Here’s one way millions of Americans will benefit from the Republican tax reform, even if they don’t benefit directly from lower tax rates: the booming stock market.
President Trump alluded to this benefit when he recently asked some in the media if they had looked at their 401(k) balance lately.
Millions of Americans, both working and retired, have personal retirement plans, which can include both regular and Roth IRAs and defined-contribution employer plans (e.g., 401(k), 403(b), etc.).
While investments vary, we know that trillions of dollars are in stocks, bonds, mutual funds and exchange traded funds.
According to a recent study from the Center for Retirement Research at Boston College, 42.5 million households owned some type of IRA in 2016.
The study authors claim about $7.8 trillion is sitting in IRAs and another $5.7 trillion in 401(k)-type plans. Together, that’s about $13.5 trillion.
And while Trump only mentioned 401(k) accounts, that was simply a way of referring to those invested in the stock market generally. Millions more have accounts that are not retirement based.
Gallup News reports that 54 percent of U.S. adults are invested in the market, which includes both normal and tax-preferred retirement accounts.
To be sure, a greater percentage of those making more than $75,000 a year are investing, but Gallup says 54 percent of middle-income workers earning between $30,000 and $75,000 are also in.
How will tax reform benefit these Americans?
The Center for Retirement Research study authors estimate that the average IRA in 2016 had assets of about $177,000.
Had the average IRA owner put that money in an index fund that followed the S&P 500 at the beginning of 2017, that investment would have increased by about 18.5 percent so far, or about $32,000 — because that’s how much the S&P 500 is up.
Alternatively, had the IRA owner put that $177,000 in an index fund that followed the tech-heavy NASDAQ, the account would be up about 27 percent year to date, or about $47,800.
Such gains are far greater than the vast majority of people will receive from any tax cuts.
Of course, retirement account owners who made more risky investments could have seen much higher — or much lower — returns. And those who chose very safe, low-risk options might have seen only a slight increase. But investors who wisely tracked the market have done very well.
President Obama has recently been trying to take the credit for the stock market rise. But we know that the recent increase is a “Trump bump” because it began the day after Trump was elected, and has roared on ever since.
Part of that bump is based on the expectation of tax reform, which looks like will happen. Part is the Trump administration’s effort to scale back some of the regulatory onslaught of the Obama administration — Trump’s famous call to cut two regulations for every new one created.
Part of the increase is a result of businesses believing they won’t be blindsided by expensive and expansive new mandates and programs — such as raising the minimum wage or a mandatory paid time off law.
And one always has to concede that part of a major market climb may be a little of that “irrational exuberance” once identified by former Federal Reserve Bank Chairman Alan Greenspan.
But the economy is improving at a more rapid pace and most of it is due to both the actions of and expectations for the Trump administration.
The point is that any tax reform plan nearly always benefits some more than others. But the way to measure the success of tax reform is if businesses begin to invest and expand, both of which create jobs and grow the economy.
The GOP plan will do exactly that. The stock market has recognized that fact and has been responding accordingly. And while not everyone will receive a tax cut, millions of Americans, including middle-income earners, will benefit enormously from a thriving economy — and a booming stock market.