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Trump's Floundering Healthcare Reform Scares Investors

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Thursday, 27 April 2017 09:54 AM Current | Bio | Archive

When at the White House briefing on the administration’s proposed tax reform, a one-page list of bullet-points of less than 250 words announcing,“The biggest individual and business tax cut in American history” was handed out to the press and while Treasury Secretary Steven Mnuchin and Gary Cohn, the director of the National Economic Council, gave their briefing on the proposed tax reform, it didn’t take long before it became evident that Trump’s tax plan leaves several crucial issues unresolved, which for example includes questions like:

  • Whether companies could immediately write off capital expenses.
  • Where to set the one-time tax rate on US companies stockpiled foreign earnings.
  • Where the new tax brackets for individuals would be set.
  • How the new tax plan will be paid for.

When Treasury Secretary Mnuchin answered during his briefing a question of the press if the tax plan pays for itself and if the plan is revenue-neutral he answered: “The core business is make business rates competitive, bring back trillions of dollars to create jobs, simplify personal taxes, create a middle-income tax cut … This will pay for itself with growth and with reduced -- reduction of different deductions and closing loopholes …This plan is going to lower the debt-to-GDP. The economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues,” it became crystal clear that too much unknowns remain, which will not become clear, and when they do, it will most probably not be before 2018.

About the subject of bring back trillions of dollars, I’d like to add here that when in 2004 Congress approved a repatriation tax holiday that brought $312 billion back to the United States, most of the money was used for giving it back to shareholders and not for enhancing economic growth.

In relation to this subject, it might be helpful for long-term investors who want to have a somewhat deeper insight on what has happened before and that could happen again, to keep in mind that in December of 2011, the Congressional Research Service published a Report for Congress (R40178) under the title “Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis” wherein we read, “Empirical analyses of the stimulative effects of the repatriation provisions in the American Jobs Creation Act also suggest a limited stimulative impact from the provisions. They conclude that much of the repatriated earnings were used for cash-flow purposes and little evidence exists that new investment was spurred.”

In simple words, due to the lack of important details in yesterday’s announcement it’s certainly not an overstatement to say that all investors, it doesn’t matter if they are short-term or long-term, got another layer of uncertainty to consider, and as financial markets don’t like uncertainty, it should not come as a surprise that the reaction to the new tax proposals was less enthusiastic than might have been supposed.

Investors may also be somewhat scared by the experience of the Trumpcare healthcare reform floundering in Congress.

Besides that, President Donald Trump told Mexico and Canada that he is not planning the immediate abrogation of the North American Free Trade Agreement or NAFTA at “this time.”

The president said: "It is my privilege to bring NAFTA up to date through renegotiation ... It is an honor to deal with both President Peña Nieto and Prime Minister Trudeau, and I believe that the end result will make all three countries stronger and better."

We also got some geopolitics in play with an apparent escalation of U.S. concerns about North Korea. The New York Times reported, “A senior White House official, who spoke on the condition of anonymity, declined to discuss the nature of the military preparations or the timetable for seeing a change in North Korea’s behavior. He also said the administration was considering returning North Korea to the government’s list of state sponsors of terrorism.”

For financial markets, this sort of situation tends not to have a significant impact until the very last minute.

So, although there may be some short-term noise, investors are likely to focus elsewhere for the time being.

Over in Europe, today is monetary policy decision day for the ECB. In this context, Reuters said, also in the context of the French presidential election, "There is, however, little appetite to change at this Thursday's meeting the pledge to buy bonds at least until the end of the year and to keep rates at rock bottom until well after that."

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Investors may also be somewhat scared by the experience of the Trumpcare healthcare reform floundering in Congress.
investors, financial, markets, trump, health, care
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2017-54-27
Thursday, 27 April 2017 09:54 AM
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