I’m feeling more punchy than usual this morning, so I’ll kick Saturday off by noting once again how patently absurd it is that the bar for the United States presidency has been set so low that it’s cause for celebration when the f*cking leader of the free world manages to read off a teleprompter. It’s now considered a miracle – and thus cause for a global rally in stocks – if Donald Trump exercises self-restraint.
And you know, I know that you know how ridiculous this is. I’m talking to you, Trump supporters. I know you realize this man is an imbecile. I also know you can’t admit that. Even to yourself. And that must be one tough f*cking spot to be in when it comes to introspection. Your brain is saying “I can’t believe I bought into this.” But you have to shut that sh*t out. Because if you don’t, you’ll drive yourself crazy.
It’s like all of those people you see interviewed about Rudy Kurniawan (look him up). They’re like “I still don’t believe it.” “That’s not Rudy.” “He would have never done that.” “There’s no way he committed a massive fine wine fraud.” “I’m putting the blinders on, so please don’t show me that picture of his f*cking kitchen again”…
Anyway, if you thought the political picture had brightened materially and sustainably following Tuesday night’s miracle on Capitol Hill, y0u got a rude awakening about 24 hours later when Jeff Sessions was accused of colluding with the Russians while serving as a surrogate for the Trump campaign.
As I noted on Friday, some folks out there – including, apparently, the Wall Street Journal – are still determined to be like all of those fine wine buyers who were duped by old Rudy (a group that ironically, considering the topic at hand here, includes Bill Koch): “no Heisenberg, there’s no way we accidentally voted for Vladimir Putin and all of this is just a giant coincidence.”
But even if we get past everything said above and assume that this elderly reality TV host manages to get through his first year in office, the outlook for tax reform, fiscal stimulus, ACA repeal, … hell, let’s just come out and say it… the outlook for f*cking all of it, is murky at best. Below, find “10 Questions On The Political Outlook” from Goldman.
1. What has changed over the last month? The most obvious development is simply the slowing pace of policy actions and expectations of further delays. Over the last month, market participants have shifted their focus away from the series of executive orders the President released shortly after inauguration and toward congressional debates on health care and tax reform. However, despite expectations that the President would release proposals on replacing the Affordable Care Act (ACA) and tax reform, the President has refrained from endorsing any particular proposals, and prospects for speedy resolution of either issue have faded. Regulatory activity, which does not require congressional consideration, continues but the absence of confirmed appointees in key positions suggests that tangible policy changes in some areas may wait until later this year or even next year.
2. Will Congress actually “repeal and replace” the Affordable Care Act? Probably, but it will take longer than originally expected and much of the law is likely to be preserved in some form. We note that while most observers in Washington believe that a resolution is likely, few are able to identify how this will be achieved. Instead, many simply assume that Republicans will reach a consensus because they must; this has been a campaign commitment in the last four elections, leaving no option for failure. However, they face two challenges. First, some conservative Republicans object to continuation of tax credit-based subsidies currently provided under the ACA, even in revised form. Second, 20 Republican senators and 10 Republican governors represent states that expanded Medicaid eligibility under the ACA, and most object to wholesale repeal of that additional funding.
3. How long will ACA repeal and replace take? We think there is a good chance that Congress will resolve the ACA debate in Q2 (Exhibit 1). Activity on the issue will intensify over the next few weeks; House committees may begin to vote on legislation as soon as the week of March 6. This could allow for passage by the full House by late March or early April, if plans remain on track. However, even on that timetable, the Senate is likely to take longer, and the odds that the Senate sends the President a bill prior to the congressional spring recess (April 10- 21) seems fairly low. If so, final resolution could be pushed until May, in light of the upcoming debate on the confirmation of Supreme Court Justice nominee Neil Gorsuch and the April 28 expiration of federal spending authority, which will require new spending legislation to avoid a temporary government shutdown.
4. What does this imply for tax reform? In our view, the slow process on ACA repeal signals that tax reform is likely to take longer than initially expected and that the final tax legislation that Congress enacts is likely to be less radical than the early proposals from House Republicans and the Trump campaign. That said, while tax legislation looks likely to be delayed we expect it to move forward eventually.
5. Will Congress enact tax reform or just a tax cut? Our expectation is that the tax legislation will be a tax cut with elements of corporate tax reform, but that the changes will not be nearly as sweeping as what the House proposes. We expect that policy actions will raise the deficit by about $200bn next year. We expect the main driver of this increase to be tax legislation, despite insistence from many congressional Republicans that the tax bill would be revenue-neutral.
6. Is there room in the federal budget for what President Trump is proposing? Only if Congress is willing to increase the budget deficit. The Congressional Budget Office (CBO) projects federal outlays will total $53 trillion over the next ten years, against an estimated $43 trillion in receipts (22% and 18% of GDP, respectively, on average). In this context, accommodating roughly $3 trillion in tax cuts under the House blueprint or more than the $5 trillion the President proposed during the campaign is at least conceivable. However, in practice this even more difficult than the already large figures suggest, for three reasons.
7. But doesn’t “dynamic scoring” allow for a large tax cut? Dynamic scoring alone would make room for only a modest tax cut. The abbreviated “skinny budget” the President is expected to release in mid-March is reported to rely on optimistic growth expectations to boost revenues and lower the reported budget deficit. A higher assumed growth rate would indeed create substantial fiscal space; for example, an assumption of 3% growth each year after 2019 would add $4.5 trillion to revenues over the next ten years, which would roughly cover most of the cost of the proposed tax cut and new spending President Trump seems to envision.
8. Is the border adjusted tax dead? Not quite but its prospects have clearly faded. The House Republican blueprint on tax reform proposes shifting the corporate tax system to a “destination-based cash flow tax” (DBCFT). The “destination-based” aspect refers to the idea that US corporate tax will be applied based on where goods and services are consumed, not produced; border adjustment—disallowing the deductibility of imports and ignoring revenues related to exports—is used to achieve this, as is the move to a territorial tax system. The “cash flow” aspect refers to the proposal to repeal the deductibility of interest expense and other tax preferences but to allow the full expensing of capital investment. Together, these moves are intended to shift the US corporate tax from an income base to a consumption base.
9. Where does this suggest that trade policy is headed? We expect trade frictions to increase, but this could be a gradual process. A notable aspect of the President’s recent address to Congress was his discussion of trade, where he noted that “many other countries make us pay very high tariffs and taxes — but when foreign companies ship their products into America, we charge them almost nothing” and announced that he would seek changes. This is not the first time that the President has discussed taxes and tariffs as essentially interchangeable, raising the possibility that if a policy like the BAT were omitted from tax reform, protective tariffs might receive more serious consideration.
10. What ever happened to infrastructure? It is still on the list of priorities, just not at the top. When Republican lawmakers list the priorities for the year, the first two are always the same: ACA repeal and tax reform. Infrastructure and financial regulatory reform generally come in third or fourth, both in terms of chronological order as well as political importance. On one hand, this is an encouraging position given the seemingly low market expectations at the moment regarding infrastructure funding. On the other hand, this puts the issue later on the calendar than two issues that are likely to take the remainder of the year to resolve, and possibly part of next year as well.