Will Trump's Tax Plan Pass: Here Is The Complete Probability Matrix

Tyler Durden's picture

With global equity markets enjoying the biggest weekly inflow since the election on what BofA described was rising expectations of a Trump tax deal, the obvious question is "what is the probability of the Trump tax deal getting done." And, as it turns out, that is also the wrong question, because as Morgan Stanley shows, the outcome from Trump's tax proposal is not binary. In fact, there are nine distinct possible results, depending on how the various binomial outcomes pan out.

But first, here is a snapshot of how Morgan Stanley's Michael Zezas sees the infamous one-pager (which was fully explained by Goldman Sachs earlier in the week).

A starting point, but we don't think the timing of tax reform is advanced: The release is a signal that the White House is taking more of a leadership role on tax than they did on healthcare. Yet that fact alone doesn't change the barriers to action and likelihood of delays (1H18 is our estimated timing), in our view, for the following reasons:

  1. Republicans still pursuing elusive healthcare deal - Until Republicans 'cut bait' on repealing & replacing Obamacare, they can't practically start the detailed work of advancing tax reform through the budget reconciliation process. While we see little practical reason for Republicans to remain focused on healthcare, the recently proposed MacArthur amendment signals renewed dedication to the effort. As such, our concern is that they become bogged down in passing amendments to AHCA that satisfy the concerns of moderates, conservatives, and Senate reconciliation rules.
  2. A credible bipartisan path remains unclear - The tax plan offers several talking points that garner bipartisan agreement, but the policy details make that agreement more difficult than it appears. We don't see evidence of a credible, bipartisan 'workaround' to reconciliation in this document. For example, personal tax breaks appear to favor the middle class by some measures (doubling the standard deduction), but the wealthy & high income earners by others (potential absolute dollar benefit of rate cuts, estate tax elimination). This leaves the plan open to criticism from the Democratic base, who have set a bar for what constitutes acceptable tax reform. Infrastructure & childcare plans have been suggested as bipartisan carrots, but were not detailed in this proposal.
  3. White House leadership doesn't necessarily speed the process - While executive leadership earlier in the healthcare process might have been the right move, it's not necessarily the case here given greater party unity around most tax reform concepts. Hence, leadership is just as likely to muddle and delay the process by creating larger 'principles' debates.

It is worth noting, that among the 9 or so distinct scenarios when lumped by probability outcomes, Morgan Stanley believes that there is a nearly 50% chance, 43% to be exact, that the result of Trump's tax proposal will be a drag on the economy, with just a one in three chance that whatever Trump does will be a true stimulus (the other options are "mixed").

Morgan Stanley's takeaway:

We expect delayed and/or disappointing fiscal outcomes, but seemingly right-sized investor expectations may make this point academic in the near term. We concede that the release affirms that a timely tax-cut-driven fiscal stimulus is in play. But we're not inclined to increase our current 33% odds of stimulus, either by reducing odds of failure to act in a timely manner or by limiting the odds of outcomes featuring pay-fors that alleviate potential deficits and carry near-term downside risks to the economy.

 

This point may be academic, though, in the near term, if investors have right-sized their expectations, permitting other factors to drive markets. Our US equity and Treasury strategy teams have noted that this is largely the case, and at our recent DC Macro Conference investors had muted expectations for a fiscal boost (58% did not believe a fiscal stimulus would come in the next 12 months; 68% believed a tax reform would not be delivered before the end of 2017). In the meantime, we of course will continue to watch for signs that fiscal optimism becomes a bigger market driver, hence elevating risks of fiscal & tax disappointment.

Finally, here is Morgan Stanley's full Probability Decision Tree for tax reform:

Collapsing the various outcomes into "stimulus", "drag" and "mixed" yields the following table:

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Looney's picture

 

Trump’s problems pushing the expensive legislation through can be easily fixed – We’re gonna need a bigger… abacus?   ;-)

Looney

HRClinton's picture

Folks, let me save you a lot of trouble in trying to follow this or getting bamboozled by the Media.

This is a disguised Corporate Bailout, the Bigly version of the Wall Street Bailout of 2008. Here's why:

   1. The reduction in corporate tax will not lead to any YUGE increase in the Labor Participation Rate (LPR).

   2. What will happen instead, is that executive bonuses will explode and cash will go to GS & Friends on Wall St. Just like in the last bailout. 

   3. With all this cash, more corporate mergers & raiding will occur. 

   4. Companies will "Modernize, to be more competitive". Meaning: more automation with Robots and AI. Bye bye union workers. 

Without hard conditions imposed on corporate taxes and repatriation of offshore funds, that are tied to significant increase in quality jobs for "Americans First", the above scenarios will play out, and MAGA will have been used in a Bait & Switch. It will become Trump's and the RINOS version of Hope & Change. 

(You were warned by me first.)

AldousHuxley's picture

forget executives....it is their turn to get screwed by the power elites since nobody else is left.

