Ok, well as noted earlier, expectations for Trump’s “phenomenal”, “bigly” tax plan have combined with Janet Yellen’s determination to stick to the near-term rate path come subdued inflation hell or high water in Houston, to provide another leg up for USD and especially for yields overnight.
Hooray: the “reflation” narrative lives! Of course all it would take is one North Korea nuclear test to throw cold water on all of this, but let’s try to forget about that for the time being.
What can we expect on taxes? Well, if history is any indication, you can expect to be disappointed and you can also expect a lot of bickering on Capitol Hill before anything actually gets done. And as far as the actual plan goes, there have been more leaks on this than usual, and that’s saying something considering this is an administration where literally everything leaks.
But in case you were wondering what Goldman thinks (and maybe this is a time where you should be wondering that because you know, Goldman has an inside guy here, even if Gary is out of favor with the President for not being racist enough), below find some excerpts from the bank’s possibly useful preview…
On September 27, the White House is expected to release a tax reform proposal that calls for substantial business and individual tax cuts. While we expect a few meaningful offsetting tax increases to be proposed as well, such as the elimination of state and local tax deductibility, the proposal looks like it might nevertheless reduce revenues by around $4 trillion over ten years (1.7% of GDP over that period).
By contrast, the debate in Congress has ranged from revenue-neutral tax reform to a recently floated proposal in the Senate that might allow for a $1.5 trillion tax cut over ten years (0.6% of GDP over that period). Even if this tentative budget agreement in the Senate becomes official the forthcoming proposal would have to be scaled substantially to fit within the fiscal constraints Congress is likely to impose.
That said, tax reform is finally starting to move and recent developments suggest a rising probability that tax legislation will be enacted by early 2018. Following the expected release of the tax proposal this week, we expect the Senate Budget Committee to vote on its fiscal year 2018 budget resolution the week of October 2, which looks likely to include a “reconciliation instruction” for a net tax cut of $1.5 trillion over ten years.
If a similar instruction is finalized by the House and Senate (probably by late October), enactment of tax reform by early 2018 would become more likely, in our view, as it would allow for a corporate rate reduction and some individual tax relief while allowing lawmakers to avoid some of the most controversial base-broadening measures that might otherwise be necessary to offset the cost of the tax cuts.
Exhibit 1 compares prior proposals with what has been reported of the upcoming White House proposal and what we expect a plausible end result might be. We note that there has been little detail reported regarding a few areas, like taxation of capital income (we assume no change) and treatment of corporate interest expense (we do not expect the White House to propose repeal of interest deductibility, but some type of limitation might be floated).