Over the weekend, several key aspects of Trump’s tax plan were leaked, including a reduction in the tax rate for the wealthiest Americans to 35% as well as plans to cut the top tax rate for “pass through” businesses from 39.6% to 25%. While these would be welcome developments for US corporations, they would be relevant only if confirmed in the coming days as the “fluid” Trump tax plan is formalized and, of course, if it were to pass the Senate, which may very well not happen. As Rafiki Capital’s Steven Englander writes, “the inability to find 50 Republican Senators who can agree on anything and the diminished authority of the tax reform Gang of Six plus the sense that even at this late stage the Six are not on the same page on tax reform versus tax stimulus makes it hard to take the ‘over’ on significant tax reform.”
As Deutsche Bank also notes over the weekend, “regular legislation would take 60 votes in the Senate and bipartisan support and allow for proper tax reform. However this is seemingly impossible. The reality is that any changes will likely be made through the reconciliation process. However this first requires a budget being passed by Congress which hasn’t been achieved since the Democratic super-majority in 2009-10.“
Which is why despite the recent surge in market sentiment that Trump’s tax reform is suddenly far more likely, analysts caution investors not to expect too much detail with the release of President Donald Trump’s tax framework this week, let alone passage. As Bloomberg summarizes, the rollout may be designed to show Trump and Congress are unified and committed to aggressive tax reform, Evercore ISI says, while “distractions” (including NFL protests and healthcare repeal) may be helping, as the “Big Six” negotiators stay out of the spotlight, according to Height Securities.
Below, courtesy of Bloomberg, is a summary of several notable sellside views on what to expect over the coming days as the Trump administration aggressively rolls out tax reform:
EVERCORE ISI (Terry Haines)
- Expects Big Six (Treasury Secty Steven Mnuchin, NEC’s Gary Cohn, Rep. Paul Ryan, Sen. Mitch McConnell, congressional tax-writing cmte chairmen) to offer top-line proposals aimed at demonstrating the Trump Administration and congressional leaders are unified, and committed to aggressive tax reform and quick legislative action
- Sees goals of boosting “market excitement” about tax prospects, raising pressure on Congress to expedite FY2018 budget resolution passage (enabling congressional Republicans to achieve tax reform via streamlined budget process requiring simple majorities)
- Still sees reform as 50% likely; odds rise to 70% if Congress adopts FY2018 budget resolution expediting tax legislation by Thanksgiving
HEIGHT SECURITIES (Stefanie Miller)
- Expects latest tax reform draft will be very light on detail, will continue to be billed as process starting point
- “Distractions” – including ACA repeal, NFL protests, updated travel ban restrictions, and Jared Kushner’s use of private emails – are probably helpful to Big Six, other congressional Republicans as they try to control tax plan messaging
- Distractions at this stage of tax reform may cut the amount of time proponents need to defend their blueprint; Height notes there are divisive components of tax reform even within the Republican Party, framers probably appreciate not holding the spotlight as they work through intra-party negotiations
COMPASS POINT (Isaac Boltansky)
- Cautions against expecting too much granularity; views release as opportunity to assess Big Six talks so far, and to gauge severity of opposition
- Watching: Whether mortgage industry becomes more forceful in opposing lesser tax benefit; whether expiring expensing regime will be enough for business interests; how rank-and-file House Republicans respond
- Still believes odds favor passage of tax package in 1H 2018 ahead of midterm elections
KBW (Brian Gardner)
- Tax reform outline might disappoint some investors who are looking for more details, specifics
- May offer some detail on plan for lower corporate, individual tax rates
COWEN (Jaret Seiberg)
- Still sees best shot for tax reform coming next year as lawmakers increasingly worry about re-election
- Focus on potential ways to help pay for tax cuts: Roth-ification, reduction of the mortgage interest deduction, elimination of ability of corporations to deduct interest as a business expense
BEACON POLICY ADVISORS
- Big Six framework release, other tax-reform events should be seen as more of a “messaging effort” than truly substantive, concrete proposal
- No signs release will change Orrin Hatch’s plans for methodical, bottom-up process of shepherding tax legislation through his cmte
- Sees little new ground being made on tax pay-fors
Horizon Investments (Greg Valliere)
- “Exceptionally difficult” week looms for Trump, with issues including healthcare reform, taxes, Alabama, North Korea
- Healthcare loss would complicate tax reform
- Treasury Scty Steven Mnuchin is “a bright and wealthy man who knows little about tax policy and getting legislation enacted”; the higher he sets the bar, the more the administration will disappoint investors
Source: Bloomberg
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