By Ryan Derousseau
June 15, 2018

The full effect of President Trump’s tax reforms, which passed in December, will likely take years to realize. But one immediate indicator has popped up, showing that a big goal of the bill is already materializing: tax simplification.

For proof, just look at the performance of the stock of one of the country’s largest consumer tax prep firms.

H&R Block reported its fourth quarter earnings this week, and for the first time the company outlined how a simplified version of the tax code is hitting its bottom line. The result: H&R Block’s shares sank more than 20%.

Block officials announced that they believe revenues for the upcoming year (H&R Block’s fiscal 2019 year) are expected to come in between $3.05 billion and $3.1 billion. That’s below what analysts were expecting and less than the $3.16 billion that the company generated this past year.

Under the new simpler rules, it turns out, fewer filers are expected to come through their door.

And as it turns out, Donald Trump may have been right. Last year, Trump proclaimed: “We’re going to simplify very greatly the tax code. It’s too complicated. H&R Block probably won’t be too happy.”

The financial release that H&R Block released “saw simplification finally take a bite out of the company’s future prospects,” wrote BTIG analyst Mark Palmer shortly after the company’s announcement, according to CNBC.

Perhaps the single biggest thing that the Tax Cuts and Jobs Act did to simplify the system was to increase the size of the standard deduction from $6,350 for single filers in 2017 to $12,000. And for married couples filing jointly, that standard deduction rose from $12,700 for those filing jointly to $24,000.

This will reduce the number of people who will itemize deductions, and hence, need a tax expert to lay it all out for them.

The number of filers to itemize their taxes is expected to fall by about 27 million under the new rules, according to the Tax Policy Center. To counter higher standard deductions it capped some common deductions, like the $10,000 limit for writing off state property taxes.

This doesn’t necessarily mean that tax reform has succeeded in meeting all its goals.

The money that companies are repatriating back to the U.S. under a reduced tax regime hasn’t reached the levels of reinvestment that the administration expected, to this point. The repatriation rules, however, have allowed companies to significantly increase share buybacks.

There’s also the on-going issue that the tax reform occurred while the economy sat in a position of strength, and during an eight year bull-run (which has now moved into its ninth year). This has brought fears that growth may get out of hand, which could increase inflation at a faster pace than markets expect.

It’s a big reason why some prognosticators believe a recession will hit sooner rather than later. The Federal Reserve increased interest rates for the second time this year on Wednesday, signaling that two more could come by the end of the year, as fighting inflation has become more important than propping up the economy.

Still, it’s good to know that it’ll likely be easier to file those taxes, unless you’re an H&R Block investor, of course.

 

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