Believe it or not, there are more market topics to talk about than tariffs.

I know it’s easy to focus on them when they seem to be affecting everything these days.

But as a research analyst, I’m always looking for catalysts that could trigger long-term investment changes. These catalysts can be positive or negative, propelling stocks significantly up or down, such as:

  • Earnings reports

  • New products

  • Activist investor activity…

Or…

They could be legislative changes like the ones President Trump has been enacting left and right.

Of course, the best way to handle these catalysts is to get ahead of them.

That’s why I want to turn our focus away from tariffs and discuss a different federal plan – one that could spark a great American manufacturing boom.

The Tax Cuts and Jobs Act 1.0 Explained

So far, the administration’s tariffs have been acting as a stick, a way to coerce industry back to the U.S. homeland. But that will only go so far.

Trump needs to find a carrot. And I think I know where he’ll look.

Back in 2017, President Trump signed the Tax Cuts and Jobs Act (“TCJA”), the biggest tax-specific overhaul in 30 years. Its most significant changes included:

  • Reducing five out of the seven income tax rates

  • Raising the child tax credit to $1,700

  • Lowering corporate taxes from 35% to 21%

I knew that last part would have significant business impacts at the time, telling MSNBC that, “the number one catalyst is corporate tax [reform].” Sure enough, we went on to see greater employment, business growth, and economic expansion.

The tax overhaul was also welcome news to investors. That’s because many American firms suddenly had extra cash that would have otherwise been paid in taxes. And many public companies used this money to reward shareholders in the form of buybacks, which surged to then-record levels in 2018.

Source: S&P Global

However, parts of the TCJA are set to expire this year. And other aspects are already being phased out. This includes the “full expensing,” or 100% bonus depreciation, clause. It allows companies to accelerate depreciation by recovering the cost of acquired assets – such as equipment or machinery – in the purchase year rather than over the course of its useful life.

That may sound like just an accounting technicality, but it has huge implications on business.

On June 7, 2023, the CATO Institute published a piece on full expensing, writing how it “protects businesses from inflation that erodes the value of the deductions and increases effective tax rates.”

That same month, the Economic Investment Alliance interviewed Tax Foundation Senior Economist Erica York on the subject. When asked what she would “expect to see if [full expensing] were phased out, here’s how she answered:

We all implicitly understand that it’s more valuable to have money now than it is in the future. That’s for two reasons. One: Inflation means that $1 in the future will be worth less. And two: Because of the opportunity costs. The $100 now could do something productive and earn a return on it. Waiting on that money means giving up that opportunity.

Yet despite this obvious reality, under the current version of TCJA, full expensing was reduced to 80% expensing in 2023. In 2024, it fell again to 60%. And by 2027, it will completely expire. Unless, of course, Congress acts to reinstate it for good.

Source: National Association of Manufacturers

If President Trump is able to permanently pass a version of his 2017 plan… you’d better believe we’ll see an increase in economic output again.

A Changing Political Reality

I’ve spoken with several business insiders – including several family office clients – who tell me how important restoring 100% expensing is to them. It would reduce their cost of capital for new equipment across the manufacturing sector.

The previously mentioned Tax Foundation, it turns out, analyzed what this would look like on a national scale. Assuming normalized inflationary rates, it found this single change would grow the economy by 0.4% over time. The size of capital stock, meanwhile – all physical assets owned by businesses – would rise 0.7%, creating 73,000 jobs.

“Those percentages may sound small,” York noted. “But we’re talking about economic aggregates, so it’s actually billions of dollars’ worth of economic benefit.”

Knowing that, how could Congress not act to make full expensing permanent?

Of course, our legislators do a lot of things that aren’t necessarily best for their constituents – on both sides of the aisle. And there is a lot of partisanship to expect at any time, much less under Donald Trump.

So far this time around, Democrats have largely pulled together to denounce every one of his decisions. And with such slim majorities in both the Senate and House, Trump doesn’t have any wiggle room.

We can’t forget that it wasn’t just Democrats who tried to kill the first Tax Cuts and Jobs Act in 2017. There were Republican defectors as well.

Even so, I do think Trump can pull off TCJA 2.0… especially as Democrats are forced to come to terms with their growing unpopularity. I don’t mean to get overly political here, but the party is in significant trouble right now.

That’s why you have New York Times opinion pieces on “Cures for What Ails the Democratic Party.” The largely centrist Newsweek ran
“Democrats Have Become a Party Without a Soul. Is Their Day Done?.”

And the not-even-close-to-centrist Vox acknowledged, “The Daunting Task Facing Democrats Trying to Win Back the Working Class.” So there may be defections coming to typical party-line votes from here.

The Full Force of Full Expensing Unleashed

If that’s the case and TCJA 2.0 does pass Congress, there are so many companies that should benefit. The manufacturing sector, for one, will almost certainly see increased orders.

I also expect many small caps – like the ones I recommend in my Wide Moat Confidential – to skyrocket as well. In fact, I know one in particular that will especially benefit…

In short, if you think Trump’s tariff moves were a big catalyst… you ain’t seen nothin’ yet. Though I expect this one will have much faster, positive effects.

I hope to meet with President Trump soon to discuss this enormous catalyst and his strategy to pass it. So I’ll keep you updated as I get more information.

In the meantime, make sure to tune in to this week’s Wide Moat Show on YouTube, where Nick Ward and I will discuss our Top 10 sleep-well-at-night stocks. That episode will air Thursday at 11 a.m. EST.

Regards,

Brad Thomas
Editor, Wide Moat Daily

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Do you agree with Brad that if TCJA 2.0 passes in Congress then many companies will benefit? Write us at [email protected].