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Senate Republicans Complicate Trump Tax-Reform Quest

Senate Republicans Complicate Trump Tax-Reform Quest
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Wednesday, 15 November 2017 02:21 PM Current | Bio | Archive

Melissa and I have been watching legislators make sausage in Washington, DC’s sausage factory. It’s not pleasant to watch. It can be a little nauseating and make one’s head spin. Sausage tends to include lots of mystery meat. There is certainly lots of mystery meat going into producing tax reform in Washington currently.

Yesterday morning, we thought that the House and Senate Republicans were likely to deliver the sausage before the end of the year. By the end of the day, we weren’t so sure.

Senate Republicans proposed to add a repeal of Obamacare’s individual mandate to their tax legislation. That could seriously complicate achieving tax reform at all.

If the Republicans still manage to push it through both Houses of Congress, there would be individual tax reform that mostly benefits the middle class, with some taxpayers paying more and some less in taxes on balance. The corporate tax rate would probably get cut to 20%, which would be very positive for corporations that have actually been paying the current statutory rate of 35%.

However, NIPA data show that the effective tax rate on all corporations averaged 21.3% during Q2-2017 (Fig. 1)! The S&P 500 companies had an effective tax rate of 26.4% last year (Fig. 2).

There would likely to be a significant tax cut for repatriated earnings without any restrictions in how the after-tax proceeds are used. If so, then significant sums of corporate cash could come back to the US and used to buy back more shares, increase dividends, pay for M&A deals, boost capital spending, and even increase workers’ pay.

Yesterday morning, we wrote, “Investors certainly aren’t worrying about a fiscal-cliff meltdown this year as they did in late 2012. Maybe we should all be worried about a fiscal-led meltup this time.” Now, who knows? There are lots of good reasons for staying away from sausage factories. If tax reform is now less likely to happen, we are sticking with our view that the strength in the global economy and earnings will keep the bull market going with or without tax cuts. A meltup becomes less likely without tax reform, which is alright with us too.

To better understand where US tax reform stood prior to the turn of events late yesterday, I asked Melissa to do a short chronology of the major related events over the past few months.

To track the stock market’s reaction to those events, Joe charted the respective dates against the S&P 500 price index (Fig. 3). We are also monitoring the S&P 600 SmallCaps stock price index, which has been especially sensitive to the changing prospects for tax reform (Fig. 4). Since tax reform officially kicked off on 9/27, the S&P 500 price index has increased 3.5% through Monday. However, it is up 20.8% since last year’s Election Day, partly on expectations of tax reform. Here are the important happenings since then and a look at what lies ahead:

(1) September 27 (S&P 500 up 3.5% since the day before): Unified framework released. On 9/27, the Trump administration, the House Committee on Ways and Means, and the Senate Committee on Finance announced a “Unified Framework for Fixing Our Broken Tax Code.” The intent of the framework was to serve “as a template for the tax-writing committees” in the House and Senate. (It followed the much less detailed White House one-pager, which had been released on 4/26.)

Given that it was just an outline, the framework was not officially scored by the Joint Committee on Taxation (JCT), which is a bipartisan group that aids members of Congress with scoring tax changes. However, the Tax Policy Center (TPC) provided an unofficial preliminary estimate of a loss of $2.4 trillion in net revenue impact over the next 10 years. The TPC turned around the estimates on the same day that the framework was released.

That estimate was significantly lower than the TPC’s $6.2 trillion estimate of the cost of the then presidential candidate Trump’s tax proposals back in October 2016.

(2) October 19 (S&P 500 up 0.9% since the day before): Budget Resolution passed. On 10/19, the Senate approved by a slim 51-49 vote the FY 2018 Budget Resolution, officially titled: “Concurrent resolution establishing the congressional budget for the United States Government for fiscal year 2018 and setting forth the appropriate budgetary levels for fiscal years 2019 through 2027.”

In addition to other non-tax-related items, the resolution included reconciliation instructions to the House Ways and Means Committee and to the Senate Finance Committee to provide for changes in laws, specifically comprehensive tax reform, that will add no more than $1.5 trillion to the deficit over the next 10 years.

(3) November 2 (S&P 500 up 0.2% since the day before): House proposes TCJA. On 11/2, the House Ways and Means Committee released its first draft of the legislation, titled the “Tax Cuts and Jobs Act” (TCJA). The JCT’s estimate for the tax changes totaled just under the $1.5 trillion over the next 10 years—no surprise there.

(4) November 9 (S&P 500 down 0.4% since the day before): Committee on Ways & Means passes TCJA. Just a couple of amendments proposed during the House Ways & Means markup sessions made it into the House’s final version of the legislation. The Committee approved it on 11/9 with a vote of 24-16 on party lines, reported The Hill. The full House is expected to vote on it this week.

(5) November 9: Senate version released. On the same day, 11/9, the Senate Finance Committee released its version of the tax reform legislation. As per the budget reconciliation instructions, the Committee’s proposal totals just under $1.5 trillion in net revenue cuts over the next decade as scored by the JCT. Although the versions arrive at more or less the same grand total, the Senate version differs from the House version in a number of ways, as detailed below.

(6) November 13: Senate markup sessions held. Upon release of the Senate version of the tax plan on 11/9, Senate Finance Committee Chairman Orrin Hatch (R-UT) announced in a press release that the committee will examine and debate the proposal known as the “Chairman’s mark.” Those sessions kicked off on Monday 11/13 at 3pm.

“The Senate Finance Committee traditionally holds conceptual markups, meaning the legislation is debated and examined as a detailed narrative, rather than actual bill text. The proposal released today is a conceptual mark,” stated the 11/9 press release.

Hatch stated: “This is just the start of the legislative process in the Senate. We expect robust committee debate on the policies in this bill, will have an open amendment process, and hope to report legislation by the end of next week. I’m confident that if we continue to allow each chamber the opportunity to work its will, we can easily reconcile our differences.”

Any way you slice it and dice it, federal deficits will be larger, and so will the amount of federal government debt. With the economy at full employment, the FY 2017 deficit was $665.7 billion (Fig. 5). Now multiply that by 10 and add $1.5 trillion for the tax cuts (maybe). The result is lots more publicly held debt added to the record $14.8 trillion during October (Fig. 6).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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EdwardYardeni
Senate Republicans proposed to add a repeal of Obamacare’s individual mandate to their tax legislation. That could seriously complicate achieving tax reform at all.
senate, republicans, tax, reform, trump
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2017-21-15
Wednesday, 15 November 2017 02:21 PM
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