bill was expected to add $1.4 trillion over the next 10 years.

Why Bank Stocks Rallied

All things apart, banks have seemed to come into the spotlight breaking their records, on expectations of higher earnings on the back of lower taxes.

In fact, investors’ sentiments have been positive of late due to the to-be Fed Chair, Jerome Powell’s positive remarks on interest rate movement.

On Monday, JPMorgan JPM and Bank of America BAC gained more than 2%. Further, shares of M&T Bank MTB and KeyCorp KEY rose nearly 4%.

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