CitizensTrustA Division of Citizens Business Bankcbbank.com/investing

Donald EvensonSenior Vice President Chief Investment Officer

R. Daniel BanisExecutive Vice PresidentHead of CitizensTrust

INVESTMENTPERSPECTIVES2017: Edition 1 Changes to Fiscal Policy Are Important

Financial markets do not have political affiliations, but they do adjust swiftly to surprises.

The markets gave us several examples after the election; bonds sold off causing a sharp

rise in rates, the dollar strengthened significantly and equities adjusted by sector. Through

the end of year and well into 2017, the uncertainty of what a Trump presidency means will

decrease as campaign promises morph into policies. Sweeping political changes may be

ahead but they are subject to a process and that is a strength of our political system.

Ten years ago was the last time there was Republican control of Congress AND the

executive branch. In November of 2004, President Bush was re-elected and both the

House and the Senate retained their Republican majorities. This was neither a change nor

a surprise. President Bush was a well-known entity and the Congress that served for the

previous two years (the 108th) was Republican controlled as well. The 109th Congress

actually became known as the “do nothing Congress” and was remembered for what little

they achieved and how infrequently they met. In fact, both the “Illegal Immigration Control

Act of 2005” and “The Comprehensive Immigration Reform Act of 2006” failed to pass

into law.

As investors, it will be important to focus on the

unfolding fiscal policy changes that will occur

throughout 2017. Those that will have the most

dramatic impact on the economy and corporate

profits will garner investor’s attention and at the

top of the list is tax policy.

Investment Perspectives | 1

Tax Policy Matters the Most

President-elect Trump campaigned on many big issues; terrorism, Obamacare,

trade, immigration, the Supreme Court, infrastructure spending, to name a few.

None of the above has a greater potential to impact the economy and thus fi-

nancial markets than another big policy issue he ran on: Tax Reform. Tax reform

is more than tweaking tax rates. It is a fundamental change to the way the government administers and collects taxes.

Lost in all of the campaign noise of the summer was a tax reform proposal titled “A Better Way” released by Speaker

Paul Ryan in late June. A multi-committee task force had been working on this proposal since February. In early August,

shortly after its publication, Donald Trump amended many of his campaign’s tax proposals to more closely align with

the “blueprint” that the House had proposed. With the election now behind us and Republicans in control, these policy

proposals warrant consideration and serious analysis.

Perhaps we need tax reform every 20-30 years. Since the last major reform to our tax code in 1986, federal tax laws that

govern how we pay our taxes have grown from approximately 26,000 to 70,000 pages. President Reagan described the

tax code back then as “a haven for special interests and tax manipulators, but an impossible frustration for everybody

else.” It is in worse shape today and ripe for reform. The Tax Reform Act of 1986 is recognized as the largest reform

of our tax code in our Nation’s history and is given partial credit for the economic strength of the 80’s. Over 23 years

before that, in 1963, President Kennedy proposed the Tax Reduction Act which cut rates across the board by roughly

20%. It was signed into law in February on 1964 by President Lyndon Johnson, three months after Kennedy’s assas-

sination. GDP growth during the five years from 1964-1968 averaged 5.3%.

Personal Income Taxes

The current proposals from Republicans introduce dozens of ideas to reform the tax code, many of which are aimed at

personal income taxes. Propositions reduce the number of tax brackets from seven to three, lower the top tax bracket,

simplify deductions, and reduce the incentive to itemize. The AMT (alternative minimum tax) is eliminated. Taxes for

small businesses and pass-through entities are lowered and simplified. Almost half (47 percent) of federal tax revenue

comes from personal income taxes, which make it the largest source of government revenue and thus major changes

have a significant impact.

Corporate Taxes

The U.S. has the highest corporate tax rate in

the developed world at 35%. We are also one

of the few countries that tax overseas earnings

at the same rate when they are “repatriated”

back home. Our lack of global competitiveness drove tax inversion transactions to alarmingly high levels in recent years.