 

It is the corporate owners...$100M+ capitalists who are getting tax cuts and foreign profits repatriated into their bank accounts.

 

And then wish all of the cash, they are going to do a stock buyback to raise SP500 even higher...then before Trump's term ends, they will sell it all, let the market crash and pick up good assets at firesale prices. 70, 80 year olds with BILLIONS don't do it for their passion of building a business (hiring employees), or spending (spend 1% of their networth max)....they do it just to keep score and boost their ego. and we all are including goldman executives (mere millionares who have to work 70 hours/week) are just pawns.

 

But we have to let the system run through it all. When CEOs get tired of this pointless game then system is ready to reset.

AGuy's picture

1. For Big Corps. Thay have a lot of debt to payoff. The Majority borrowed billions (Collectivity about 1.6T) to do stock buybacks. They need to start servicing all that borrowed money.

2. Small Business may be able to take advantage of a lower Income tax. As a small business owner I would switch to paying myself in salary to paying myself in dividends since the taxes savings would be huge. As far as business investments, nada. There is no point in expanding since businesses, Consumers, and well as gov't (state/local/fed) are buried in debt and likely are not going to buy more.

3. Its certainly Dead-on-Arrival. The Federal Gov't still has a $1T yearly deficit that needs to be addressed, and So no budget cuts are on the table. I don't think the RNC or DNC will support any major cuts without getting the budget deficit under control. Hell they can't even get rid of Obozocare, which is pretty bad for both RNC & DNC.

4. If anything. I think taxes will go up not down. Retiring boomers continue to suck money out via entitlements, and they need to start raising taxes to prevent deficits spiralling out of control. My guess is that a VAT is in the works, since it probably the only remaining option to raise taxes.

chubbar's picture

With Ryan as the speaker, I'd say the odds of anything important passing the house are about nil. He didn't take money from the Clinton campaign for no reason.

Ghost of PartysOver's picture

If I were a Republican Congressman I would switch party's just to get the DipShit Ryan out of there.  With Pelosi you know you are going to get kicked in the shorts but with Ryan you never know when he will stab you in the back.

zzzz88's picture

pass or not pass, we small guys get nothing. forget it. 

Donald J. Trump's picture

Try we small guys are going to pay for the stimulus.  Eliminating state and local deductions is a huge tax increase on the middle class.

Automatic Choke's picture

go into the robot building business.....

flyonmywall's picture

If you ain't in the club, you get nothing, plebe!

j0nx's picture

With the dems and their activist oncall judges on one side and Paul Rino and Turtle McConnell running the other side Trump will never get shit done in his entire term. Hard to believe he hasn't figured this out yet since everyone else already has.

ljag's picture

You might want to re-read that. If you think Trump doesn't know what time it is,.....we'll, when you look around the table for the sucker.....

syzygysus's picture

When the red button on his desk changes from "Gimme a Coke" to "More oxy" you'll know we're near the end.

lester1's picture

Won't pass!

Dems say no to anything Trump proposes because he hurt their feelings.

Freedom caucus will say no bcause the tax cuts do not include a BAT or VAT to cover the losses by dropping the corporate rate. Trump's plan would blow a hole in the Federal defecit. No Republicans in the freedom caucus will sign on to that.

 

Trump should have listened to Bannon instead of globalist Gary Cohn.

 

lester1's picture

Won't pass!

Dems say no to anything Trump proposes because he hurt their feelings.

 

Freedom caucus will say no bcause the tax cuts do not include a BAT or VAT to cover the losses by dropping the corporate rate. Trump's plan would blow a hole in the Federal defecit. No Republicans in the freedom caucus will sign on to that

 

Trump should have listened to Bannon instead of globalist Gary Cohn.

 

 

 

Peacefulwarrior's picture

 Trump is chasing his own tail.

ToSoft4Truth's picture

Nah, the voters are chasing their tail.

 

Some Trump supporters voted for Obama the first time.  Bush was the savior...  Reagan just legalized the illegals, problem solved....  he's the greatest president ever....

 

Hippies figured it out 60 years ago.

 

 Sonny Cher The Beat Goes On YouTube

 

https://www.youtube.com/watch?v=fegr2-q-Z2g

 

 

 

barysenter's picture

Enough people quit working, Americans get the last word.

aloha_snakbar's picture

Last job was four years, seven months ago; .gov can FOAD...

Dg4884's picture

"You Shall not Pass!"

- Gandolf.

ToSoft4Truth's picture

Trump doesn't give a rats ass about the serfs. 

 

Trumped duped the voters. 

 

 

aloha_snakbar's picture

Who cares; I have my own *tax plan*, and here is is: .gov, you can pound sand for any more taxes from me, unless and until you return to a government by the people, for the people, which I am guessing is roughly never, because you are either too stupid to handle it, or your arrogance and hubris is such that you feel you dont have to. Good luck with that...

ljag's picture

Just remember, there is no law says you have to pay but there is one for filing. Be careful