Heisenberg Report

Your Complete (Updated) Guide To Tax Reform That Will Never Pass

Tax reform is one of those issues that is the worst of all possible worlds – it’s painfully boring to talk about let alone analyze but talking about it and analyzing it are necessary because sweeping changes to the tax code affect everyone.

For his part, Paul Ryan is confident that he’s going to move this thing through the House in time for the turkey pardon.

“We’re on track for moving this through the House before Thanksgiving. That’s our plan,” Ryan told Fox News on Sunday.


That may indeed be “the plan” but you know what they say about the “best laid plans” – something about how they often go awry as soon as a sitting President calls a Senator from his own party ”Liddle Bob’ on Twitter.

As for the Senate, Ryan said that House Republicans “expect our friends in the Senate to be about a week behind us.”

Got that? No? That’s ok, because nobody understands what the fuck is going on here, least of all Paul Ryan. This has become the most convoluted legislative endeavor in recent memory save maybe the bungled attempt to repeal and replace Obamacare and there’s a lot of irony there considering both health care reform and tax reform were high on Trump’s agenda.

As you’re undoubtedly aware, the market has been pricing this out – and “bigly” despite Steve Mnuchin’s contention that taxes are somehow “baked in” to the equity rally.

I mean maybe Steve is right to say that what you see reflected in record highs on the benchmarks reflects tax reform expectations, but somehow I doubt it. Because high tax stocks have been faded relative to the broader market all year, this year has been all about growth in the growth vs. value debate, and the curve is the flattest it’s been since the crisis. So you know, I’m not sure any of that fits neatly in some thesis about reflation euphoria.

Anyway, Goldman is out with something new on this and to let them tell it – and fuck me runnin’, they should know, right? I mean after all, Gary Cohn is supposed to be the guy gettting this done – “there is a 65% chance of enactment by Q1 2018.” First, here’s a “simple” table that shows you how this train wreck has evolved over time:

And here are three reasons Goldman says you should be optimistic – if guardedly so:

  1. First, tax reform—and a net tax cut—is an area where the President and most congressional Republicans generally agree. This is notable, since there are substantial differences within the Republican Party on a number of other issues, including immigration, infrastructure, international trade and health reform.
  2. Second, congressional Republicans face a difficult midterm election in 2018 and many lawmakers believe Republican prospects would be improved by a major legislative achievement before voters head to the polls. Republicans tend to be more supportive of most of the general aspects of tax reform than Democratic voters, though some tax changes are more popular than others; middle-class tax cuts and small-business relief enjoys broad support, while corporate tax cuts do not.
  3. Third, tax legislation can pass in the Senate with only 51 votes, instead of the customary 60 votes, through the budget reconciliation process. Now that a majority of the House and Senate have passed a budget resolution calling for a tax cut of up to $1.5 trillion over ten years, the odds would seem low that they would fail to follow through in passing the tax legislation itself

You’ve gotta love the bit about it being “notable” that a Republican President and most Republican lawmakers are all on the same page about something. Equally amusing is the list of things they are not on the same page about: “immigration, infrastructure, international trade and health reform.” So basically, “everything else.”

Additionally, I’ve never been sure that it says much for the state of American politics when the only motivation for getting something done is that midterms are coming up. It’s almost like they’re legislating in order to get reelected rather than getting elected in order to legislate.

For the pessimists out there, here are Goldman’s reasons for how this could – and this a quote – “run off the rails”:

  1. First, tax reform is much harder than tax cuts. The recently introduced House proposal is a case in point. While the proposal achieves meaningful reductions in individual and corporate tax rates, it also targets a number of specific tax benefits and several important constituencies have come out against the bill. This is the main risk to passing tax reform with only Republican votes, in light of the slim Republican majorities in both chambers.
  2. Second, although House and Senate majorities voted in favor of a budget resolution including an instruction to cut taxes by up to $1.5 trillion over ten years, a few of these lawmakers have expressed some hesitation regarding the tax legislation itself. Senator McCain (R-AZ), for example, has called for the legislation to be considered under “regular order” and might not support a tax bill passed via the reconciliation process. Senator Corker (R-TN) supported the budget resolution but has left open the possibility that he would oppose the tax bill itself if he feels it would add to the deficit beyond the estimated revenue gain from economic growth effects and the cost of extending expiring provisions.
  3. Third, while few argue against the concept of revenue neutral reform that lowers statutory tax rates and broadens the tax base, there are good arguments against a large net tax cut at the moment, including a high debt-to-GDP ratio, growing fiscal imbalances projected over the coming decade, and an economy with little remaining slack. This stands in contrast to the 1981 and 2001 tax cuts, when the federal budget was projected to run surpluses, the debt-to-GDP ratio stood at less than half of its current level, and the economy was in recession.

I’m sorry, but the reasons to be pessimistic seem far more concrete than the reasons to be optimistic. And as you can see from the following flow chart, we are a long ass way from the finish line:

And finally, the betting odds:

Needless to say, this by no (ways and) means what Trump had in mind in terms of how quick and seamless this process would be. And yet he continues to pretend as though the problem is lawmakers.

In part, he’s right. No one has ever accused Congress of being particularly efficient – or at least not in recent memory. That said, if you’re Trump it doesn’t help when you’ve also tasked the same Congress with overhauling the entire health care system, reworking the Iran nuclear deal, figuring out what to do with DACA after you’ve already scrapped it, and on and on. Then, to add insult to injury (figuratively and literally), you’re all over Twitter telling them how terrible they are.

So yeah, I’m willing to give Goldman the benefit of the doubt on the 65% number because again, they should by all rights have a better read on this than I do, but in the immortal words of DealBreaker’s Thornton McEnery:

… it seems like we’re forgetting to correct for the data point that Donald Trump is the fucking President of the United States.