Corporate inversions became such a big issue that the Treasury Department implemented new rules in April of 2016 to

halt the trend of companies leaving the U.S. for nations with lower tax rates. However, inversions are simply a symptom

of a disease called “bad tax policy”. In 1960, 17 of the top 20 largest global companies were headquartered in the United

States. In 2016, that number has dropped to 6. Current proposals are for a corporate tax rate of 15% (Trump) to 20%

Investment Perspectives | 2

Could it really get this simple?

Simple, Fair “POSTCARD” Tax Filing Source: better.org

1 Wage and compensation income I

2 Add I /2 of investment income 2

3 Subtract contributions to specified savings plans 3

4 Subtract standard deduction OR 4

5 Subtract mortgage interest deduction 5

6 Subtract charitable contribution deduction 6

7 Taxable income 7

8 Preliminary tax (from tax table) 8

9 Subtract child credit 9

10 Subtract earned income credit 10

11 Subtract higher education credit 1 1

12 Tot al tax 12

13 Subtract taxes withheld 13

14 Refund due I taxes owed 14

Source: Bloomberg

Pace of Inversion Picks Up AgainDeals Completed Each Year

9

8

7

6

5

4

3

2

1

0

Congress enacts moratorium

on inversions, then new law

meant to stop them

Companies begin to

exploit exceptions in

new law

‘98 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15

Investment Perspectives | 3

(House) versus the current 35%. That would be a 15-20 point drop and the biggest cut in history. By comparison, the 1986

Act dropped the rate 12 points from 46% to 34%. There is currently an estimated $2.6 trillion in cash parked overseas un-

willing to pay the current tax rate. Republicans have proposed rates from 8% to 15% with a variety of conditions attached.

A permanent reform, as opposed to a one-time tax “holiday”, is preferred. Previous tax “holidays” did not produce the

growth or jobs that proponents advertised. Never-the-less, the dollar amount is multiples larger than the last time Con-

gress attempted to deal with this issue in 2004, when roughly $600 billion was overseas.

Source: Strategas; (OECD – Organization for Economic Cooperation and Development)

Statutory Corporate Tax RatesCombined Federal + Subnational Tax Rates

United States

OECD, Ex-US

OECD International Tax Competitiveness Corporate Tax ScoresTax Foundation 2016

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CitizensTrust is a division of Citizens Business Bank. Trust and Wealth Management are provided by CitizensTrust Wealth Management. The information provided is an opinion on economic outlook and not investment advice. The information is not offered with a product or service. This information is not intended to be a substitute for specific tax, legal, or

investment planning advice. We suggest that you discuss your specific questions with your qualified tax, legal or investment advisor. 1216

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Impact

Tax scoring is a guessing game and results can vary wildly depending on what assumptions are made. Even within that

purview, the numbers are still very large. Preliminary forecasts estimate the income tax cuts to have a fiscal impact in

the range of $200 to $350 billion. Corporate tax proposals could be another $200 billion annually, not including any-

thing from repatriation. One tax scoring entity put out an estimated fiscal impact of $560 billion in 2018, rising north

of $600 billion in the following years. At the third quarters GDP run rate of $18.6 trillion, every $186 billion of tax cuts

has a 1% impact on GDP. Even if only half the proposals are enacted, the impact to GDP growth could be near 1.5%.

This is why Republicans are focused on Tax Reform. Public statements by administration officials have identified GDP

growth as a top priority and nothing moves the needle like taxes.

The current environment substantially increases the likelihood of tax reform being enacted for the first time in de-

cades. Negotiating and implementing tax reform and other fiscal policy changes, is a process and will likely take longer

than those driving the change would like. Over time, financial markets and corporations tend to adapt to new fiscal

environments rather smoothly. However, just as new rules create new opportunities, they also introduce new risks. We

will be watching closely as events unfold during 2017.

As always, please reach out to your CitizensTrust contact with any questions that you may have.