Pivot to Tax Policy (Mar. 28)

Update 171 — Pivot to Tax Policy

Time to Pass a Bill or Pass the Ball

Donald Trump’s presidency is at risk on several fronts.  For our purposes, the most serious of these is the risk of a legislatively stillborn administration.  After  the Trump-Ryan health care brick at the buzzer last week, you might think Infrastructure would be a lay-up.  But Trump has moved on to tax reform, a three-pointer for all the marbles.
The madness will go on long after March and it may come to feel like April Fool’s. Tax reform is no slam dunk and putting all your eggs in that basket is a huge risk.  Here’s a look at what to expect on tax reform from an administration that has yet to prove its legislative viability on big-ticket items.

Pivoting To Tax Reform

Having faced losses in Congress, federal court, and the court of public opinion (approval: 36), Donald Trump needs a win, fast.  But betting on tax reform — or even tax cuts — you need good odds to take it.  The Trump/Ryan’s failure on health care certainly revealed a fissure in the GOP not easily mended.
Given Trump’s difficulties passing major legislation, the nation may soon wonder, can he get anything passed?   Like a budget?  Or a debt limit increase?  So its eyes are fixed on how tax reform fares.
In fact, the American Health Care Act was as much a means to reform the American health care industry as it was an effort to provide massive tax relief for the wealthy.
So bear in mind this political albatross.
ACHA was a huge setback for the GOP’s tax plans — it provided at least $600 billion in tax cuts, most of which would have gone to the wealthy.  (In perspective: the health care tax cuts were just over half of what President George W. Bush’s tax cuts amounted to, $1.5 trillion.
What happens if Trump proves so legislatively incompetent that not just big-ticket items with popular mandates fail, but so called “must-pass” legislation does as well?   These would include:
  • the federal budget
  • debt-limit hikes to avert default
  • reauthorization bills
Failure of the last of these would not pull the plug on the economy or otherwise imperil the republic.  But the congressional capacity to pass bills more meaningful than naming post offices is still to be determined.

The easiest shot the president could take right now would be infrastructure.  That’s as much advice as a Democrat should give him at this juncture besides hire some more criminal defense attorneys.

Brady vs. Trump Tax Plans

Investors have been banking on the idea that Trump was going to pass tax reform, which is mostly why the stocks rallied up until last week.  But investors have been basing their moves on the House Republican tax plan, or the Brady Plan, which cut corporate tax rates from 35 percent to 20 percent (Trump gives lip service to bringing it down to 15 percent).

The ACHA failure made tax reform harder — the offset the revenue loss from corporate tax cuts was spurned.  Now, to make up for the corporate cuts, Republicans have proposed a Border Adjustment Tax (BAT), which is bound to fail as a consumer tax.  Mathematically, paying for the president’s massive tax cuts is nearing impossible.
Among the leading pay-fors currently under discussion:
  • Border Adjustment Tax (BAT)
  • repatriation tax holiday
  • loopholes closures

The BAT, which would tax imports, is setting up an unnecessary fight between two major industries: manufacturing and retail.  The president has decided to increase the cost of goods and services by imposing at least a 20 percent tariff on imports, driving up costs for retail trade as well as impacting consumers across the country.  While the manufacturing industry has about 12 million employees, retail has about 16 million.  Why would the president create a situation were these two major industries compete and then go on to side with the smaller one?  NB: many major retailers are headquartered in Congressional districts held by Republicans, making the passage of a BAT even more difficult for the president.

Senators are tepid when it comes to repatriation, yet the president has pushed the idea forward.  Given the history of efforts to tax repatriated profits by US firms, Senators may be reluctant to vote for tax holidays, making a critical pay-for  another long-shot.
Another difference between the plans is that Trump is a fiscal agnostic while many Republicans are not. Trump promised to cut taxes on the middle class and is willing to throw it a bigger piece of the pie, but at a cost that is almost twice that of the Ryan/Brady tax plan.  Those in the Freedom Caucus do not approve of any tax bills not revenue neutral.  A key variable: whether others in the Tea Party follow Freedom Caucus member Rep. Mark Meadows, who announced today that he could vote for a non-revenue neutral tax reform.
What To Expect

Needless to say, the president is running far behind schedule.  Treasury Secretary  Mnuchin expressed quant hopes as recently as last week (albeit before Ryan pulled the ACHA) that we’d see a Rose Garden signing of the most comprehensive tax reform bill in over 30 years before the August recess.

The longer the administration takes to work out a tax proposal with Congress, the longer the odds it can finally get on the scoreboard with a legislative win.
The blowback from the health care debacle is only going to make things more difficult for them administration going forward.  If only it was only the win-loss record of the administration at stake.

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